Action Required Following Changes To Jersey's Proceeds Of Crime Legislation - Financial Services

The Proceeds of Crime (Jersey) Law 1999 (the Proceeds of Crime Law) has been amended to align more closely with the Financial Action Task Force (FATF) Standards, which comprise International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation (the Recommendations) and Methodology for Assessing Technical Compliance with such Recommendations. The amendments are anticipated to bring a significant number of entities that operate in or from within Jersey within Jersey's regime for the prevention and detection of money-laundering, the countering of terrorist financing and the countering of proliferation financing (AML/CFT/CPF). Entities should now take action to assess whether they are in scope and therefore subject to relevant obligations under the AML/CFT/CPF regime.

This briefing explains the new requirements and outlines actions that must be taken by (1) entities, if they are now in scope of the AML/CFT/CPF regime and (2) trust company service providers that propose to offer services to assist client entities to comply.

Background

The principal law governing Jersey's regime for AML/CFT/CPF is the Proceeds of Crime Law. Under the Proceeds of Crime Law, it is an offence for a 'financial services business' to fail to implement procedures for the prevention and detection of money laundering. Schedule 2 to the Proceeds of Crime Law specifies certain activities and operations, which when conducted as a business, constitute 'financial services business'. Under the Money Laundering (Jersey) Order 2008 (the Money Laundering Order), any person conducting any financial services business in or from within Jersey, and any Jersey-registered legal entity carrying out such activity anywhere in the world, is required to put in place specified AML/CFT/CPF measures.

With effect from 30 January 2023, a recast list of Schedule 2 activities came into force to ensure closer alignment with terminology from the FATF Standards. This means that relevant persons (including persons who were not previously caught by, or were exempt from, the AML/CFT/CPF regime, referred to as "previously exempt supervised persons" (PESPs)) should now consider whether they are conducting 'financial services business' and, if required, to register with the Jersey Financial Services Commission (JFSC) pursuant to the Proceeds of Crime (Supervisory Bodies) (Jersey) Law 2008 (the Supervisory Bodies Law). Registration must take place prior to 11.59pm on 30 June 2023, when the transitional period following the implementation of the amendments will come to an end.

Entities should be mindful of the potentially severe penalties that apply under AML/CFT/CPF legislation, both to the entity itself and to its senior management. In particular, carrying on unauthorised Schedule 2 business is an offence punishable by imprisonment for up to seven years and a fine. In this context, it should be noted that activities and operations conducted by legal arrangements such as trusts or limited partnerships, are carried on by their governing body acting in that capacity. Accordingly, the governing body of a legal arrangement (such as a trustee or general partner) is responsible for compliance with AML/CFT/CPF obligations in relation to the activities or operations it is conducting in relation to the legal arrangement.

Separation of conduct of business and prudential regulation from AML/CFT/CPF supervision

As mentioned above, at the heart of the changes is a revised Schedule 2 to the Proceeds of Crime Law. The list of activities and operations has been recast using terminology from the FATF Standards. The changes have achieved a separation of conduct of business and prudential regulation from AML/CFT/CPF supervision. For example, the list no longer carves out activities based on exemptions to the Financial Services (Jersey) Law 1998 (the Financial Services Law), such as the 'professional investor regulated scheme' or 'connected company' exemptions on which a number of SPV entities rely. These exemptions will continue to apply under the Financial Services Law (so that such activities will remain exempt from Financial Services Law registration and other requirements).

However, those activities and operations are now caught under Schedule 2 and relevant PESPs are obliged to register under the Supervisory Bodies Law (with the exception of non-professional trustees, in respect of which see further below) and will become supervised persons subject to the provisions of Jersey's AML/CFT/CPF regime, including the Proceeds of Crime Law, the Money Laundering Order and the JFSC's AML/CFT/CPF Handbook.

Schedule 2 is broadly framed and the list of activities that constitute 'financial services business' are arranged under the following headings:

Financial Institutions (FIs) (including lending and investing, fund and security services activities, portfolio management and investing, administering or managing funds or money)
Designated Non-Financial Businesses and Professions (DNFBPs) (such as lawyers, accountants and real estate agents). DNFBPs also include Trust and Company Service Providers (TCSPs) (including formation agents, acting or arranging for another person to act as a director or secretary of a company and providing a registered office for a company or a partnership)
Virtual Assets Service Providers (VASPs) (including among others token exchanges and those providing custody, administrative or other services in respect of virtual assets); and
Express Trusts

The JFSC has published guidance on the interpretation of Schedule 2. This guidance emphasises that the activities in Schedule 2 should be interpreted broadly. Indeed, it is expected that businesses will "favour inclusion over exclusion" when determining whether their activities or operations fall within Schedule 2.

Assessing whether activities and operations constitute financial services business

Persons who have until now been exempt from, or out of scope of, formal AML/CFT/CPF requirements should first assess whether they are now in scope, i.e. whether they are a PESP. There are a number of high level filters that determine whether an activity or operation constitutes financial services business under the Proceeds of Crime Law, namely:

whether they are conducting any of the activities or operations specified in the recast Schedule 2; and
if so, whether they are conducting the relevant activity or operation "as a business"

The JFSC guidance includes principles to assist persons in determining whether their activities are conducted as a business, though neither Jersey law, nor the FATF Standards on which it is based, is prescriptive and a qualitative analysis should be undertaken in respect of each activity that a person conducts. The guidance sets out a number of indicators which may support the conclusion that an activity is conducted as a business. These indicators include the following but the list is non-exhaustive and other factors may be relevant:

holding out or publicly offering to conduct the activity or operation for other persons
the activity or operation is conducted for commercial purposes with the intention to earn a profit through receipt of compensation, including non-financial benefits or benefits in kind, and whether or not the profit is made by the person themselves or someone else (such as another group company)
conducting the activity or operation for multiple persons
conducting more than one activity falling under Schedule 2; and
conducting the activity or operation with a view to making a profit, including where the intention is for the profit to come to someone else such as another group company

A further filter should then be applied as follows. In respect of FIs, to be considered as a business the activity must be conducted for or on behalf of a 'customer', in respect of TCSPs, the service must be provided for a 'third party' and, in respect of VASPs, the service must be provided for or on behalf of 'another person'. If they do not, the relevant entity will not be in scope.

According to the JFSC's guidance, in respect of FIs, certain activities will not be considered as being conducted for or on behalf of a customer where:

the entity and those for whom the activity is performed are under the same legal and equitable ownership
the activity is conducted as part of a business activity under common direction; and
there are no persons involved in the conduct of the activity or operation outside that same legal and equitable ownership

It is not automatically the case that intra-group activity will be carved out, however, and each activity should be carefully assessed on its facts.

In respect of TCSPs, the concept of providing a service to a third party encompasses similar considerations to those outlined above to identify customers but also extends more broadly. It includes, among other things, anyone who has entered into an agreement for the provision of the services (such as the settlor or instigator, or the beneficiaries of a trust) and anyone who may receive the benefit of the services provided (for instance a limited partner).

In every case the JFSC's guidance should be considered in view of the relevant entity's relationships with those for whom or on behalf of it conducts the activity in question and legal advice should be sought, where appropriate.

What action is required if a person now falls within scope of Schedule 2?

By no later than the end of the transitional period (30 June 2023), persons now in scope must:

register with the JFSC under the Supervisory Bodies Law
conduct a Business Risk Assessment and adopt and maintain AML/CFT/CPF policies and procedures; and
appoint a money laundering compliance officer (MLCO) to monitor compliance with these and with applicable legislation and codes of practice; and
appoint a money laundering reporting officer (MLRO) to whom reports of possible money laundering may be made

The one exception to the above is that a non-professional trustee will continue not to be required to register under the Supervisory Bodies Law in accordance with the Proceeds of Crime (Duties of Non-Professional Trustees) (Jersey) Order 2016, though it will be subject to the requirements of the Money Laundering Order.

A PESP may elect to comply with its AML/CFT/CPF obligations in three ways:

by itself
by engaging the services of a regulated service provider known as the "anti-money laundering service provider" (AMLSP); or
through outsourcing within the same group or to a third party (though the provision of an MLRO and MLCO cannot be outsourced in this way)

PESPs that carry on a regulated business, which are not required to register under the Supervisory Bodies Law and which have an established place of business in Jersey (other than provided by a regulated trust company business or fund services business), are not eligible to appoint an AMLSP.

It is anticipated that the majority of PESPs, which already receive services from a Jersey regulated service provider which complies with the AML/CFT/CPF regime for itself in respect of the relevant entity, will engage with that service provider to assist with these obligations.

Nevertheless, the responsibility to comply with AML/CFT/CPF obligations will rest with the PESP itself (or, in relation to a PESP which is a legal arrangement, its governing body), as will the obligation to comply with applicable sections of the new Code of Practice for AMLSPs and their customers published by the JFSC. The arrangements between a PESP and its AMLSP must be clearly considered on both sides, both at the outset and on an ongoing basis, and the arrangements should be formally documented and adopted by the respective parties.

What action is required if a person was previously in scope of Schedule 2?

By no later than 30 June 2023, persons who were previously in scope of Schedule 2 must file a notification with the JFSC that they intend to continue carrying on the Schedule 2 business.

What should service providers do now?

Service providers that intend to act as AMLSPs to client entities are required to seek the JFSC's approval to perform the role. The application will include the identification of the PESPs for which the AMLSP will act, and details of the individuals who will perform the roles of MLROs and MLCOs to those PESPs.

The MLRO and MLCO must be employed by the AMLSP or a member of its financial group, be based in Jersey and have sufficient experience and skills for the role. AMLSPs should ensure that MLCOs and the operational aspects of their role will meet the JFSC's requirements, set out in the new Code of Practice.

AMLSPs will need to extend their own Business Risk Assessment, AML/CFT/CPF strategy, systems and controls (including policies and procedures) to cover the provision of AMLSP services to PESPs. In providing such services, AMLSPs should view the customers of the PESPs as if they were the AMLSP's own customers.

As set out above, the PESP will retain responsibility for the AML/CFT/CPF function even where an AMLSP is appointed. Inherent in the AMLSP regime is the concept that the AMLSP must satisfy its customer (the PESP) that it will fulfil the AML/CFT/CPF obligations on an ongoing basis. This includes among other things demonstrating how a PESP's MLRO will be provided with reports of potential money laundering or terrorist or proliferation financing.

Prospective AMLSPs should carefully digest the new legislation and JFSC guidance, including the new Code of Practice, and put arrangements in place promptly to ensure they are able to support their clients effectively. It is recommended that applications for the AMLSP role should be submitted to the JFSC by 31 March 2023 to ensure that the requisite approval is obtained prior to the end of the transitional period.

How can Ogier assist?

Ogier's regulatory team is advising on all aspects of the new AML/CFT/CPF regime, including:

assisting entities in assessing whether they are now in scope of Schedule 2 and whether they are required to register under the Supervisory Bodies Law
advising PESPs on governance arrangements
reviewing arrangements between a PESP and its AMLSP to ensure they comply with legal and regulatory requirements
advising AMLSPs on their preparation for and implementation of the AMLSP role; and
assisting with the preparation of Business Risk Assessments and the adoption of policies and procedures

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.