The application of SDD and EDD to notarial occasional transactions : a risk-based approach

Abstract

In the past few years, much more importance has been given to anti-money laundering and combating the financing of terrorism owing to concerns following the rise in these two crimes. Hence, obligations were imposed on certain professions and financial institutions so one is able to detect any suspicious transaction. Money laundering involves a process whereby money obtained illegally is given a clean face by passing the money through a number of different transactions to make the source of funds appear legitimate. This is done through three stages; the placement stage where the illegal money is moved from its source and placed into the country’s financial system; the layering stage which conceals and losesthe trail of money from its source through complex transactions; and the final stage known as integration where the illegal funds are integrated into the legitimate economy, purporting to be licit funds, which allows the money launderer to use the money as he wishes. On the other hand, funding of terrorism refers to the process of collecting, receiving and providing funds, with the intention of being utilised to fund terrorist activities. However, the said funds may be derived through both legitimate and illegitimate sources. It is the intended use of said funds which makes this activity a crime. In view of the above definitions, notaries will encounter certain notarial transactions which may be involved in a ML/FT crime. On this matter, reference must be made to the definition of ‘relevant activity’ found in Regulation 2 of the PMLFTR. The occasional notarial transactions considered to constitute a relevant activity are sale of real property and business entities, and the creation of companies, trusts, foundations or similar structures i.e. trust deed, deed of foundation, etc. This is so because transactions used to launder and conceal illegal source of money could very easily be one of above mentioned. With regards to funding of terrorism, this may be done through the setting up of non-profit organisations who will receive donations, or by setting up legitimate businesses to collect funds, which might at time require notarial transactions. For these reasons, notaries are subject persons obliged to carry out AML/CFT obligations in order to avoid being involved in these crimes, and more importantly, to be able to detect any suspicious transaction which should be reported to the appropriate authorities. For the purposes of this report, the focus will be on occasional transactions as defined in Regulation 2 of the PMLFTR, specifically since the definition includes transactions exceeding €15,000, whether carried out in a single operation or in several linked operations. This is because business relationships require an element of duration which thus seems to target other institutions such as banks, other financial institutions and insurance companies. Thus, public deeds and private writings are deemed to be occasional transactions.8 The importance of remarking the distinction between occasional transactions and business relationships is because the latter brings about more CDD measures to be implemented by the subject person. Hence, in this report, such additional measures will not be explored by the author. Moreover, this report will strictly deal with CDD measures ancillary to notarial transactions and will not deal with other AML/CFT obligations which are more general and related to the ‘notarial office as a business’ such as having in place a BRA, ensuring that employees handling any anti-money laundering obligations themselves are aware of the measures and policies to be undertaken, carry out training of such employees and more. Despite this, it must be kept in mind that the BRA is still useful to assess the risks of ML/FT, since it provides for ‘an assessment of risk that one’s business is in general exposed to,’ by taking into consideration the nature and size of the business. However, the BRA is something, which although must remain updated especially if new changes in the business activities are made, or new risk factors are discovered, it does not differ for each and every customer or transaction but is commensurate to the business.

Following the brief introduction on why notaries are considered subject persons, the focus of this report will shift on the risk-based approach, and SDD and EDD, since both these levels of due diligence are based on such an approach. Through this report, the author aims to answer the questions of what the applicable measures under SDD and EDD are and what they entail in more practical terms, which will further allow the author to observe the differences noticed between SDD and EDD. The author will also delve into situations where SDD and EDD may or shall be applied. The methodology implemented for this report is mainly a desk-based approach, focusing on current applicable legislation and publications by the relevant authorities. An informal interview with an FIAU representative will also be held which will assist the author with understanding the practical side of the AML/CFT obligations imposed on notaries. Ultimately, the use of both methods will allow the author to arrive at a clear answer to the chosen research question since the author will be able to comprehend both the theoretical as well as the practical situation.