INTERNAL SYSTEMS AND CONTROLS FINDINGS

4.1  Client Due Diligence (“CDD”)

The Commission noted a number of instances where Registered Persons were unable to fully demonstrate compliance with Sections 3 and 4 of the AML Handbook. All Registered Persons are required to demonstrate sufficient knowledge of their clients by way of collecting and maintaining appropriate CDD.

The Commission’s findings identified that there is some confusion amongst Registered Persons as to when confirmation of source of funds and source of wealth is required. Section 3.3.3 of the AML Handbook stipulates that source of funds must be documented for all clients, whereas confirmation of source of wealth is only required for higher risk clients. However, the Commission noted that confirmation of source of wealth is frequently requested, irrespective of the client’s risk rating, whereas the requirement to obtain confirmation of source of funds was regularly omitted.

The Commission also identified a number of instances where insufficient enhanced due diligence was held for those clients categorised as Politically Exposed Persons; guidance in this respect is provided in Section 3.4 of the AML Handbook.

Whilst the above matters indicate areas of procedural weaknesses, they also identify a need for Registered Persons to consider whether sufficient training has been provided to employees.

4.2  Intermediary/Introduced Relationships

In accordance with Articles 16 and 17 of the Money Laundering (Jersey) Order 2008, effective in 2013 (the “MLO”) and Section 4.10 of the AML Handbook, a Registered Person is permitted to rely on the identification measures previously applied by an appropriate intermediary or introducer. However, this may present additional risks that must be appropriately considered and addressed by the Registered Person in order to demonstrate compliance with the requirements of the MLO and AML Handbook.

The Commission had a number of findings in this area, spanning two key aspects.

1. In a number of instances, the Registered Person had not implemented a formal methodology to risk rate intermediaries or introducers.
2. Additionally, a number of Registered Persons were unable to demonstrate compliance with Section 4.10.3 of the AML Handbook, which stipulates that a Registered Person placing reliance on an intermediary or introducer must be able to demonstrate that it has obtained relevant client information from the intermediary or introducer. Specifically, the Commission identified examples where Registered Persons had relied on an introducer to demonstrate compliance with the CDD requirements of the AML Handbook but, whilst introducer certificates were held on the client file, not all key information was captured, such as all relevant controllers to the account.

4.3  Periodic Reviews of CDD/Anti-Money Laundering (“AML”) Risk Ratings

The process of periodically reviewing client files for compliance with internal policies and procedures is common practice within investment businesses and is seen by the Commission as a key control to enable Registered Persons to demonstrate compliance with the IB Codes as well as the AML Handbook.

Whilst the Commission noted that, in the majority of cases, Registered Persons were able to demonstrate an effective periodic review cycle, in some instances the Commission identified the following:

• management information was insufficient to allow the Registered Person to complete a summary of the status of its periodic reviews or to demonstrate that reviews had been completed within the prescribed frequency;
• the review process did not require the reviewer to consider the client’s AML risk rating or CDD and decide whether any updates in this respect were required; and
• the frequency of reviews for low and standard risk clients was not prescribed. The Commission would expect a Registered Person to adopt a risk based approach in this respect and, where any additional risk factors are identified during the review process, amend client information and AML risk ratings.

4.4  Personal Account Dealing (“PA Dealing”)

A robust PA dealing policy is an important control against the potential risk of insider dealing and market abuse.

The primary purpose of a PA dealing policy is to manage the potential conflict of staff dealing on their own account as well as for clients, to ensure that the Registered Person is acting in the best interests of the client at all times.

This requires the Registered Person to ensure systems are in place to guard properly against involvement in financial crime, fraud and market abuse.

However, the Commission identified a number of instances where the PA Dealing Policy did not include specific reference to the Insider Dealing and Market Manipulation legal provisions, as set out in Part 3A of the Financial Services (Jersey) Law 1998.

Additionally, there were a number of instances where the Commission identified weaknesses in a Registered Person’s systems and controls, which prevented it from fully evidencing/demonstrating adherence to its PA Dealing Policy. For example, instances were identified where policies required pre-approval of all staff trades; however, PA Dealing approval forms were dated after the trade was dealt or the time of pre-approval was not recorded.

Finally, the Commission noted instances where PA Dealing did not feature prominently in the CMP. Its inclusion enables a Registered Person to test whether appropriate approval has been obtained and to evidence that instances of non-compliance have been identified, escalated and remediated, as appropriate.

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