Fundamental accounting principles 23rd edition pdf download

Where a company is well-known, or regulated for AML to a standard equivalent to which you are subject to in the UK you may consider that the level of money laundering and terrorist financing risks are low and apply CDD on a risk-based approach. For listed companies see below. Where you commence acting for a wholly owned subsidiary of an existing client, you may refer to the CDD file for your existing client for verification of details of the subsidiary, provided that the existing client has been identified to the standards of the Regulations or to a similar standard in another jurisdiction.

In accordance with R28 5 , if the company is listed on a regulated market it is not necessary to:. This may also be applied to a majority-owned subsidiary of such a company where you have established the nature of ownership via an independent and reliable source. Such evidence may be:. If a regulated market is located within the EEA there is no requirement to undertake checks on the market itself. Under a risk-based approach you may wish to simply record the steps taken to ascertain the status of the market.

Consider a similar approach for non-EEA markets that subject companies to disclosure obligations which are contained in international standards equivalent to specified disclosure obligations in the EU. Jurisdictional AML risks should also be considered — see the risk assessment section of this guidance for further information. Consult the register on the European Securities and Markets Authority website.

Following an assessment that the client is low risk it will be sufficient, for a listed company, to obtain confirmation of the company's listing on the regulated market. Where a listed company is owned by multiple parties that are themselves held on a regulated market s , this does not need to be treated differently to a listed company that is a wholly owned subsidiary of one, except that you need to collect the details of all owners as above. In this context, you should consider seeking further information about any owners whose relationship is not through a regulated market on a risk sensitive basis.

In other words, a company having any proportion of a listing on a regulated market however small, does not mean you do not need to check other owners. Where further CDD is required for a listed company i. This may include obtaining relevant information or particulars of the company's identity or business practices.

You are still required to conduct ongoing monitoring of the business relationship with a publicly listed company to enable you to spot suspicious activity. Companies whose listing does not fall within the above requirements should be identified in accordance with the provisions for private companies.

Private companies are generally subject to a lower level of public disclosure than public companies. In general, however, the structure, ownership, purposes and activities of many private companies will be clear and understandable. R43 requires UK companies not listed on a regulated market to provide information about their identity on request, including their articles of association or other governing documents and information about beneficial owners. Obtaining CDD material for these companies may be more difficult, particularly regarding beneficial ownership where ownership is held in jurisdictions where no publicly available corporate registers are available, or ownership can be otherwise concealed through the use of nominees.

If this is the case, it should be taken as an increased risk factor and may warrant the application of enhanced due diligence measures. The company's identity should be established in the same way as for UK private and unlisted companies. Where you are not obtaining original documentation, you should consider the need for further comfort on authenticity on a risk-based approach. Certification of documents does not automatically guarantee documentation is genuine. These obligations set out below, apply to all trusts including will trusts and personal injury trusts.

In the UK, trusts do not have legal personality. As such, a trust cannot be your client. When advising in relation to a trust, your client may be:. Your client s will be the person to whom you owe your duty of care and who will receive the benefit of your advice. Where an express trust has yet to be established and you are providing tax or transactional advice to a prospective settlor in anticipation of creating a trust, your client will usually be the settlor. Your responsibilities to verify the identity of the client and their source of funds, is then no different to any other client, except that you will also need to understand the nature and extent of the assets that will be settled on the trust.

Where you are instructed in relation to an existing trust, when applying CDD: you must obtain and verify the identity of your client including beneficial owners where applicable:. If the trust is a relevant trust for registration, you must also identify potential beneficiaries. If the identified beneficial owner is an entity, you may need to understand who its ultimate beneficial owners are, depending on the entity's status e.

The ultimate beneficial owner of a settlor, protector or sole beneficiary entity should be fully identified. R6 1 implies that individual beneficiaries need not be identified in CDD unless it has been determined that they will benefit from the trust. That is, unless and until they have a vested interest in the capital of the trust.

If you do not note all individual beneficiaries named in the trust deed or any associated document on the basis that their benefit from the trust has not yet been determined, you must identify any named class of beneficiaries, by its description.

For example:. As CDD can only take account of circumstances at a point in time, you should note the names of all discretionary beneficiaries including those who have yet to acquire determined interests named in the trust deed and any document from the settlor relating to the trust, such as a letter of wishes.

Their interests may vest or otherwise be determined while you are acting in relation to the trust, thus bringing them within the group of individuals who need to be noted in CDD as beneficiaries, as defined in R6 1 c.

When considering the identity of those in whose main interest a trust is set up or operates and there are several classes of beneficiary, consider which class is most likely to receive most of the trust property. However, where you act in relation to a discretionary trust, if you decide against noting in your CDD the names of individual beneficiaries who are named in the trust deed or any associated document on the basis that their benefitting from the trust has not yet been determined, you will need to seek regular updates from your client, as part of your on-going monitoring measures on a risk based approach.

The wider approach, involving noting all beneficiaries and potential beneficiaries named in the trust deed and any associated document at CDD outset, may therefore be preferable from the outset. R6 1 e brings any individual who has control over the trust within the definition of the beneficial owners of a trust and they will therefore need to be identified when you act in relation to a trust. R6 2 defines control as a power, whether exercisable alone, jointly or with the consent of another, under the trust instrument or by law to:.

R6 4 b specifically excludes from the definition of an individual who has control over a trust an individual 'P' who has control solely as a result of:.

If you or your practice on occasions acts as as opposed to for a trustee of a taxable relevant trust, pursuant to R44 of the Regulations you will need to maintain accurate and up to date records of all beneficial owners and potential beneficiaries of the trust. Even if your practice is also acting for the trustee s and has applied CDD, this may involve you in more extensive investigations. That obligation lies on external trustees of relevant trusts who enter into transactions in relation to which you or your practice are required to apply CDD or who form a business relationship with you or your practice if you are subject to the Regulations.

This should assist you in your compliance with your CDD obligations and is another reason why it makes sense to extend your CDD in relation to a relevant trust's beneficial owners also to cover potential beneficiaries.

Applying CDD where you act in relation to an existing trust should generally involve your having sight of the trust deed or documents which relates to it and obtaining an appropriate understanding of their content. In some circumstances, this understanding of the content may come from an explanatory note provided by another professional regulated for AML to a similar standard. The rationale for obtaining such evidence in this manner should be documented.

In low risk situations as determined by appropriate and thorough documented risk assessment you may be able to record an account of the terms of the trust given by the client or another regulated person who has had an involvement with setting up or managing the trust. However, before doing so, you should be assured that the reason for your not being provided with the trust deed and any document which relates to it makes sense in all circumstances, is recorded by you and is not indicative of a higher risk of money laundering.

A partnership, other than in Scotland, is not a separate legal entity, so you must obtain information on the constituent individuals. Where partnerships or unincorporated businesses are well-known, reputable organisations, with long histories in their industries and with substantial public information about them, their principals, and controllers the following information may be sufficient:.

R5 3 provides that in the case of a partnership but not a limited liability partnership the following individuals are beneficial owners:. You should also consider whether there are any other registries on which you may be able to verify the details of the partnership. Other partnerships and unincorporated businesses which are small and have few partners should be treated for identification and verification purposes in the same way as private individuals i.

Where the numbers are larger, they should be treated for identification and verification purposes in the same way as private companies. Where a partnership is made up of regulated professionals, it may be sufficient to confirm the practice's existence and the trading address from a reputable professional directory or search facility with the relevant professional body.

Otherwise you should obtain evidence on the identity of at least two partners and evidence of the practice's trading address. For a UK LLP or SLP, you should obtain information in accordance with the requirements for companies as outlined above as these are treated as corporate entities.

Careful consideration should be made regarding clients where partners themselves are overseas entities, particularly where these overseas entities are located in jurisdictions where no publicly available corporate registers are available, or ownership can be otherwise concealed through the use of nominees or similar structures. This is particularly relevant where the vehicle is used to hold assets or is involved in transactional or other potentially high-risk activities, or conversely, where no discernible business activity can be determined, from internet searches or other sources.

Such factors may be indicative of shell companies and are likely to be indicative of higher ML risk. You should give consideration to why the use of such structures may not be legitimate and the nature and purpose of the business.

Your client may be able to help you understand this. Information obtained should be considered in light of other CDD information available. Where you have assessed the client risk to be higher risk because of its structure or factors as above, then you must put in place enhanced due diligence and ongoing monitoring.

Foundations may or may not have legal personality. You should investigate whether this is the case and whether it is appropriate to take on the foundation as your client or whether your client should be the board of trustees or another party involved with the foundation. If the foundation lacks legal personality, you should approach CDD, as you would where you act for a client in relation to a trust.

For registered charities, you should take a record of their full name, registration number and place of business. Details of registered charities in the UK can be obtained from:. Other countries may also have charity regulators which maintain a list of registered charities. You may consider it appropriate to refer to these when verifying the identity of an overseas charity.

For all other types of charities, you should consider the business structure of the charity and apply CDD appropriately. Further, in applying the risk-based approach to charities it is worth considering whether it is a well-known entity or not.

The more obscure the charity, the more likely you are to want to view the constitutional documents of the charity, along with any other documents that may clarify the individuals in control and its status. Due to the numerous examples of charities and not-for-profit organisations as fund raising vehicles for terrorist organisations you may want to also consult HM Treasury's consolidated list of persons designated as being subject to financial restrictions to ensure the charity is not a designated person.

Another point to consider is source of funds, in that charities may fund transactions effectively through crowdfunding, which can make a source of funds check difficult to complete.

Taking a risk-based approach you should consider whether you need to seek information as to who those individuals or entities are that are funding the charity, particularly those contributing larger percentages or amounts. When acting for the executor s or administrators of an estate, you should establish their identity using the procedures for natural persons or companies set out above.

When acting for more than one executor or administrator, you should verify the identity of at least two of them. You should also get copies of the death certificate, grant of probate and any letters of administration. If a will trust is created, and the trustees are different from the executors, the procedures in relation to trusts will need to be followed when the will trust comes into operation. Places of worship may either register as a charity or can apply for registration as a certified building of worship from the General Register Office GRO which will issue a certificate.

Further, their charitable tax status will be registered with HMRC. As such, identification details with respect to the church or place of worship may be verified:.

Schools and colleges may be a registered charity, a private company, an unincorporated association or a government entity and should be verified in accordance with the relevant category. The Department of Education maintains lists of approved educational establishments which may assist in verifying the existence of the school or college.

Many of these bear a low money laundering risk, but this depends on the scope of their purposes, ownership structure, activities and geographic spread. The money laundering and terrorist financing risks associated with public authorities vary significantly depending on the nature of the retainer and the home jurisdiction of the public authority. It may be simple to establish that the entity exists, but where there is a heightened risk of corruption or misappropriation of government monies, greater monitoring of retainers should be applied.

Under R37 3 the fact that the client is a public administration or publicly owned enterprise is one of the factors to take into account when deciding whether it is low risk and whether to apply simplified due diligence. It will usually be appropriate to apply simplified due diligence to UK public authorities and to some non-UK public authorities, particularly those in the EEA. You should note though that in the context of legal services, the LSAG guidance takes precedent.

A beneficial owner is normally an individual who ultimately owns or controls the customer or on whose behalf a transaction is being conducted. In respect of private individuals i. Therefore, if your client is an individual, you may want to consider whether they are acting on their own behalf. R5 1 defines the beneficial owner of a body corporate, other than a listed company, as meaning any individual who:.

This does not apply to a company listed on a regulated market. It does apply to UK limited liability partnerships. In relation to a foundation or other legal arrangement similar to a trust, the beneficial owners are those who hold equivalent or similar positions to those set out above in the case of trusts. In relation to a legal entity or legal arrangement which does not fall into the above, the beneficial owners are:.

Unincorporated associations and foundations are examples of entities and arrangements likely to fall within these requirements. You should be alert to the risk that a corporate entity can also be subject to control by persons other than shareholders.

Such control may rest with those who have power to manage funds or transactions without requiring specific authority to do so, and who would be in a position to authorise changes to internal procedures and control mechanisms. Depending on the control structures in an entity, this could be a senior role operating without actual or effective supervision or another entity.

You should remain alert to any person or entity with such powers while you are obtaining an understanding of the ownership and control structure of the corporate entity and make such further enquiries you need in order to understand the control structure.

Monitor situations within the retainer where control structures appear to be bypassed or unduly complex on a risk sensitive basis. Beneficial owners must be identified, and reasonable measures must be taken to verify their identities so that you are satisfied you know who the beneficial owner is and that they are in fact the beneficial owner in question. In complex structures, practices may have to look through layers of ownership and consider any associated dilution of that ownership to arrive at any natural persons owning or controlling the client entity.

It is important to review both shareholdings and voting rights in respect of beneficial ownership, along with understanding the class and value of shares any individual holds.

CEO, board, controlling mind of the company be considered as the beneficial owners under R5 1 a and c. This is subtly different to the requirements of R28 8 and would not necessarily raise a concern of extra risks as the circumstances of R28 7 might. When conducting CDD on a client, you will need to identify any beneficial owners as defined above.

This may be undertaken by obtaining:. You should consider what is the appropriate level of verification required on a RBA. These reasonable measures to verify a beneficial owner, may differ to those you may use to verify the identity of a client that is a natural person. It is for your practice to determine a tailored and risk sensitive approach that is appropriate to ensure you are satisfied you know who a beneficial owner is and that you fully understand their relationship with the non-natural person.

If you cannot identify a beneficial owner pursuant to the above despite having exhausted all possible means of doing so or if you are not satisfied that the person is the beneficial owner, you must then take reasonable measures to verify the identity of the senior responsible manager of the body corporate. In practice, this may be the chief executive officer or president of the group, or someone else in the executive team with high level responsibility for the running of the relevant aspect of the body corporate.

R6 9 says a beneficial owner generally means any individual who ultimately owns or controls the client or on whose behalf a transaction is being conducted. In most cases, it is presumed that the client is acting on their own behalf, unless the features of the transaction indicate that they are acting on someone else's behalf. As highlighted above you should make enquiries when it appears the client may be acting on behalf of someone else.

You should be alert to the possibility that purported agency relationships are actually being utilised to facilitate a fraud, leading to possible encounters with the proceeds of crime. Understanding the reason for the agency, rather than simply accepting documentary evidence of such at face value, will assist to mitigate this risk.

Where a client or retainer is higher risk, you should obtain further verification of the beneficial owner's identity in line with the suggested CDD methods to be applied to natural persons.

This may also include where a legal practice commissions your services on behalf of someone else. Where you have adequately assessed ML risk to be lower, it would not be generally proportionate to conduct independent searches across multiple entities at multiple layers of a corporate chain to see whether, by accumulating very small interests in different entities, a person finally achieves more than a 25 per cent interest in the client corporate entity.

Nevertheless, you must be satisfied that you have an overall understanding of the ownership and control structure of the client company. This provision does not apply in any situations of higher risk, where EDD should be applied. A bearer share is a form of equity i. Given this, there is no way to confidently or consistently register the owner of the stock nor track transfers of ownership. You should consider whether the risk posed is acceptable for your practice before proceeding.

Ultimately it is for your practice to determine the confidence you can place in any assurances that the bearer shares will not be used to hide money laundering or terrorist financing, however extreme caution must be exercised.

Bear in mind that the issuance of bearer shares has been banned in the UK since May , primarily due to money laundering and transparency concerns. Enhanced due diligence and ongoing monitoring should be performed and practices must be able to demonstrate the effectiveness of controls in place to their supervisor.

Where a practice does undertake work for clients where beneficial ownership is held in the form of bearer shares, this should be articulated in the Practice-Wide Risk Assessment. Higher-risk indicators may be where the professional trustee entity is unregulated or where the professional trustee is not independent of the settlor e.

In such low-risk instances, you should not need to identity and verify beneficial ownership of the professional trustee, although you should document the rationale for your actions. R28 4 requires a relevant person to identify the beneficial owner "of a client" which is beneficially owned by another person.

R6 1 defines "the beneficial owners in relation to a trust" as the settlor, the trustees, the beneficiaries or class of beneficiaries and any individual who has control over the trust. Although your client will not actually be the trust because a trust does not have legal personality , if you advise any client in relation to a trust, the Regulations require you to understand who the trust's other beneficial owners are, as defined in R6 1.

A fundamental element of client due diligence is understanding the nature, background and circumstances of the client, including their financial position — and making an assessment as to whether the legal services provided to the client are in keeping with your understanding of that background and circumstances.

In enhanced due diligence situations this requirement is more stringent. The financial circumstances of a client can broadly be categorised into source of funds SoF , and source of wealth SoW.

A practice must scrutinise transactions on a matter by matter basis, with the objective of understanding what the source of funds are for transactions you undertake on behalf of a client. This is a fundamental aspect of holistic CDD. It is important to remember that understanding the SoF and SoW is a key protection for your practice, and it should be approached as an opportunity to protect your practice from being used for money laundering.

The higher the risk, the more comprehensive and reliable documents you obtain should be. Taking a risk-based approach, you may consider funds remitted from a legal practice regulated for AML to equivalent standards as the Regulations as being of lower risk.

You should also consider doing so as a part of ongoing monitoring of any business relationship whether high risk or otherwise. You should also apply a source of wealth check in other applications of EDD on a risk-based approach. It is good practice to check the SoF even if a business relationship as defined in the Regulations has not been formed, and the matter is an occasional transaction.

It should be considered that checking source of funds is a useful practical tool for protecting your practice generally. SoF and SoW do not mean the same thing, although there can be significant overlap between the two and they do not exist in isolation to each other. Source of funds refers to the funds that are being used to fund the specific transaction in hand — i.

For further reference see point 87 in the following FATF guidance. The types of data and documents that you use for verification of source of funds will vary depending on the circumstances and the information that the customer provides to you. The SoF pertains directly to the funds that are being used to fund the specific transaction in hand i. Checking this means ascertaining where those funds came from, how they were accumulated by the client and ensuring on a risk-based approach that they are not the proceeds of crime.

SoF is not simply be limited to knowing from which financial institution the funds in question may have been transferred, except where the financial institution is providing financing for the transaction e.

Establishing income from share capital, business activities, a bequest of gift etc. In circumstances where a client declares that they have been given funds for a transaction from a third party you may wish to record information relating to that original transaction too. You may verify this by requesting bank statements and other relevant documentation relating to this transfer. SoF can often be difficult to determine without some understanding of the source of wealth of the individual.

This can particularly be the case where the funds for a transaction have become mixed with other funds in an account. Here, to understand the SoF, you may need to have an awareness of the SoW of the individual, although your level of confidence in the source of wealth in such a case, should be considered on a risk based approach.

This should recognise that the composition of wealth generating activities may change over time, as new activities are identified, and additional wealth is accumulated.

For further reference see point 88 in the following FATF guidance. SoW is a holistic appraisal as to where an individual or an entity has derived their overall wealth i. For guidance in establishing SoW in higher risk situations see 6. For further information on source of wealth requirements please see the enhanced due diligence section below.

In-depth guidance on source of wealth and source of funds requirements has been issued by the Wolfsberg Group. R33 provides that you must apply enhanced due diligence EDD and enhanced ongoing monitoring in addition to the CDD measures required in R28, where:.

The Regulations specify that you must take measures to examine the background and purpose of the transaction and to increase the monitoring of the business relationship where enhanced due diligence is required.

You will also need to apply the steps below when either your client or the counterparty is established in a HRTC where you are undertaking an occasional transaction within the meanings of R27 1 b and 2.

If a client with whom you have a business relationship not in a HRTC is engaging in a transaction where the counterparty is based in a HRTC, you should consider the risks this presents and whether it is appropriate to apply EDD to the transaction. You should also consider whether it is appropriate to go beyond the above minimum requirements, particularly in circumstances of higher risk or where you have identified red flags. An important additional EDD measure should include understanding the financial situation of the client — in practice this means taking additional measures to understand the SoW as well as the SoF of the client.

You should document your rationale in a file note. When addressing SoW, you should consider whether the SoW is commensurate to your client in general i. This information will usually give an indication as to the volume of wealth the client would be expected to have, and a picture of how the person acquired such wealth.

This will help you to establish whether the transaction makes sense. In many complex scenarios it may be difficult to determine original sources of wealth, possibly accrued many years ago. Although a practice may not have specific information about assets not deposited or processed by them, it may be possible to gather general information from commercial databases or other open sources. Actions taken, documentation and materials reviewed, and decisions taken including rationale must be clearly recorded.

These may be reviewed at a later date by your supervisor or other relevant authorities. Where you cannot successfully establish the SoW in higher risk situations, you should consider ceasing to act for the client and whether you need to submit a report to the NCA.

One aspect of keeping transactions under review is to ensure they are still in line with the CDD information held on the client, and information contained in the client and matter risk assessments. Whatever controls you have in place to monitor other business relationships, may be intensified in order to apply enhanced monitoring.

You should ensure that funds paid into your client account come from an expected source and are for an amount commensurate with the client's known wealth and with what is expected to be deposited in relation to the matters on which you act for them. You must apply EDD measures in any business relationship with a person established in a high risk third country or in any transaction where either party is established in a high-risk third country. The list of countries is available here. Under the Regulations, a high-risk third country is defined as a country which has been identified by the European Commission under Article 9.

See the current list of high-risk third countries. Note that not all countries where there may be a higher risk of money laundering are 'high-risk third countries' for these purposes. Other jurisdictions may equally pose higher ML risks — these should be assessed as part of client and matter risk assessments, and additional, enhanced due diligence measures should be applied accordingly.

Enhanced due diligence is also required where there is a higher risk of money laundering or terrorist financing. In determining whether there is a higher risk of money laundering or terrorist financing in a given case, you must take into account the risk factors set out in R33 6 , along with the outcomes of your practice-wide, client and matter risk assessments.

Please see the features outlined in section 5 and 18 of this guidance for further information. You should consider the situation in context of the CDD information held on your client, including their background and financial circumstances. When assessing whether there is a high risk of money laundering or terrorist financing in a particular situation, and the extent of the measures which should be taken to manage and mitigate that risk, relevant persons must take account of risk factors including, among other things—.

As well as considering the risks identified above, you should have regard to any of the risk factors discussed in section 5 that may be present in a given client or matter. Politically exposed persons PEPs present risks as they have the opportunity to use their political position to enrich themselves through corrupt activities. In order to treat PEPs in a risk-based way, it is a precondition that you can correctly identify them.

A PEP is a person who has been entrusted within the last year or for a longer period if you consider it appropriate to address the risks in relation to that person with one of the following prominent public functions by a public institution, an international body, or a state, including the UK. Middle ranking and junior officials are not PEPs. In the UK, only those who hold truly prominent positions should be treated as PEPs and the definition should not be applied to local government, more junior members of the civil service or military officials other than those holding the most senior ranks.

This should be borne in mind as many commercially available PEP checking tools may have a much lower threshold for considering an individual a PEP.

Section 2. R35 1 requires you to have appropriate risk management systems and procedures to determine whether a client or beneficial owner is a PEP.

To assess your risk of encountering a PEP, you must take into account your PWRA, the level of risk of money laundering or terrorist financing inherent in your business and the extent to which that risk would be increased by a business relationship with a PEP.

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