Tue, Nov 10, 2020

Jersey’s National Risk Assessment - So What?

A National Risk Assessment (NRA) is an assessment which forms part of the Financial Action Task Force recommendations and is a process whereby countries assess the risk of it being used by criminals to launder money obtained from criminal activity. The Jersey NRA was published on September 30, and not many participants were surprised at the results of the risk ratings assigned to Jersey as a whole or for individual sectors operating within it. Although we summarize the results at a high level in this article, the more fundamental question for Jersey institutions is what the NRA results mean for them.

In summary, although the NRA stresses that the risk heatmap of business sectors in Jersey should not be compared to other jurisdictions, it highlights that the results are similar to that of other international finance centers (IFCs). For example, trust and corporate services providers (TCSPs), the funds and investment management sectors are rated as medium high for money laundering vulnerability, with banking and the legal sector rated as medium risk. Given that Jersey, as well as other IFCs, mainly provide services to clients who are residents elsewhere and that these industries offer products and services that could be used for layering proceeds of crime by criminals, these ratings are not surprising.

A key clue to of the reasons for the overall ratings lies in the NRA’s list of the ten residual risks. Although not all of the risks are summarized in this article, we deal with some of them below, some of the associated actions recommended to address the ten residuals risks and what these may mean for firms in Jersey.

One of the ten risks listed is the law enforcement agencies’ (LEAs) cooperation with jurisdictions where crimes, or “common predicate offices”, occur requires improvement in order for Jersey LEAs to pursue effective money laundering investigations and prosecutions locally. The ability to successfully prosecute for money laundering failures, whether they are in relation to firms failing to have adequate policies and procedures or for pursuing cases of money laundering, is a common area for improvement for many IFCs. Linked to this is also the risk that the quality of intelligence made available to the Financial Intelligence Unit (FIU), together with resource constraints suffered there. This means that it is challenging for Jersey to identify, investigate and prosecute money laundering cases, especially those which present the greatest threat to Jersey, namely cross-border money laundering.  Generally speaking, money laundering in IFCs is often a cross-border activity but laws to combat it are locally implemented. This makes it very difficult for one country to combat money laundering cases by itself and collaboration across borders is vital, and the risk listed in regard to the FIU is therefore not wholly unsurprising.

The risks summarized above point to development needs in the way in which authorities operate, and this is as much of a global risk as it is a local one, as recently highlighted by the FinCEN leaks of suspicious activity reports (SARs).

Other key risks highlighted by the NRA are that policy development is not sufficiently agile in relation to emerging threats faced by Jersey, that the authorities do not have a sufficiently granular understanding of money laundering risks in key market sectors in Jersey and that their understanding of the risks specific jurisdictions pose to Jersey in relation to cross-border money laundering is not sufficiently developed by either authorities or industry. These risks are interesting, not only as they point to the need for improvements at both authorities as well as industry, but also that we might expect action points to update and/or improve the legislative framework to improve policy development in Jersey. This is indeed the case, as highlighted by examples provided below.

The action points put forward to deal with the above (and other) risks are the most meaningful indicator to firms as to what they need to prepare for in terms of future developments. In particular, it is recommended that improved guidance and communication is provided to industry by, for instance, increasing the feedback to industry on the outcomes of SARs. In our view, this will be welcomed by industry as although SARs are routinely submitted by firms to the FIU, firms often require feedback as to the quality of information reported and it is clear this requires improvement as indicated by the risk that the FIU does not receive prosecution-standard intelligence. It is also interesting that intelligence is often received from outside of Jersey that may at times warrant investigation of local wrongdoers. The action recommended for LEAs to work actively to “encourage collaboration with other jurisdictions to facility increased exchange of information” should act to facilitate this.  Hence, we will likely see more guidance and communication from authorities and regulators to industry (as recommended in the action points), and hopefully better intelligence from industry going the other way as a result, thereby improving the ability for local authorities to prosecute money laundering cases.

As also recommended by the action points, public statements by authorities will also provide more detail on the type of behaviours that led to a sanction so that those behaviors are discouraged.  It is also recommended that the Money Laundering (Jersey) Order 2008 (MLO) will be updated to “allow for criminal and civil sanctions to be effectively taken”. This may mean that we will see more civil and criminal prosecutions in years to come.

In conclusion, although we have not covered all risks and action points stemming from the NRA in this article, it is clear that the risks identified and action points recommended apply to both authorities, regulators and firms alike. Whilst the results may not have been surprising, it is perhaps a comfort to industry that all institutions in Jersey have been assigned areas for improvement and that these are not just confined to industry alone. When it comes to protecting the island from money laundering threats and vulnerabilities, it appears to be a case of all for one and one for all.

This article was first published in the Jersey Evening Post on October 7.

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