Sections 3 and 4 address the CDD requirements necessary to enable a licenceholder to develop a customer profile and provide the base from which to monitor the relationship.

Under paragraph 15 of the Codes licenceholders must monitor the conduct and activities of the relationship / account / client company / foundation to ensure that they are consistent with the nature of business, the risk profile, source of funding and estimated turnover that was determined when the relationship / account / client company was established.

Effective ongoing monitoring is vital to maintaining a proper understanding of a customer's activities, and is an integral part of any effective AML/CFT programme. It is key to allowing a licenceholder to detect unusual or suspicious activity. An unusual transaction may be in the form of activity that is inconsistent with the expected pattern for that customer, or with the normal business activities for the type of product or service that is being delivered. Complex, large and unusual transactions or patterns of transactions that have no apparent visible or economic purpose may indicate money laundering or terrorist financing.

Failure to adequately monitor customers' activities could expose a licenceholder to potential abuse by criminals, and may call into question the adequacy of systems and controls, or the prudence and integrity or fitness and properness of the management of licenceholders.

Under paragraph 8(2) of the Codes licenceholders must give special attention to business relationships and transactions with persons or legal arrangements resident or located in countries that do not sufficiently apply the FATF Recommendations. Particular attention must be paid to transactions and business connected with countries and territories assessed as higher risk or which have been classified by the FATF as non-cooperative in the fight against money laundering and terrorist financing.

In determining which jurisdictions do not, or insufficiently apply the FATF Recommendations, a licenceholder may consider:

(a) Findings of reports conducted by the FATF, FATF-style regional bodies, the Group of International Finance Centre Supervisors, the IMF, and the World Bank.

(b) Its own experience or the experience of other group entities (where part of a multi-national group) which may have indicated weaknesses in other jurisdictions.

Licenceholders must be vigilant for changes in the basis of the relationship with the customer over time. This may be where:

(a) new products or services are entered into;

(b) new corporate or trust structures are created;

(c) a change in a customer's employment or other circumstances takes place;

(d) the stated activity or turnover of a corporate entity changes or increases; or

(e) the nature, volume or size of transactions increases etc.

Possible characteristics to monitor could be:

(a) the nature and type of a transaction;

(b) the frequency and nature of a series or pattern of transactions;

(c) the amount of any transactions, paying particular attention to particularly large transactions;

(d) the geographical origin/destination of a payment or receipt;

(e) the parties concerned with a view to ensuring that there are no payments to or from a person on a sanctions list;

(f) the customer's normal activity or turnover.

Where the basis of the relationship changes significantly, licenceholders must carry out further CDD procedures to ensure that the revised risk and basis of the relationship is fully understood. Ongoing monitoring procedures must take account of these changes.

Licenceholders must ensure that any updated CDD information obtained through meetings, discussions, or other methods of communication with the customer is recorded and retained with the customer's records. That information must be available to the MLRO.

Ongoing monitoring of a customer's activities will allow licenceholders to continue to build a profile of the customer, and will entail the ongoing collection of CDD information.

5.1.1 Taking a risk-based approach to monitoring

The extent of monitoring will be linked to the risk profile of the customer which has been determined through the risk assessment required by Paragraph 3 of the Codes. To be most effective, resources should be targeted towards relationships presenting a higher risk of money laundering or terrorist financing.

Paragraph 8 of the Codes requires licenceholders to have particular regard to whether a business relationship poses a higher risk. High risk relationships, e.g. those involving PEPs, will generally require more frequent intensive monitoring. In order to monitor high risk situations, a licenceholder must consider:

(a) whether it has adequate procedures or management information systems in place to provide relationship managers and reporting officers with timely information, including information on any connected accounts or relationships;

(b) how it will monitor the sources of funds, wealth and income for higher risk customers and how any changes in circumstances will be recorded;

(c) conducting an annual independent review of CDD information, activity and transactions.

When considering how best to monitor customer transactions and behaviour, a licenceholder should take into account:

(a) the size and complexity of its business;

(b) its business risk assessment;

(c) the nature of its systems and controls;

(d) the monitoring procedures that already exist to satisfy other business needs; and

(e) the nature of the products and services and the means of delivery.

Methods to be considered include:

(a) simple exception reports to advise supervisors/operations managers of large transactions for their review;

(b) more complex exception reports to advise the MLRO, or other appropriate staff, of customers and transactions matching certain predetermined criteria;

(c) computerised transaction monitoring systems.

5.2.1 Monitoring complex and unusual transactions

Paragraph 15 of the Codes requires licenceholders to scrutinise transactions paying particular attention to transactions which are complex, large and unusual, or unusual patterns of transactions which have no apparent economic or lawful purpose.

Where such transactions are noted, paragraph 7 of the Codes requires licenceholders to undertake procedures to examine the purpose and background of the transactions or circumstances. This may involve making enquiries of the customer and asking the questions an honest man would reasonably ask himself in the circumstances. Such enquiries, when conducted properly and in good faith, do not constitute tipping off where:

(a) a suspicious transaction report has not yet been made to the FCU;

(b) the licenceholder has no reason to believe a suspicious transaction report has been made to the FCU;

(c) the licenceholder has no knowledge of or reason to believe that an investigation of the customer is about to be started or already under way by the relevant authorities.

In addition, if CDD information and documentation was not obtained at the time the relationship was commenced or it is inadequate, licenceholders must take steps to obtain the relevant documentation and information.

These enquiries can be addressed using a customer service approach. They are directly linked to the CDD requirement, and indicate the importance of knowing your customer in detecting unusual or suspicious activity.

Such enquiries and their result should be properly documented and be available to any competent authorities and auditors who request it. Where there is any suspicion a report must be made to the FCU using the Financial Disclosure Form, a link to this can be found at Appendix F.

5.2.2 Considering unreasonable customer instructions

Licenceholders must remain conscious that under the Codes they have an obligation "to forestall and prevent money laundering and terrorist financing." They must also remain conscious that under the primary legislation the offence of assisting a launderer or terrorist exists.

A customer who is, or may be, attempting to launder money will frequently structure his instructions in such a way that the economic or lawful purpose of the instruction is not apparent or is absent entirely. When asked to explain circumstances or transactions, the customer may be evasive or may give explanations which do not stand up to reasonable scrutiny.

Where a licenceholder is suspicious, or has knowledge of, money laundering or terrorist financing, it should not unquestioningly carry out instructions exactly as issued by the client.

If a licenceholder unquestioningly carries out unreasonable instructions in this manner, it may mean that it is failing in its duty to "forestall and prevent money laundering and terrorist financing", and in extreme circumstances may place itself in a position of potentially being construed to have assisted money laundering or terrorist financing.

When faced with unreasonable customer instructions, the Commission recommends that licenceholders take legal advice and also contact the FCU prior to undertaking any such transactions.

Licenceholders must also be robust when faced with customer instructions to move funds, make cash collections available etc., where the customer has not satisfied the CDD requirements of the licenceholder, either at the outset or during the course of the business relationship. The desire on the part of the customer to move funds without satisfying the CDD requirements of the licenceholder can be highly indicative of the customer deliberately evading the requirements, and may be highly indicative of criminal intent on the part of the customer. In addition, licenceholders will need to have regard to the remitter information that is required to be included in respect of wire transfer transactions. Requirements came into effect from 1 January 2007. (See Section 5.3 below).

The failure by a licenceholder to satisfy its AML/CFT obligations while at the same time permitting the movement of significant customer funds will be viewed with concern by the Commission.

5.2.3 Handling cash transactions

Where cash transactions are being proposed by customers, and such requests are not in accordance with the customer's known reasonable practice, licenceholders must approach such situations with caution and make relevant further enquiries.

Where the licenceholder has been unable to satisfy himself that any cash transaction is reasonable activity, and therefore he considers it suspicious, he should make a suspicious transaction report to the FCU. Licenceholders should be especially robust when dealing with requests for cash collections by customers, especially where the customer is resident in jurisdictions where tax evasion is a known problem.

Licenceholders should be vigilant for explanations given by customers to explain the need for cash which do not stand up to scrutiny.

5.2.4 "Hold Mail" relationships

"Hold Mail" relationships are defined as those where the customer has instructed the licenceholder not to issue any correspondence to the beneficial owner/customer/account holder's address. Licenceholders must exercise due caution around such relationships, only allowing relationships to be conducted on a "Hold Mail" basis as an exception and where there are plausible and legitimate reasons.

Evidence verifying the identity of the beneficial owner/customer/account holder must be obtained by the licenceholder, even where an Eligible Introducer introduced the business. Due to the increased money laundering risk they represent, "Hold Mail" relationships must also be regularly monitored and reviewed.

Licenceholders must have controls in place for identifying when existing relationships change status to "Hold Mail", and evidence verifying the identity of the client/account holder must be obtained, where not already on the licenceholder's file.

Relationships featuring a "c/o" address must not be treated as "Hold Mail" relationships, as mail is being issued, albeit not necessarily to the beneficial owner/client/account holder's address. There are of course many genuine innocent circumstances where a "c/o" address is used, but the Commission expects licenceholders to monitor such relationships more closely if they believe they represent a higher risk.

5.2.5 Mail / Email Forwarding

CSPs may provide services to client entities which include mail/email collection and forwarding. As with hold mail relationships, mail/email forwarding relationships carry additional risk to licenceholders and they should exercise due caution as a result.

Where mail collecting and forwarding services are provided, CSPs should monitor the mail/email a client entity receives by opening and examining it. This procedure would apply to all client entities irrespective of when they were taken on as clients. Where the content of the mail/email does not accord with the known activity of the client entity, the CSP must conduct further enquiries, and in the event of knowledge or suspicion of money laundering or terrorist financing, make a disclosure to the FCU as appropriate.

5.2.6 Monitoring for money or value transfer services

FATF Recommendation 14 relates to Money or Value Transfer Services. If such businesses are operating on the Isle of Man they must be licensed by the Commission under the Financial Services Act 2008.

However, it may well be that licenceholders may unknowingly be providing services to persons or entities who are involved in, or serve as a cover for, money or value transfer services that are not correctly licensed or registered with the appropriate authorities. Licenceholders must be vigilant for indications that their services may be being abused in such a manner. In the event of knowledge or suspicion of such activity, they must make a disclosure to the FCU as appropriate.

5.3.1 Background

The FATF first issued international standards dealing with electronic funds transfers as Special Recommendation VII ("SR VII") on Wire Transfers in October 2001. The FATF reissued its Recommendations and Interpretive Notes following an extensive revision process on 16 February 2012 with the document "International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation". This can be found at http://www.fatf-gafi.org/document/50/0,3746,en_32250379_32236920_49653426_1_1_1_1,00.html. This document merged the 9 Special Recommendations on Terrorist Financing with the 40 Recommendations on Money Laundering, at which point, the standards in SR VII became Recommendation 16.

Recommendation 16 (formerly SR VII), has the objective of enhancing the transparency of electronic payment transfers ("wire transfers") of all types, domestic and cross border, thereby making it easier for law enforcement to track funds transferred electronically by terrorists and criminals.

On 26 July 2005 the European Commission issued a proposal for a Regulation ("the Regulation") to implement Special Recommendation VII ( Recommendation 16 as from 16 February 2012) within the EU with effect from 1 January 2007. In its final form the Regulation was approved by the European Parliament on 6 July 2006 and by the ECOFIN Council on 7 November 2006. It was published in the Official Journal of the European Union (OJ L 345) on 8 December 2006 (EU Regulation 1781/2006). It is available at http://eur-lex.europa.eu/LexUriServ/site/en/oj/2006/l_345/l_34520061208en00010009.pdf

Whilst the implementation date was set at 1 January 2007, sanctions for non-compliance were not enforced until 15 December 2007, coincident with the deadline for implementation of the Third EU Money Laundering Directive.

The Regulation provides for EU Member States to establish agreements with territories outside the EU with whom they share a monetary union and payment and clearing systems for them to be treated as if they were part of the Member State concerned, so that the reduced information requirement can apply to payments passing between that Member State and its associated territory (but not between any other Member State and that territory). In the case of the UK, such arrangements will include the Isle of Man and the Channel Islands.

The Regulation requires the ordering financial institution to ensure that all wire transfers carry specified information about the originator (Payer) who gives the instruction for the payment to be made. The core requirement is that this information consists of name, address and account number; however, there are a number of permitted variations and concessions and those relevant to the Handbook are set out in 5.3.4 below.

To implement SR VII (now Recommendation16) in the Isle of Man, the EU Regulation was applied (with appropriate modifications) as part of the law by the European Communities (Wire Transfers Regulation) (Application) Order 20071 as amended by the European Communities (Wire Transfers Regulation) (Application) (Amendment) Order 2007 (Appendicies H(a) and H(b). The EC Wire Transfers Regulation (Enforcement) Regulations 2007 (Appendix I) were made to implement the Order. These Isle of Man Regulations contain enforcement provisions and sanctions for non-compliance and came into force on 15 December 2007 coincident with the introduction of sanctions throughout the European Union as described above.

References to the UK Payment Area in this Section are to an area that comprises the United Kingdom, the Bailiwick of Guernsey, the Bailiwick of Jersey and the Isle of Man.

To ensure that the data protection position is beyond any doubt, it may be advisable for a payer Payment Service Provider ("PSP") to ensure that terms and conditions of business include reference to the information that will be provided.

5.3.2 Scope of the Regulation

The Regulation is widely drawn and intended to cover all types of funds transfer falling within its definition as made "by electronic means" other than those specifically exempted wholly or partially by the Regulation. For UK Payment Area based PSPs it therefore includes, but is not necessarily limited to, international payment transfers made via SWIFT, including various Euro payment systems, and domestic transfers via CHAPS and BACS.

The Regulation specifically exempts transfers where both Payer and Payee are PSPs acting on their own behalf, i.e. this will apply to MT 200 series payments via SWIFT. This exemption will include MT 400 and MT 700 series messages when they are used to settle trade finance obligations between banks.

The UK credit clearing system is out of scope of the Regulation as it is paper based and hence transfers are not carried out "by electronic means". Cash and cheque deposits over the counter via bank giro credits are not therefore affected by the Regulation.

5.3.3 Pre-conditions for making payments

Licenceholders must ensure that the Payer information conveyed in the payment relating to account holding customers is accurate and has been verified. The verification requirement is deemed to be met for account holding customers of the licenceholder whose identity has been verified to comply with AML/CFT requirements, i.e. in the Isle of Man in accordance with the Codes and the Handbook. No further verification of such account holders is required, although licenceholders may wish to exercise discretion to do so in individual cases. (See Section 5.3.4 below under Information Requirements where the named Payer is not holder of the account to be debited.)

Before undertaking one-off payments in excess of Euros 1000 on the instructions of non-account holding customers, a licenceholder must verify identity and either date of birth or address in accordance with Article 5.2 of the Regulation. Evidence of verification must be retained with the customer information in accordance with Record Keeping Requirements (see Section 5.3.6 below). For non-account based transfers of Euros 1000 and under, licenceholders are not required by the Regulation to verify the Payer's identity (e.g. by passport), except when several transactions are carried out which appear to be linked (see Article 5.2 of the Regulation) and exceed Euros 1000. NB, even in cases where the Regulation does not require verification, the customer information has to be obtained and it may be advisable for the licenceholder to verify the identity of the Payer in all cases.

5.3.4 Information Requirements

5.3.4.1 Complete payer information:

Except as permitted below, complete Payer information must accompany all wire transfers. Effectively, the complete requirement applies where the destination PSP is located in a jurisdiction outside the UK Payment Area. Complete Payer information consists of: name, address and account number.

(a) Address ONLY may be substituted with the Payer's date and place of birth, or national identity number or customer identification number. In the event a Payee PSP demands the Payer's address, where one of the alternatives had initially been provided, the response to the enquiry should point that out. Only with the Payer's consent or under judicial compulsion should the address be additionally provided.

(b) Where the payment is not debited to a bank account, the requirement for an account number must be substituted by a unique identifier which permits the payment to be traced back to the Payer. The Regulation defines a unique identifier as "a combination of letters, numbers or symbols, determined by the payment service provider, in accordance with the protocols of the payment and settlement system or messaging system used to effect the transfer of funds."

(c) The extent of the information supplied in each field will be subject to the conventions of the messaging system in question and is not prescribed in detail in the Regulation.

(d) The account number could be, but is not required to be, expressed as the IBAN (International Bank Account Number).

(e) Where a bank is itself the Payer, as will sometimes be the case even for SWIFT MT 102 and 103 messages, this Guidance considers that supplying the Bank Identifier Code (BIC) constitutes complete Payer information for the purposes of the Regulation, although it is also preferable for the account number to be included where available. The same applies to Business Entity Identifiers (BEIs), although in that case the account number should always be included. As the use of BICs and BEIs is not specified in the Regulation, there may be requests from Payee PSPs for address information.

(f) Where payment instructions are received manually, e.g. over the counter, the Payer name and address (or permitted alternative) should correspond to the account holder. Any request to override customer information should be processed within a rigorous referral and approval mechanism to ensure that only in cases where a licenceholder is entirely satisfied that the reason is legitimate should the instruction be exceptionally dealt with on that basis. Any suspicion of improper motive by a customer must be reported to the licenceholder's MLRO.

5.3.4.2 Reduced Payer Information:

Where the PSPs of both Payer and Payee are located within the UK Payment Area, wire transfers need be accompanied only by the Payer's account number or by a unique identifier which permits the transaction to be traced back to the Payer.

However, if requested by the Payee's PSP, complete information must be provided by the Payer's PSP within 3 working days, starting the day after the request is received by the Payer's PSP. ("Working days" is as defined in the jurisdiction of the Payer's PSP).

5.3.4.3 Batch File Transfers:

A hybrid complete/reduced requirement applies to batch file transfers from a single Payer to multiple Payees outside the UK Payment Area in that the individual transfers within the batch need carry only the Payer's account number or a unique identifier, provided that the batch file itself contains complete Payer information.

5.3.4.4 Payments via Intermediaries:

Intermediary PSPs ("IPSPs") must, subject to the following guidance on technical limitations, ensure that all information received on the Payer which accompanies a wire transfer is retained with the transfer. A requirement to detect 'lack of presence of information' (see Section 5.3.5 below under Checking Incoming Payments) applies in the same way as for transfers of funds received direct by the Payee PSP.

It is preferable for an IPSP to forward payments through a system which is capable of carrying all the information received with the transfer. However, where an IPSP within the Isle of Man is technically unable to on-transmit Payer information originating outside the UK Payment Area, it may nevertheless use a system with technical limitations provided that:

(a) if it is aware that the Payer information is missing or incomplete it must concurrently advise the Payee's PSP of the fact by an agreed form of communication, whether within a payment or messaging system or otherwise,

(b) it retains records of any information received for 5 years, whether or not the information is complete. If requested to do so by the Payee's PSP, the IPSP must provide the Payer information within 3 working days of receiving the request.

Note: the above information requirements are minimum standards. It is open to licenceholders to elect to supply complete Payer information with transfers which are eligible for a reduced information requirement and thereby limit the likely incidence of inbound requests for complete information. (In practice a number of large UK and European banks have indicated that they will be providing complete payer information for all transfers where systems permit).

5.3.5 Checking Incoming Payments

Licenceholders must have effective procedures for checking that incoming wire transfers are compliant with the relevant information requirement. In order not to disrupt straight-through processing, it is not expected that monitoring should be undertaken at the time of processing the transfer. The Regulation specifies that PSPs should have procedures "to detect a lack of presence" of the relevant information, which is a reference to the validation rules of whichever messaging or payment system is being utilised. Additionally, the Regulation requires PSPs to take remedial action when they become aware that an incoming payment is not compliant. Hence, in practical terms it is expected that this requirement will be met by a combination of the following:

Licenceholders must therefore subject incoming payment traffic to an appropriate level of post event random sampling to detect non-compliant payments. This sampling should be risk based, e.g.:

(a) the sampling could normally be restricted to payments emanating from PSPs outside the UK Payment Area where the complete information requirement applies;

(b) the sampling could be weighted towards non FATF member jurisdictions, particularly those deemed high risk under a PSP's own country risk assessment, or by reference to external sources such as Transparency International, or FATF or IMF country reviews;

(c) focused more heavily on transfers from those Payer PSPs who are identified by such sampling as having previously failed to comply with the relevant information requirement;

(d) other specific measures might be considered, e.g. checking, at the point of payment delivery, that Payer information is compliant and meaningful on all transfers that are collected in cash by Payees on a "Pay on application and identification" basis.

NB None of the above requirements obviate the obligation to report suspicious actions in accordance with normal suspicious transaction reporting procedures.

If a licenceholder becomes aware in the course of processing a payment that it contains meaningless or incomplete information, under the terms of Article 9(1) of the Regulation it should either reject the transfer or ask for complete information on the Payer. In addition, in such cases, a licenceholder is required to take any necessary action to comply with any applicable law or administrative provisions relating to money laundering and terrorist financing. Dependent on the circumstances such action could include making the payment or holding the funds and advising the MLRO.

Where a licenceholder becomes aware subsequent to processing the payment that it contains meaningless or incomplete information either as a result of random checking or other monitoring mechanisms under its risk based approach, it must:

(a) seek the necessary information on the Payer and/or

(b) take any necessary action under any applicable law, regulation or administrative provisions relating to money laundering or terrorist financing.

Where a PSP is identified as having regularly failed to comply with the information requirements, a licenceholder must take steps, which may initially include issuing warnings and setting deadlines, prior to either refusing to accept further transfers from that PSP or deciding whether to terminate its relationship with that PSP either completely or in respect of funds transfers.

A licenceholder must consider whether incomplete or meaningless information of which it becomes aware on a funds transfer constitutes grounds for suspicion which would be reportable to its MLRO for possible disclosure to the FCU.

With regard to transfers from PSPs located in non-member countries of FATF, licenceholders should endeavour to transact only with those PSPs with whom they have a relationship that has been subject to a satisfactory risk-based assessment of their AML/CFT culture and policy and who accept the standards set out in the Interpretative Note to FATF Recommendation 16.

It should be borne in mind when querying incomplete payments that some FATF member countries outside the EU may have framed their own regulations to incorporate a threshold of Euro or US Dollars 1000 below which the provision of complete information on outgoing payments is not required. This is permitted by the Interpretative Note to FATF Recommendation 16. The USA is a case in point. This does not preclude Isle of Man PSPs from calling for the complete information where it has not been provided, but it is reasonable for a risk-based view to be taken on whether, or how far, to press the point.

5.3.6 Record Keeping Requirements

Records of all electronic payments and messages must be retained in accordance with paragraph 17 of the Codes.

5.4.1 The importance of CDD information to the recognition and evaluation of suspicious activity

Satisfactory CDD procedures provide the basis for recognising unusual and suspicious transactions and events. An effective way of recognising suspicions is knowing enough about customers, their particular circumstances and their normal expected activities to recognise when a transaction or instruction, or a series of transactions or instructions, is abnormal.

The requirements for obtaining and updating CDD are contained in Sections 3 and 4 above. The mechanisms for monitoring transactions and customer behaviour to identify the unusual are contained in Section 5.

Sufficient guidance must be given to staff to enable them to form a suspicion or to recognise when money laundering or terrorist financing is taking place. This should involve training that will enable appropriate staff, adequately and responsibly, to seek and assess the information that is required for them to judge whether a transaction or instruction is suspicious in the circumstances. Guidance and training will need to take account of the nature of the transactions and instructions that staff are likely to encounter, the type of product or service and the means of delivery, i.e. whether face-to-face or remote.

Further guidance on staff training is provided at Section 7.

5.4.2 What constitutes knowledge and suspicion of money laundering or terrorist financing?

Licenceholders have an obligation to report where there is knowledge or suspicion of money laundering or terrorist financing (see Section 6 below).

Generally speaking, knowledge is likely to include:

(a) Actual knowledge;

(b) Knowledge of circumstances which would indicate facts to an honest and reasonable person;

(c) Knowledge of circumstances which would put an honest and reasonable person on enquiry.

Suspicion is more subjective. Suspicion is personal and falls short of proof based on firm evidence. Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation. For example the Court of Appeal held at:

"It seems to us that the essential element in the word "suspect" and its affiliates, in this context, is that the defendant must think that there is a possibility, which is more than fanciful, that the relevant facts exist. A vague feeling of unease would not suffice. But the statute does not require the suspicion to be 'clear' or 'firmly' grounded and targeted on specific facts' or based on 'reasonable grounds".

As the types of transactions which may be used by money launderers are almost unlimited, it is difficult to determine what will constitute a suspicious transaction. However, it is important to properly differentiate between the terms "unusual" and "suspicious".

The key is knowing enough about the customer's business to recognise that a transaction, or a series of transactions, is unusual and from an examination of the unusual, whether there is a suspicion of money laundering or terrorist financing.

Where a transaction is inconsistent in amount, origin, destination, or type with a customer's known, legitimate business or personal activities, the transaction must be considered unusual, and the licenceholder put "on enquiry."

Where the licenceholder conducts enquiries and obtains what he considers to be a satisfactory explanation of the activity or transaction, he may conclude that there are no grounds for suspicion, and therefore take no further action as he is satisfied with matters. However, where the licenceholder's enquiries do not provide a satisfactory explanation of the activity or transaction, he may conclude that there are grounds for suspicion, and must make a disclosure.

The single issue that should most arouse licenceholders' attention is the transaction or a series of transactions that has no commercial reason, or which does not constitute the most logical, convenient or secure way to do business.

For a person to have knowledge or be suspicious, he does not need to know the exact nature of the criminal activity underlying the money laundering, or that the funds themselves were definitely those arising from the criminal offence.

5.4.3 What constitutes reasonable grounds for knowledge or suspicion?

In addition to establishing a criminal offence when suspicion or actual knowledge of money laundering or terrorist financing is proved, Section 142 and 143 of the Proceeds of Crime Act 2008 and Section 14 of the Anti-Terrorism and Crime Act 2003 provide for an offence to be committed where there are reasonable grounds to know or suspect that another person is engaged in money laundering or that property relates to the funding of terrorism. This introduces an objective test of suspicion. The test would be likely to be met when there are demonstrated to be facts or circumstances, known to an employee of a licenceholder, from which another person in similar circumstances would have inferred knowledge or formed the suspicion that terrorist financing was involved.

To defend themselves against a charge of failing to meet the objective test of suspicion licenceholders and their employees would need to be able to demonstrate that they took reasonable steps in the particular circumstances to know the customer and the rationale for the transaction or instruction.

5.4.4 The type of situations giving rise to suspicion

An illustration of the type of situations that might give rise to suspicion in certain circumstances are:

(a) transactions or instructions which have no apparent legitimate purpose and/or appear not to have a commercial rationale;

(b) transactions, instructions or activity that involve apparently unnecessary complexity;

(c) where the transaction being requested by the customer, without reasonable explanation, is out of the ordinary range of services normally requested, or is outside the experience of a financial services business in relation to the particular customer;

(d) where, without reasonable explanation, the size or pattern of transactions is out of line with any pattern that has previously emerged;

(e) where the customer refuses to provide the information requested without reasonable explanation;

(f) where a customer who has entered into a business relationship uses the relationship for a single transaction or for only a very short period of time;

(g) the extensive use of trusts or offshore structures in circumstances where the customer's needs are inconsistent with the user of such services;

(h) transfers to and from high risk jurisdictions, without reasonable explanation, which are not consistent with the customer's declared business dealings or interests;

(i) unnecessary routing of funds through third party accounts;

(j) unusual investment transactions with no discernable purpose.

This is not, however, an exhaustive list.

5.4.4.1 Questions to ask when assessing suspicious activity

The following factors should be borne in mind when seeking to identify a suspicious transaction or instruction:

(a) Is the customer known personally?

(b) Does the transaction or activity make sense for that particular customer?

(c) Is the transaction in keeping with normal practice in the market to which it relates i.e. with reference to market, size and frequency?

(d) Is the role of any agent involved in the arrangement unusual?

(e) Is the transaction to be settled in the normal manner?

(f) Are there any other transactions or activity linked to the transaction in question which could be designed to disguise money and divert it into other forms or to other destinations or beneficiaries?

(g) Are the reasons for the transaction transparent and understandable i.e. is there an easier, cheaper or more convenient method available?

Where any of the above circumstances apply, or there are other issues giving cause for concern, all enquiries, investigations, decisions and actions should be properly documented and retained by the licenceholder.