Guidance for advocates and law firms on the Act on Measures against Money Laundering and Terrorist Financing

Transkript

1 Guidance for advocates and law firms on the Act on Measures against Money Laundering and Terrorist Financing The money laundering legislation from the perspective of advocates

2 Table of Contents 1. General Introduction Background What is money laundering and terrorist financing? Money laundering Terrorist financing What are the major differences for advocates in the new money laundering legislation? When are advocates and associates at law firms subject to the new legislation? Client due diligence General Exemptions from basic measures for customer due diligence Basic measures for client due diligence Enhanced measures for satisfactorily completing client due diligence How should identification of the client take place? Natural persons Legal entities Time for client due diligence Ongoing follow-up of business relationships Consequences of client due diligence not being satisfactorily completed Record-keeping Special rules on client fund accounts Obligation to conduct reviews and provide information Obligation to conduct reviews Obligation to provide information Exemptions from the obligation to provide information Obligation to discontinue a mandate Prohibition on disclosure Penalties Liability for neglecting the obligation of professional secrecy Compliance with the money laundering legislation by advocates and law firms Supervision Supervision by the Swedish Bar Association Supervision by the State Miscellaneous The Act on Measures against Money Laundering and Terrorist Financing (SFS 2009:62) Examples of information to clients concerning obligations under the money laundering legislation

3 1. General Guidance on the Act on Measures 1.1 Introduction On 12 February 2009, the Swedish Parliament adopted the Act on Measures against Money Laundering and Terrorist Financing (SFS 2009:62). The new Act applies from and including 15 March Advocates (Sw: advokat = Member of the Swedish Bar Association) are subject to the provisions of the legislation, under penalty, when they participate in certain financial transactions, as well as corporate and real estate transactions, on behalf of a client. The new legislation provides for changes in a number of respects, including with respect to client due diligence, the obligation to provide information, compliance, and supervision. It is important and difficult for advocates and associates at law firms to apply the money laundering legislation (any reference in this document to advocates also includes, in all cases, associates at law firms). The legislation imposes obligations which, in a number of respects, entail a departure from the key values which apply to the legal profession, not only in Sweden but throughout Europe. In Sweden, this has resulted in advocates being exempted in certain respects from the requirements of the Act. However, it also means that problems of application arise in a number of respects. According to the money laundering legislation, an advocate has principally four obligations: To identify and verify their clients client due diligence; To review transactions which can reasonably be assumed to constitute money laundering or aim at money laundering; To report suspected cases of money laundering to the Swedish Financial Intelligence Unit (Sw: Finanspolisen); and To provide information to the Swedish Financial Intelligence Unit in certain cases even where the advocate himself or herself did not previously report anything. In addition to these obligations, there is a prohibition on disclosing in any way to the client or any other third party that a review has been conducted, that a report has been submitted, or that a police investigation is being conducted (referred to as a prohibition on disclosure). This guidance is intended to act both as an introduction to the new legislation and as an aid in relation to certain practical and administrative matters (see e.g. Appendix 2). The guidance also adopts certain views on a number of difficulties which arise from an interpretation of the legislation. The guidance replaces the previous guidance (15 June 2005). The guidance will be updated on a continuous basis as and when required. Please submit any views on the guidance to the office of the Swedish Bar Association (+46 (0) or info@advokatsamfundet.se). 3

4 1.2 Background The Act on Measures against Money Laundering and Terrorist Financing (SFS 2009:62) entered into force on 15 March (the Act is hereinafter referred to as the MLA ). The Act is based on and implements what is referred to as the Third Money Laundering Directive 2. A consolidated version of the Act is provided as Appendix 1. The new Act replaces the Act on Measures against Money Laundering (SFS 1993:768), which was based on the First Money Laundering Directive 3, which was implemented in Sweden in conjunction with its accession to the EEC on 1 January 1994, 4 and subsequently on the Second Money Laundering Directive 5, which was implemented by way of amendments which entered into force on 1 January The Act originally applied to certain financial institutions (banks, etc.) and imposed certain obligations on them. The changes which entered into force on 1 January 2005 entailed, inter alia, that advocates and associates at law firms were, in certain cases, subject to the provisions of the Act. This guidance deals with issues which are of particular importance to the legal profession. Information can also be obtained from the regulations and general guidelines issued by the Swedish Financial Supervisory Authority concerning measures against money laundering and financing particularly serious crimes in certain cases. Advocates and law firms are not subject to the regulations, but they can, in certain respects, also serve as guidance for law firms, such as with respect to matters concerning identification and internal procedures (see FFFS 2009:1). 7 These regulations entered into force on 15 May 2009 and replace the 2005 regulations. The FATF (Financial Action Task Force Against Money Laundering) was formed in 1989 by the G-7 countries. The FATF currently has a mandate to continue its activities until Sweden is one of the member countries. The organisation publishes information concerning money laundering and its activities on its website ( The website contains, for example, the 40 recommendations which form the basis for many of the provisions concerning measures against money laundering, as well as updates of lists of socalled non-cooperative countries and territories ( Non-Cooperative Countries and Territories, NCCT). As regards comparisons with the legislation of other countries, it should be borne in mind that the Directive is a minimum directive. Member States can choose whether they wish to introduce more stringent requirements than those in the Directive. They can also, in certain respects, choose whether to take certain special measures, referred to as national choice. Such choices exist, inter alia, in order to be able to adapt the provisions to special national conditions. Such choice possibilities have been used, for example, in respect of the 1 Gov t Bill 2008/09:70, opinion 2008/09:JuU13, SFS 2009:62. 2 Directive 2005/60/EC of the European Parliament and Council of 26 October 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing. 3 Council Directive 91/308/EEC of 10 June 1991 on prevention of the use of the financial system for the purpose of money laundering. 4 Gov t Bill 1992/93:207, opinion 1992/93:JuU37. 5 Directive 2001/97/EC of the European Parliament and Council of 4 December 2001 amending Council Directive 91/308/EEC on prevention of the use of the financial system for the purpose of money laundering. 6 Gov t Bill 2003/04:156, opinion 2004/05:JuU7, SFS 2004: The regulations and other information concerning the money laundering rules are also available on the website of the Swedish Financial Supervisory Authority ( 4

5 implementation in relation to advocates. Accordingly, direct comparisons with guides from other organisations for advocates can be difficult to make and they should be read with this in mind. 8 The Swedish legislature has stated that more stringent rules than those required, given the purpose of the rules, will not be introduced so as to avoid unnecessarily ruining the prospects of running an effective business within the areas subject to the legislation. 2. What is money laundering and terrorist financing? 2.1 Money laundering The definition of money laundering is contained in Chapter 1, section 5, subsection 6 of the MLA. The definition is equivalent to the definition which was contained in section 1 of the 1993 MLA. In general, it can be said that money laundering means measures which are taken for the purpose of concealing or converting the proceeds of a crime, i.e. measures to launder dirty money. It is thus a prerequisite that money or other assets which are laundered are proceeds of a crime (such as drug offences, robbery, theft, fraud, breach of fiduciary duty, tax offences, corruption, etc.). It should be noted in particular that money laundering may not only mean measures concerning money, but also measures with other property acquired through crime. Nor do the measures need to relate to the acquisition of property through crime being concealed, but also for example where the criminal is able to avoid legal sanctions or the recovery of the property is impeded. The money laundering rules also cover measures with property other than that acquired through crime, if the measures are likely to conceal that someone has profited from criminal acts. The purpose of this provision is that the Act on Measures against Money Laundering must also include property of which the general public has been deprived (for example, through a failure to pay taxes or fines) through criminal acts. According to Swedish legislation, essentially all criminal offences which are capable of generating financial assets constitute what are referred to as predicate offences and be the source of money laundering. Nor is there any requirement in the new legislation that the offence which can form the basis of money laundering be serious: in principle, petty theft would qualify. Nor does it matter whether an offence is committed in Sweden or whether a criminal act is even punishable in Sweden. Money laundering is usually described generally as a process which comprises three stages: 1. The placement stage = placement of money in a bank account, for example, or in other financial products. 8 See for information on the money laundering rules from an international lawyer s perspective. 5

6 2. The layering stage transactions for the purpose of breaking or impeding the link to the criminal origin of the money. 3. The integration stage the money (or that which has taken its place) is integrated into the legal economy. 2.2 Terrorist financing The definition of terrorist financing is contained in Chapter 1, section 5, subsection 4 of the MLA. The definition refers to the list of criminal offences which is contained in Section 2 of the Penalties for Financing Particularly Serious Crimes, etc. Act (SFS 2002:444). Terrorist financing is sometimes referred to as reverse money laundering through proceeds of crime and/or legal activities being used to finance a future terrorist act. Terrorist financing is supporting terrorism financially. This means not only making direct contributions to terrorism, but also collecting, providing or receiving money or other assets in the knowledge that they will finance terrorism. The International Task Force for Financial Action Against Money Laundering (FATF) extended its activities in October 2001 to include combating terrorist financing. 3. What are the major differences for advocates in the new money laundering legislation? The rules relating to money laundering which previously applied to advocates will largely remain unchanged even after the new MLA enters into force. However, the rules for advocates will change in some respects as a result of the Third Money Laundering Directive being implemented in the new MLA. The changes can be summarised as follows: In addition to money laundering, the Act also covers terrorist financing. More stringent and more flexible requirements for client due diligence and verifications of identity based on a risk-based approach, such as with respect to beneficial ownerships, politically exposed persons (PEP) and a greater requirement for documentation. The requirement for the ongoing monitoring of client relationships following a risk assessment (follow-up, etc. based on the risk profile of the client). The introduction of an absolute prohibition on disclosure. The previous exemption provision, pursuant to which the prohibition on an advocate informing his or her client that reporting has taken place, only applied for 24 hours, has now been removed and replaced by an absolute prohibition on disclosure for advocates as well. However, an advocate is still under an obligation, in accordance with the Guidance Rules on Generally Accepted Standards for Advocates, to discontinue the mandate when reporting has taken place. 6

7 An extension of the obligation for advocates to provide information. At the request of the Swedish Financial Intelligence Unit, without previous reporting and without delay, advocates must provide all information which is needed for an investigation concerning money laundering or terrorist financing. Since information can now be demanded from an advocate without the member himself or herself having had cause to report a suspected transaction, the obligation to provide information has thereby been extended significantly without the issue having been subject to debate outside of the Government ministries. 9 However, in the opinion of the Swedish Bar Association, the extendsion of the obligation to provide information does not affect the provisions concerning when an advocate need not provide information pursuant to the rules on the prohibition on disclosing information under testimony, etc. pursuant to Chapter 36, section 5 of the Swedish Code of Judicial Procedure. The extended obligation to provide information is dealt with in more detail in section 6.2. More stringent requirements for compliance with the money laundering legislation a greater responsibility is imposed on advocates and individual law firms to have wellfunctioning and effective procedures in place for client due diligence, reviews, and reporting. A requirement is also imposed for staff at the law firm to receive regular training. More stringent requirements for the Swedish Bar Association to exercise active supervision to ensure that advocates comply with the money laundering legislation. The Swedish Bar Association is required to monitor and ensure that law firms have taken sufficient measures to comply fully with the rules, i.e. have well-functioning and effective procedures to satisfy the requirements under the legislation. 10 However, the provisions of the Act concerning supervision (Chapter 6) do not cover law firms and advocates (see section 12 below). 4. When are advocates and associates at law firms subject to the new legislation? Advocates are subject to the legislation to the extent their activities relate to services set forth in Chapter 1, section 3, first paragraph of the MLA. The provision contains an exhaustive list of the situations in which an advocate is subject to the legislation. Therefore, the MLA only applies to advocates where they: 1. act on behalf of and for a client in any financial transactions or real estate transactions; or 2. assist in the planning or execution of transactions on behalf of their client, concerning: 9 The Swedish Bar Association has, in a number of different contexts, pointed out the seriousness of such a change with respect to advocates and has also requested that the Act be amended in this respect. See the letter from the Swedish Bar Association to the Justice Committee and the Ministry of Finance of 19 December 2008 and the letter of 18 February 2009 to those Members of Parliament who participated in the hearing of the bill in Parliament. 10 The manner in which the supervision by the Swedish Bar Association is to be exercised with respect to compliance by advocates with the money laundering legislation is set forth in Circular no. 26/2009 and the memorandum appended thereto entitled Proactive supervision of advocates and law firms an issue of quality and confidence, and independence and self-regulation. 7

8 buying and selling of real property or business entities; managing of client money, securities or other assets; opening or managing of bank, savings or securities accounts; acquisition of contributions for the creation, operation or management of business entities; creation, operation or management of companies, associations, foundations or trusts. The provision corresponds, for the most part, to section 2(a) of the 1993 MLA and is based on and implements the corresponding provision of the Directive (Article 2.3(b)). As in the 1993 MLA, the preparatory works are fastidious as regards the problem of setting limits that arises from the provision. However, the basis which was established in connection with the previous statutory amendment (Gov t Bill 2003/04:156, p. 49), that the Act on Measures against Money Laundering only relates to activities aimed at clients, remains unchanged. This also means that, in the future, advocates will only be subject to the provisions with respect to the relationship with a client pursuant to a mandate and only for certain specifically-stated transactions where the risk of money laundering is deemed to be greatest. With reference to the assumption that advocates are only subject to the Act in relation to their relationship with a client pursuant to a mandate, bankruptcy administrators are not subject to the provisions of the Act because they are appointed/commissioned by law. On the same basis, the services of a liquidator should also fall outside the scope of the Act. The Act should also not usually apply in other cases where it cannot be said that there is any actual relationship with a client pursuant to a mandate (for example, marital/partnership property administrators and estate administrators appointed by law). Tax advisers are generally subject to the Act pursuant to Chapter 1, section 2, subsection 12 of the MLA. The question of whether an advocate who provides tax advice is generally subject to the Act pursuant to this provision or only in those situations covered by Chapter 1, section 2, subsection 13 of the MLA, is not answered unequivocally in the preparatory work. This also applies to other activities set forth in the provision in which an advocate may engage within the scope of his or her legal activities. However, the majority of arguments, inter alia with reference to the principle of lex specialis, speak in favour of advocates being subject to the provisions of the Act only in those cases set forth in subsection The following can be noted with respect to the interpretation of certain terms contained in Chapter 1, section 3 of the MLA. The term business entity in subsections 2 a) and 2 d) means both companies and sole proprietorships. Real property means just that. Advice given by advocates in relation to the purchase and sale of, for example, co-operative flats and condominiums, is not covered by the legislation. 11 Cf. that which is stated in this respect with regard to the previous legislation by Axel Calissendorff in JT no. 3, p. 562 et seq. 8

9 Subsection 2 b) means the management of all kinds of assets on behalf of a client. The expression bank, savings, or securities accounts in subsection 2 c) includes, inter alia, cases where an advocate assists in opening a client fund account (see also Chapter 2, section 5, subsection 7). A securities account includes securities which are deposited or registered by a central securities depository (such as VPC) on an account or in a custody account at a securities institution. The wording of the Directive: trusts, companies, or similar structures has, as far as concerns the Swedish, been considered in subsection 2 e) to be the equivalent of companies, associations, foundations, or trusts. At the request of the Swedish Council on Legislation, trusts are referred to in the Swedish legislation, even if they do not exist in Sweden. The reason for this is that certain cross-border services may be provided by a party engaged in activities in Sweden, and cross-border activities which are conducted from establishments in Sweden of Swedish legal entities or foreign legal entities are covered by the Swedish money laundering rules. In this regard, the provision should therefore not exclude similar foreign legal forms. As regards subsection 2 e) and, in particular, the wording management of companies, it should be noted in particular with respect to its applicability to advocates acting as board members of companies that the following is stated in the commentary to the statute concerning the provisions of Chapter 1, section 3 of the MLA: It is important to note that the activities covered are natural persons and legal entities which offer these services in a professional capacity to a third party. Consequently, the provision does not cover parties engaged in activities who have been personally commissioned to act as a board member or partner of a general partnership or limited partnership (see Gov t Bill 2008/09:70, page 182). Another issue which may arise is whether a client s payment of fees for a mandate which, per se, is covered by the legislation, can be deemed to be covered by the money laundering legislation and its requirement of the obligation to provide information. The Swedish Bar Association s view in this respect is that the payment of fees cannot in itself be deemed to constitute the type of transaction covered by the money laundering legislation. However, given general bases and punishable acts in the Swedish Penal Code, etc., care should of course be taken where funds are suspected of deriving from criminal acts. Difficulties may also arise, and a large degree of care is required, where an advocate has received money in good faith on a client fund account and subsequently has cause to suspect money laundering. 12 Accordingly, only certain types of advocate mandates are covered by the money laundering legislation: financial transactions, as well as corporate and real estate transactions. Thus, other advocate mandates are not covered by the MLA. Therefore, in general, most types of mandates relating to non-commercial law, such as advising on family law matters, mandates as defence counsel, general advice on matters relating to foreigners, etc. fall outside the scope of the Act, if the mandate does not also include specified transaction mandates. 12 Guidance as to how an advocate should act in such a situation when the client relationship must be ended and the money cannot remain on the client fund account, see Suzanne Wennberg, The responsibility of advocates for money laundering, JT pp. 852 et seq.; cf. also a Guidance Statement dated 12 October 2000 regarding the re-reporting of client funds. 9

10 In addition to this limitation on the scope of the Act for advocates, certain express exemptions apply where advocates are not subject to the obligation to report suspected transactions, i.e. where advocates are not subject to the applicable obligation to provide information according to the legislation (see section below concerning the proceedings exemption and the investigation exemption). 5. Client due diligence 5.1 General The rules relating to customer due diligence/client due diligence are, as previously mentioned, more flexible under the new legislation compared with the legislation which applied from 1 January 2005 until 15 March Client due diligence will be satisfactorily completed by means of a risk-based approach, which means that advocates must expend most resources where they are most needed, i.e. in situations where the risk of money laundering is greatest. Therefore, in certain situations, clients must be verified more thoroughly than previously, while in other cases a less thorough verification is required. The provisions concerning customer due diligence are drafted in such a way that it is set forth when basic measures are required (Chapter 2, section 3 of the MLA) and when enhanced measures are required (Chapter 2, section 6 of the MLA). In addition, in certain cases, there are exemptions from basic measures for client due diligence (Chapter 2, section 5 of the MLA). In the latter case, there is in practice a simplified process for conducting client due diligence in situations which are characterised by a low risk of money laundering. The measures which must usually be taken to complete basic client due diligence satisfactorily need not be taken in these cases. In general, the risk assessment is based on factors such as who the client is and what activities the client conducts, on what type of matter the client needs advice, as well as the client s domicile and the country in which a transaction is being carried out (certain countries are deemed high risk countries ). The FATF has produced special guidance for advocates with respect to client due diligence. Please see the FATF s RBA Guidance for Legal Professionals 23 October 2008, which is available at for a detailed report of the international view of money laundering and the risk-based approach which must be applied by advocates, among others. The basis of Chapter 2, section 2 of the MLA is that basic measures to complete client due diligence satisfactorily must be taken when forming a business relationship. For a law firm, this occurs when a new client offers a mandate to an advocate. The identity of an existing client who offers a new mandate need not be verified each time he or she offers a mandate (unless there is reason to believe that the information is not complete or up to date), but in such cases it is usually sufficient for the advocate to follow up with his or her client regularly and be informed of the mandate itself (see section 5.7 below). According to the transitional provisions of the Act, in order to complete client due diligence satisfactorily for business relationships which were established prior to 15 March 2009, measures must be taken when it can be deemed appropriate, based on an assessment of the risk of money laundering or terrorist financing. Since the client was also required to have 10

11 been identified pursuant to the previous legislation, there should normally be no suspicions of money laundering or terrorist financing and no further measures need be taken in respect of existing clients for ongoing mandates due to the new Act coming into effect. Pursuant to Chapter 2, section 2, subsection 2 of the MLA, customer due diligence will also be satisfactorily completed in relation to individual transactions amounting to a sum corresponding to EUR 15,000 or more. The question for law firms is whether this entails an obligation to verify the identity of, for example, counterparties as well. The provision is due to the fact that banks and other financial institutions have different types of customers: those who enter into more long-term relationships (opening a bank account or custody account, etc.), and other more short-term customers (for example, those who wish to execute an exchange transaction). Given that the Act covers activities aimed at customers (see section 4 above) and the fact that the counterparty cannot be regarded as a customer of the advocate, the Swedish Bar Association s view is that counterparties are not subject to the requirement for an identity check. Other interested parties, such as financiers, may be involved in transactions, and here the issue is more uncertain, but the starting point is that the requirement for client due diligence only covers the advocate s prospective clients. 5.2 Exemptions from basic measures for customer due diligence When a mandate which is subject to the MLA (in accordance with that which is stated in section 4 above) is accepted in relation to a new client, it is appropriate to begin by establishing whether the client is exempted from the requirement for client due diligence. However, as a consequence of the risk-based approach, as is clear from the following, it is no longer the case that the identity of a client who is known need not be checked. According to Chapter 2, section 5 of the MLA, the requirement for satisfactorily completing basic client due diligence and on an ongoing basis (see sections 5.3 and 5.7 below) does not apply to, among others: Swedish authorities; parties engaged in activities as referred to in Chapter 1, section 2, subsections 1 7 of the MLA (banking businesses, life insurance companies, etc.) which are domiciled in Sweden, within the EEA, or in a State outside the EEA if the State has corresponding provisions on measures against money laundering and providing there is supervision of compliance with these provisions; 13 companies which are listed on a regulated marketplace and which satisfy the information requirements under Directive 2004/39/EC (in Sweden this is the Nasdaq OMX and NGM). It should be noted that law firms are not among those that are generally exempted from the identification requirement, but only in those cases where the beneficial owner behind, for example, a client fund account, must be identified (see section 5.10 below). 13 According to regulations FFFS 2005:5 of the Swedish Financial Supervisory Authority which are applicable to date, those States which satisfy these conditions are: Australia, Japan, Canada, China/Hong Kong, New Zealand, Switzerland, Singapore, Turkey and the United States. According to FFFS 2009:1, this condition is now also satisfied by Argentina, Brazil, Mexico, Russia and South Africa, but not Turkey. 11

12 In order to determine whether the client is covered by the exemption, information about the client s status may need to be obtained. The easiest way to do this, in the event the legal entity is foreign, is to ask the client. If the client is Swedish, information can be obtained about Swedish authorities at (governmental authorities only). Information about Swedish listed and financial companies is available from the Swedish Financial Supervisory Authority ( and from and The reason for the provisions granting exemptions from the requirement for measures to complete client due diligence satisfactorily is that it has been deemed in certain cases that the risk of money laundering and terrorist financing is generally low. However, note that since the legislation is based on a risk-based approach, pursuant to Chapter 2, section 2, second paragraph of the MLA, where there is a suspicion of money laundering or terrorist financing, basic or enhanced client due diligence is required even if the client is covered by an exemption. 5.3 Basic measures for client due diligence If no exemption under 5.2 above applies, in order to complete basic client due diligence satisfactorily, measures must be taken when a mandate for a new client is accepted. Pursuant to Chapter 2, section 3 of the MLA, information about the client and its mandate must be obtained by verifying the client s identity with the aid of extracts from registers, passports, driving licences, or the equivalent. If the client is a legal entity, the identity of the representative and the client s ownership structure and control structure must also be determined, as well as the identity of the beneficial owner. The entire chain of the ownership structure must be investigated, down to the natural person or natural persons who ultimately own the legal entity. The beneficial owner is the person on whose behalf a person is acting, or the natural person who ultimately owns or controls not less than 25% plus one share or the voting rights in a legal entity. The beneficial owner is also the person who is a future beneficiary and the holder of 25% or more of the assets managed by a foundation, for example. See section 5.5 below for further information about identification. In order to complete basic client due diligence satisfactorily, information regarding the client s purpose for the mandate must also be obtained. The reason for this is that the advocate must have a clear picture of that which he or she will be advising on and of what the client s activities consist. The purpose should often already be clear at the time the advocate is hired, but, due to the risk-based approach which must be used, the advocate may need to obtain more fundamental information about the mandate in order to make an assessment of the risks of money laundering and terrorist financing. An important new element in the new money laundering legislation is that an advocate can rely on, and benefit from, previous measures carried out by third parties in order to complete client due diligence satisfactorily. 12

13 In accordance with Chapter 2, section 3, third paragraph, and section 4 of the MLA, where basic client due diligence is required, an advocate/law firm may rely on such due diligence about the client which is obtained, for example, from another law firm, bank, life insurance company, insurance intermediary, mutual funds activity business, and approved or authorised auditors within the EEA, or equivalent legal entities outside of the EEA if they apply equivalent money laundering rules as do we within the EEA and there is a system in place for monitoring these rules. In these cases, it is not necessary to obtain evidence of the third party s client due diligence, but it is sufficient to ensure that the party engaged in activities who previously conducted the due diligence is able to hand over the information obtained upon request and without delay. However, since an advocate/law firm can never be absolved of the liability to complete client due diligence satisfactorily, it should be made certain that the third party has actually satisfactorily completed a sufficient level of client due diligence and that it is able, upon request, to provide this information without being obstructed by any customer or client confidentiality rules. Under the risk-based approach, which permeates the Act, in the event the risk of money laundering or terrorist financing is deemed to be high in a particular situation, enhanced measures for satisfactorily completing client due diligence must be taken pursuant to section Enhanced measures for satisfactorily completing client due diligence If the risk of money laundering and terrorist financing is deemed to be high, enhanced measures for satisfactorily completing client due diligence must be taken pursuant to Chapter 2, section 6 of the MLA. Some risk factors are provided below as examples of situations where there may be deemed to be a high risk. It is important to note that other circumstances in the relevant situation may also be relevant and that an overall assessment of the risks should always be made. 14 A high risk may be deemed to exist: Where information about the identity of the client is insufficient or is not deemed to be reliable. Where uncertainties remain based on the basic client due diligence. Where there are suspicions of money laundering or terrorist financing. Where the mandate comprises products or transactions which may facilitate anonymity (e.g. the use of cash payments). Where the client is domiciled in, or transactions are executed in, a country where there is a high risk of money laundering or terrorist financing ( high risk country ) Information which may be relevant for a risk assessment is also contained on the following websites, among others: International sanctions against certain countries: Country risk classification list containing graded country risks: Warning list in respect of certain companies in Sweden: Consolidated list of natural persons and legal entities which are subject to EU sanctions: 15 See more information about high risk countries in the FATF s RBA Guidance for Legal Professionals 23 October 2008 ( 13

14 Chapter 2, section 6, third paragraph, of the MLA states that the risk of money laundering and terrorism is assumed to be high in the following cases, unless circumstances in the individual case indicate the contrary. Where the client or its representative is not physically present but is at a distance ( distance customer ). If the client is a person in a politically exposed position (referred to as a PEP ) who is resident abroad. A PEP (Politically Exposed Person) is a person in a politically exposed position who is or has been (normally during the last year) entrusted with prominent public functions. This means public functions at the highest level in an individual country or at a European or international level, such as heads of state and governments, ministers, members of parliament, Supreme Court judges, high-ranking officers, ambassadors, board members of central banks, and the highest positions within state-owned companies, etc. In addition, a PEP also includes those people who are immediate family members, such as the spouse, partner who is the equivalent of a spouse, parent or child (and the child s spouse), and close associates. A close associate means a person who, together with a PEP, owns or controls more than 25% of a legal entity (or, in relation to a trust or foundation, is the beneficial owner of 25% or more of the assets), or in some other way has had close business relations with a PEP. The expression close associates means publicly close and thus no enquiries as regards such persons need be made. Enhanced client due diligence generally means that more extensive measures than those for basic client due diligence are required. Additional documents, material, or information may need to be obtained and checks or verifications as to the authenticity of the documents may be required, such as samples of signatures of clients at a distance and evidence of the identity of the beneficial owner. If the client or the beneficial owner is a PEP, in addition to the other information which must be obtained to complete client due diligence satisfactorily, the following are always required where there are enhanced measures for client due diligence: Information about the origin of the assets which are handled in the transaction. Enhanced regular follow-up of the client relationship. Approval to accept the client from a person at a higher hierarchical level in accordance with the law firm s own internal procedures (e.g. an advocate who is a partner or several advocates acting jointly). The regulations of the Swedish Financial Supervisory Authority also contain other examples of sources from which information regarding identity can be obtained See Chapter 5 of FFFS 2009:1 regarding customer due diligence. 14

15 5.5 How should identification of the client take place? Natural persons If the client is a natural person, a copy of an identification document which is normally used in Sweden should be obtained (driving licence, other certified identity card, or valid passport). The identity of foreign citizens is verified from an equivalent foreign document. If identification documents of the kind referred to in this paragraph are lacking, the identification check should be conducted through a combination of information obtained from various independent sources. The following are examples of such sources: Extract from the population register or SPAR Reference from a reliable source Testimonial from a bank Original bills indicating the name and home address Testimonial from an embassy or consulate Reliable source on the Internet (such as the employer s website), preferably including a photograph Persons in a politically exposed position (PEP) If the client or the beneficial owner is a natural person who resides abroad, he or she should be asked about their profession and whether he or she is related (spouse, partner equivalent to a spouse, parent or child and his or her spouse) to a PEP. In the event of an affirmative response, enhanced client due diligence should normally be conducted. In addition to the identification documents which are required to be obtained pursuant to 5.5.1, verifying the client on the Internet can be helpful in order to find information prior to the risk assessment which is to be conducted Beneficial owner and ownership structures and control structures In relation both to basic and enhanced client due diligence, the beneficial owner (i.e. the natural person on whose behalf a person is acting or the natural person who ultimately owns or controls 25% plus one share or the voting rights of a legal entity) must be identified. Any person who is a future beneficiary and the holder of 25% or more of the assets which are managed by a foundation, for example, is also deemed to be a beneficial owner and must be identified. There are no complete registers of ownership or beneficial entitlement in Sweden. Limited companies have share registers containing information about shareholders, which must be made available to the general public according to the Swedish Companies Act. The trade and industry register which is maintained by the Swedish Companies Registration Office at and other commercial databases, including Basun Plus and Dun and Bradstreet (GRS), provide information about the control structures of some Swedish and foreign companies, but far from all companies are included. Usually, the simplest and quickest way to obtain information about ownership and beneficial owners is to ask the client to provide this information. It is sufficient to obtain the information oneself, but it must be 15

16 documented and archived. The beneficial owner s identity need only be verified (see above in relation to identification) for enhanced client due diligence. Even in these cases, the simplest way to do this is to ask the client itself to provide relevant copies of passports, extracts from registers, extracts from share registers, etc., and other identification documents. Only if there is cause to suspect that the documents are not genuine is there reason to carry out identity checks via independent sources Legal entities The identity of a legal entity is verified through a certificate of registration or extract from a register or, to the extent such documents have not been issued, through other identification documents. The Swedish Companies Registration Office ( by way of the Trade and Industry Register, provides extracts from registers and other information about Swedish limited companies, general partnerships, limited partnerships, economic associations and certain non-profit associations. Information about foundations can be obtained from County Administrative Boards. Basun Plus and Dun and Bradstreet (GRS) are commercial databases containing similar information. Equivalent information about foreign legal entities can be obtained through the Swedish Companies Registration Office s fee service (European Business Register, EBR), which contains corporate information from many European countries. Otherwise, refer to national company registers in relevant countries or Dun and Bradstreet (GRS). It is generally the case that the simplest and very often the quickest way to obtain information about the identity and ownership structure, etc. of the client is to ask the client itself for the information required. If there is an obligation to conduct enhanced client due diligence, information from the client may need to be verified, but in the case of a risk-based approach, information from the client is often likely to be sufficient. See also section 5.3 above concerning relying on information from third parties Representatives of legal entities Representatives of legal entities must be identified in the same manner as natural persons by way of a passport or driving licence or an equivalent identification document. The authority to represent the legal entity may be contained in, for example, a certificate of registration or a written power of attorney, or due to an assumption of the existence of implied authority as a result of the position of a person concerned. In such cases, the position in the company can be verified, for example, through a business card and address or via the company s website and switchboard. 5.6 Time for client due diligence Pursuant to Chapter 2, section 9 of the MLA, the identity of the client and the beneficial owner must generally be verified prior to establishing the business relationship, i.e. before the mandate for the client has been accepted. 16

17 If it is necessary in order to avoid interrupting the normal course of the business and there is a low risk of money laundering or terrorist financing because of the identity of the client and the purpose and nature of the business relationship, a full identification check may be completed in close conjunction with the client relationship having been established. However, no transactions may be executed until the client due diligence has been satisfactorily completed. For example, no funds may be received onto the client fund account. The expression in close conjunction means a limited period of time, but could probably vary from a few days to a few weeks, depending on the difficulties in finding full information taking into consideration a risk-based approach. 5.7 Ongoing follow-up of business relationships An advocate who works for a client on a mandate or who has regular contact with the client on several mandates must continuously monitor that the measures which are effected within the scope of the mandate or mandates correspond with the information previously provided by the client, and appear to be within the scope of the client s business and the risk profile. Deviations from this may trigger the obligation to conduct a review and reporting pursuant to section 6 below. Special attention should be given to unusual transfers to and from client fund accounts at the law firm, or other deviations from the client s normal behaviour. More stringent monitoring is required in cases where enhanced client due diligence is required pursuant to section 5.4 above. 5.8 Consequences of client due diligence not being satisfactorily completed According to Chapter 2, section 11 of the MLA, a business relationship may not be established unless client due diligence has been satisfactorily completed. If the collated information about the client cannot be deemed to be sufficient to ensure that there is no risk of money laundering or terrorist financing, the mandate must not be accepted and the client must be turned away. However, a client must not be turned away or the mandate discontinued (despite the fact that client due diligence has not been satisfactorily completed) in cases where the advocate only evaluates the client s legal position in a specific situation or defends or represents the client in legal proceedings. However, the sole fact that the client cannot be identified does not confer an obligation on the advocate to turn the client away in these cases, because an individual should not be denied the opportunity to obtain legal advice solely as a result of an inability to be identified (access to justice consideration). This may also be the case in other types of cases. However, a similar situation will then likely trigger an obligation to conduct a review (see section 6 below). 5.9 Record-keeping According to Chapter 2, section 13 of the MLA, documents or information about measures taken to complete client due diligence satisfactorily must be kept for at least five years after the cessation of the client relationship. This record-keeping duty is normally not a problem in 17

18 the legal profession and does not constitute a substantial difference to the rules applicable under the previous legislation. 17 However, the record-keeping duty may entail that special measures must be taken in order for the documentation to be saved for the correct period of time when measures carried out previously in order to complete client due diligence are used in a subsequent mandate. In practice, the obligation entails that documents or information which constituted documents used to verify the identity of clients, such as agreements, receipts containing the client s signature, copies of identification documents and certificates of registration or authorisation documents or the like, must be kept. Notes on identity checks conducted on legal representatives or attorneys must also be kept Special rules on client fund accounts Parties engaged in activities who are required to complete basic client due diligence satisfactorily and who thereby usually carry out an investigation as to who is the beneficial owner of a client fund account, for example, are exempted from this requirement when the account is held by an advocate. According to Chapter 2, section 5, subsection 9 of the MLA, the beneficial owner/beneficiary of a client fund account need not be verified if the information can be made available at the request of the party engaged in activities (cf. section 5.3 on the right to rely on the identification check conducted by a third party). Client fund accounts are assumed to constitute a low risk because they are managed by advocates who are themselves subject to the money laundering legislation and subject to disciplinary supervision. However, note that, as a result of client confidentiality, the advocate may be unable to disclose information to a third party without the client s consent. It should also be noted in this context that advocates are not subject to the provision contained in Chapter 2, section 14 of the MLA regarding a prohibition on anonymous accounts. 6. Obligation to conduct reviews and provide information 6.1 Obligation to conduct reviews According to Chapter 3, section 1, first paragraph of the MLA, a person subject to the Act is obliged to review transactions in order to examine transactions which the party engaged in activities suspects or has reasonable grounds to suspect constitute a step in money laundering or terrorist financing. The provision substantially corresponds to the provisions of section 9 of the 1993 MLA concerning an obligation to conduct reviews. The evidential requirement which triggers the obligation to conduct reviews is derived from the First Money Laundering Directive and its content has not been set out in detail in the preparatory works. Consequently, an advocate who is subject to the legislation is under an obligation to review transactions where there is suspicion or reasonable grounds for suspicion that the transaction constitutes a step in money laundering or terrorist financing. The purpose of the Act on 17 According to of the Guidance Rules on Generally Accepted Standards for Advocates, an advocate is under an obligation to archive documents which are accumulated during the performance of a mandate for ten years or such longer period of time as so demanded by the nature of the mandate. 18

19 Measures against Money Laundering is to prevent money laundering. It does not have the objective, in very broad terms, to provide for an obligation to review clients assets and transactions. There must therefore be a specific circumstance in respect of the relevant transaction which triggers the obligation to review it more closely. The following are examples of such specific circumstances which trigger the obligation to conduct reviews which have been specified by FATF: difficulties in identifying the client (costly verification procedure, sources which are difficult to verify); payments which deviate from the norm (large cash sums, a number of small payments rather than one large payment); unnecessarily complex transactions; and transactions which have a connection to what are referred to as risk countries. In order to be able to subsequently defend oneself against claims that a review should have been conducted earlier, it is a good idea to document thoroughly when the law firm becomes aware of different types of information. It should be emphasised in this context that documenting the measures taken is important as regards all of the obligations which are imposed on advocates under the MLA. 6.2 Obligation to provide information Chapter 3, section 1, second paragraph of the MLA provides that if, following closer analysis, a suspicion remains, information about all of the circumstances which may indicate money laundering or terrorist financing must be provided without delay to the Swedish Financial Intelligence Unit, which is a unit within the National Police Board. In comparison with section 9, second paragraph of the 1993 MLA, the time element has been clarified through the reference to the fact that information must be provided without delay. It should also be added that the information must be provided on one s own initiative. A review of a transaction may be concluded with the assessment that, as far as can be determined, everything is as it should be and no further measures are therefore necessary. However if, following closer analysis of the transaction, a suspicion remains and the review indicates that the transaction can reasonably be assumed to constitute money laundering or terrorist financing, this must be reported. If a law firm s risk procedures detect a suspicious transaction, this should not be reported before a closer analysis has been carried out, pursuant to which it is stated that the suspicion remains. However, in the opinion of the Swedish Bar Association, in the absence of any clarification statements, a somewhat higher evidential requirement is needed for a reporting duty as regards what triggers an obligation to conduct reviews ( circumstances which may indicate money laundering ). In order for there to be deemed a reporting obligation, there should reasonably be a reinforced suspicion following the analysis of the transaction which is carried out. In cases where the review of a transaction indicates that it can reasonably be assumed that a transaction is aimed at money laundering or terrorist financing, the party engaged in activities must refrain from carrying out the transaction. The prohibition on carrying out the transaction remains until it has been reported to the Swedish Financial Intelligence Unit. However, there are cases where a transaction pursuant to the legislation can be carried out in order to then be immediately reported. This is the case if it is not possible to refrain from carrying out a transaction, for example because the suspicion would otherwise be revealed or if the 19

20 investigation might otherwise be made more difficult if the transaction is not carried out. In such cases, information must be provided immediately afterwards. (Chapter 3, section 1, third paragraph of the MLA). Where information has been provided, there is an obligation to provide any additional information for the investigation on money laundering or terrorist financing which is requested, even where another subject accountable under the Act on Measures against Money Laundering has provided information to the police (Chapter 3, section 1, fifth paragraph of the MLA). The extent of this duty to co-operate is uncertain and there is clearly a conflict with the provisions on the obligation of professional secrecy (see the section below with respect to the extension of the obligation to provide information). Extension of the obligation to provide information A very important and (for advocates) alarming new element is that, pursuant to Chapter 3, section 1, fourth paragraph of the MLA, a party engaged in activities is under an obligation to provide without delay all information required for a money laundering or terrorist financing investigation. The provision that has applied to date regarding the obligation to provide information (section 9 of the 1993 MLA) provided that, after the party engaged in activities himself or herself had cause to report the transaction, he or she was under an obligation to provide, at the request of the Swedish Financial Intelligence Unit, any additional information which was deemed to be required for an investigation. Consequently, there was previously no independent obligation to provide supplemental information, and the obligation to provide information has always been based on reporting by a party engaged in activities who was subject to money laundering legislation. The new MLA introduces a right of enquiry for the Swedish Financial Intelligence Unit, and the obligation to provide information applies even where the advocate did not previously report anything. The Swedish Financial Intelligence Unit can also ask questions arising from suspicions which originate from a source other than the advocate. However, it must be deemed to be justified to make an enquiry. Before the Swedish Financial Intelligence Unit can request information, the police must have received information of a specific nature, such as through a tip or in connection with another criminal investigation. It is thus not sufficient to have a general suspicion of a certain person or transaction. Accordingly, fishing expeditions by the Swedish Financial Intelligence Unit are not permissible. According to the preparatory works, the right of enquiry for the Swedish Financial Intelligence Unit is conditional on there being a specific suspicion of money laundering or terrorist financing (see Gov t Bill 2008/09:70 pages 117 et seq. and 197). According to information from the Swedish Financial Intelligence Unit, a decision regarding obtaining information pursuant to this provision must also be directly sanctioned by highranking police officers. As a result of this change in the new legislation, the obligation to provide information has been significantly extended for advocates. However, it should be noted that, as a result of the extension of the obligation to provide information, the fact that an obligation to provide information exists does not result in any change as regards an advocate s duty to testify. It is neither stated in the MLA nor its preparatory works that the rule on the extension of the obligation to provide information takes precedence over the provisions contained in the Code of Judicial Procedure concerning the prohibition on disclosing information under testimony and an advocate s duty to testify. Consequently, in the opinion of the Swedish Bar Association, the prohibition on disclosing information under testimony with respect to the 20