Law Assignment: Jurisdiction Of England & Wales

Question

Task:
You are a Relationship Manager in a large, regulated firm based in a jurisdiction of your choice. You have been introduced to a new client by a Business Development Manager. You interview the new client by the name of Emmanuel Santos, who is interested in opening a series of accounts and utilising some of the firm’s investment products.

You conduct the initial interview and proceed to complete the initial client information prior to carrying out a preliminary risk rating on the potential account.

In this law assignment, you are required to draft a summary of the initial client information as follows:

Client: Emmanuel Santos

Nationality: Mexican- with residences in the US, Mexico and Columbia

Business Interests: Shareholding in ABC Ltd, incorporated in the State of Delaware in US, Farming interest in Latin America and corporate interest in a pharmaceutical operation in Texas, US land holding in Mexico

Source of Wealth: Family money

Source of Funds: Cash investments from friends and family; Trust fund inheritance held in off shore corporate accounts in the Cayman Islands

1. What would be your initial risk rating of the accounts of Emmanuel? Explain your rationale and the consequences of your initial risk rating
2. The customer due diligence (CDD) support team wishes to make further enquiries about the potential client prior to on-boarding. What information would you expect them to obtain and how might it be acquired?
3. If you decided to on-board Emmanuel as a client, but after 12 months, further information come to light that he was a criminal and was laundering the proceeds of crime, what consequences might result for the firm?

Answer

Background
For the present law assignment, a specific jurisdiction of the UK that has been taken into consideration is England and Wales. Under this jurisdiction, an initial interview has been conducted and proceeds to finalize the initial client information by the name of Emmanuel Santos. The client seems to be fascinated in opening accounts and wants to use a number of investment products of the firm. Thus, as a Relationship Manager of that particular firm under England and Wales’s jurisdiction, it is important to conduct an initial risk rating on the potential account before undertaking further inquiries. However, the potentially criminal activities of Emmanuel have also been evaluated in the present assignment.

Initial risk rating of the accounts of Emmanuel Santos
As per the initial client information, the potential risks that have been identified under the selected jurisdiction are as follows:

Meeting legal requirements of selected jurisdiction- Considering the client information, it has been found that Emmanuel Santos holds a Mexican nationality with residences in the United States, Mexico, and Columbia. Here, it can be said that the client could face issues to fulfil the legal requirements of the UK jurisdiction, i.e., England and Wales . Both nations have different legal criteria for business and investment.

Risk related to possible liability of the company- There can be a risk that the activities of the firm and the regular performance outcomes of the firm can be affected negatively by claims and demands concerning the obligations of non-recognized or non-disclosed and breaches in connection with investments incurred by the firm. This might result in the liability of the company for such violations and obligations, and thus, the investment value and the share price of the firm may considerably decrease. In this particular situation, Emmanuel may or may not support the firm financially, or he may not be capable of supporting the firm.

Past performance risk- Past performance is not a direction to future performance, nor a consistent indicator of future outcomes or performance and has no guarantee of a future outcome as it is commonly treated as a warning label. Therefore, a business should not assume that an investment will endure performing effectively in the future merely because it has been conducted well in the past². Thus, as per the client information, Emmanuel is currently a part of ABC Ltd as a shareholder, and he may have negative performance on that particular firm. Hence, this can eventually affect the firm while operating its business in the future.

Intentional risk- This risk is not easily recognized as it depends on the mindset and the physical feature of an individual, who they are, and what they want from the business. Intentional risk is hard to identify by a short-term interview or reviewing all of the persons' financial background, financial statements as well as a source of income³. Hence, considering the client information, this risk cannot figure out as Emmanuel seems to be part of a particular organization and holds a strong source of funds. On the other hand, a criminal mind cannot be identified and judged by assumptions; therefore, this risk may or may not affect the business operations.

As per the above-identified potential risks, an initial risk rating of the accounts of Emmanuel Santos has been rated accordingly in the table below:

Rational
The rationale of rating the risks identified in the above section are as follows:

Meeting legal requirements of selected jurisdiction- The potential risk that has been identified in the accounts of Emmanuel is the risk that he might not be able to follow the laws and legislations of the chosen jurisdiction. However, this risk has been rated as high that indicates that the possibility of this risk is very high in the company. This is because; the mentioned risk associated with Emmanuel can have an adverse effect on the firm and can also lead the firm to be involved in legal consequences. However, this risk can be assessed by investigating his capability to work in the jurisdiction of Mexico, Columbus, and United States⁴.

Risk related to possible liability of the company- Another identified risk in the accounts of Emmanuel is rated as a medium that indicates that it has the medium possibility to occur in the firm depending on his ability. This is because; Emmanuel has been identified with a business interest as a shareholding in the firm that is incorporated in the state of Delaware in the US and many more. Therefore, it can be said that the risk related to the liability of the company depends on how well he utilizes the investment products of the company. This risk can be assessed by asking him about his ideas and perspectives regarding the company's liabilities and how he could support the company in a financial crisis⁵.

Past Performance Risk- The risk associated with the performance risk is rated as Low/Medium that indicates that this risk in Emmanuel can have less impact on the firm because, in the jurisdiction of England and Wales, the business process is different along with the accounting processes. Therefore his performances can be well-supervised, and his poor past performances can be rectified in the new firm. Therefore, the past performance of Emmanuel can hardly affect the firm. This risk can be assessed by analyzing his performance records in his past companies.

Intentional Risk- The intentional risk is rated as high because the company does not know the true intention of Emmanuel behind joining the firm. Therefore, if he is found to have a criminal or offensive mind, then the firm will have to suffer because of him. Therefore, the risk has a high possibility to occur in the business because it might lead the firm to deal with frauds, theft, etc. This risk can be assessed by analyzing his nature, behavior, and his intelligence in opening an account in the company and utilizing the company’s investment products.

Consequences
The possible consequences of the initial risk rating are as follows:

High Risk- The risk that has been rated as high potential risk can have an adverse effect on the company and can lead the firm to deal with many losses and uncertainties in business. However, with the high-risk rating, the firm will be able to focus on the dangers that could occur in the business. These are the risks that cannot be easily mitigated and avoided because high risks damage the business to a higher level if not assessed in the beginning. Therefore, it can be said that the consequences of this risk rating are that it will enable the firm to prioritize higher risk factors in the initial stage.⁶.

Medium Risk- Unlike high potential risk, medium potential risk means that it can occur in the business, and it may not take place depending on the type of risk. However, this risk rating will enable the firm to take the medium level of risk seriously and be prepared to mitigate or deal with the same in a proper manner.

Low/Medium- On the other hand, a low/medium risk rating means that this risk can either have a reducible effect on the firm, or the risk may not affect the firm at all. Therefore, this risk rating will, however, make the entire firm aware of the potential risks.

Low Risk- The risk that has been rated low risk indicated that these risks could be easily accessed and mitigated. However, the ratings still make the firm aware of the risks even though the risks will not hamper the company to an increased level.⁷.

Further enquires about the potential client prior to –boarding
In order to know and understand more concerning the possible client preceding to on-boarding, the customer due to the diligence support team, will create additional inquiries. Here, Customer Due Diligence (CDD) is a process of assessing the background of the customers to know their identity and the level of risk they may affect the business in the future⁸. Hence, this procedure is mostly done by the CDD team by analyzing a person's name, photo on an authorized document, and address where the customer is residing presently. CDD is said to be the heart of Anti-Money Laundering and initiatives to know the client and is planned to assist the financial organizations and banks to confirm if clients are the one they present themselves, verify they are not on any illegal records and consider their risk factors. Thus, for further enquiries about the client before approaching for any business relation, it is important to expect four elements from CDD as vital information, and they are listed and discussed on the following grounds accordingly:

Customer Identification and verification- It is important to know the customer's identity for further business deals or to make a business relationship. The firm must identify its clients by acquiring personal information that includes name, address, photogenic ID, and birth certificate from are the dependable and independent sources. Hence, verifying the client's identity will help to minimize the risk of security violations while eradicating much of the resistance of the client interactions. However, this identity information that the CDD will gather eventually helps the convenient, personalized experience and Omni-channel that is exposed to build revenue and loyalty⁹.

Beneficial ownership identification and verification- Due diligence assessment recognize the firm’s beneficial ownership in circumstances where this is not the client. Recognizing beneficial ownership must include knowing the firm’s control structure. Thus, it is important for the firm to the beneficial ownership of Emanuel as it is imperative to obtain precise information of beneficial ownership in order to assure that the firm performs screening and delivers risk rating for all the needed parties against PEPs (Politically Exposed Persons). In simple terms, it can be said that beneficial ownership and verification is to assure compliance with the law. Hence, anti-money laundering, sanctions, and anti-corruption requirements utter that the firm needs to gather and analyze this information to avoid risk.

Understanding the nature and purpose of the client- It is important to understand the nature and purpose of the client before making any kind of business commitment or deal. Thus, knowing and understanding their needs is at the core of every secure and accomplished business, whether it directly deals with the agencies or any other individuals. Once the firms got to know about the nature and the intention of the client for the business they are interested in, the firm can use it to focus on the existing and potential risks as well as opportunities that may occur after any business deal in the future.

Financial background of the customer- It is important to know about the financial background of the client before going for a further business deal. Thus, CDD can focus on the financial background of the client to know how stable financial assets they hold and in case of any kind of financial disturbances within the organization; thus, they have to support the firm to overcome the issues. On the other hand, it also helps to assess liquidity, solvency, and creditworthiness of businesses as well as with its managerial accounting, wherein it helps firms make decisions concerning how to assign insufficient resources¹⁰.

Acquisition of further inquiries is the most important factor in order to qualify a particular client to open an account in a particular company and to let them use the company’s inventory products. However, the above-mentioned further inquiries of the client must be acquired as follows:

Customer Identification and verification- This inquiry can be acquired by developing an effective customer identification program. In this program, one method involves "independently verifying the customer’s identity” with the help of comparing the data given by the client with data investigated from a customer with information gained from the customer reporting agency. As such, with the help of developing a customer identification program, the customer due diligence (CDD) must make sure that the information given by Emmanuel is true. The officials must match his personal information in the clients’ personal data and the outcome of the investigation done by the firm. Therefore, if any of the information is not matching, then the overall identity of the client will be dismissed. The company should not conduct any further verification process for Emmanuel.¹¹.

Beneficial ownership identification and verification- In order to verify the beneficial ownership of the client, the CDD officials must check the beneficial ownership of Emmanuel in his previous companies and all the records regarding his management in the company. In addition to that, the CDD officials must check Emmanuel’s ability to handle the profit share or any beneficiaries provided to him by the company. In order to check the beneficial ownership, the CDD officials must conduct a KYC session with the client, which is a legal requirement to perform identity checks and do customer due diligence. With this session, the CDD officials will be able to gain enough information regarding the beneficial ownership of Emmanuel.

Understanding the nature and purpose of the client- The customer due diligence must communicate with the client for a longer time and ask him tricky questions in order to know the nature and purpose of the chosen client. In order to investigate the client’s behavior and purpose, the CDD must conduct a proper analysis of the relationship of Emmanuel with his previous company. In addition to that, the CDD officials must conduct an interviewing session, wherein Emmanuel must be given some situation where he is supposed to be handling the situation with his skills and talent. With this session, the CDD officials will be able to know how he manages and respond to the given situation. Therefore, it can be said that a situational session must be conducted by CDD officials in order to know the actual intention of the client.

Financial background of the customer- In order to let h client open an account and utilize the inventory products of the company, the financial background must be adequately verified to ensure that the client is financially stable to join the company. Therefore, in order to check the financial background of the client, the CDD officials must conduct a creditworthiness check for Emmanuel. Since Emmanuel's information shows that the wealth source is family income, it is important to check the financial ability of Emmanuel to let him use the company’s inventory products. In order to check his creditworthiness, the CSS officials must enquire about his business transactions and the source of funds he uses to meet the needs.

Consequences of criminal and laundering proceeds of crime
The jurisdiction of England and Wales follows English Criminal Law, which focuses on offenses, their preventions and the ultimate consequences within the jurisdiction¹². English Criminal Law involves Financial Conduct Authority (FCA), which is the financial regulator in the UK that is responsible for financial crime and frauds in the companies¹³. As per the specified authority, the consequences that the company might face if Emmanuel is found to be criminal are as follows:

Loss of revenue- Laundering of money reduces the governmental tax and thus damages the honest and regular taxpayers. Similarly, if Emmanuel is found to be illegal and committing a crime, the company might face loss of revenue to a higher level. This is because the crime would lead to instability in the financial part of the firm because Emmanuel would be entirely involved in the financial transaction. Therefore, the crime committed by Emmanuel would directly reflect in the financial report of the firm. In addition to that, the company might also deal with some legal conflicts because the laundering of the money by Emmanuel will create a criminal picture of the firm as a whole.

Reputation risk- Reputation risk is the most common and potential consequence that the company might face because of the criminal activities if ever committed by Emmanuel. It is because; the entire company will be exposed as a criminal group even if Emmanuel will be the only one committing the fraud or crime. This is because, when a client is appointed as an account opener in a company, it is believed that the company has appointed the client with full investigation and verification of the same that includes verification of their identity, financial background nature, and purpose, etc. As per the law, the company will be directly responsible for the criminal offenses taking place by the clients of the company. Similarly, in the case of Emmanuel, the company will be entirely responsible for his criminal offense because which the reputation and goodwill of the firm will be at risk to a certain level.

Undermining the integrity of financial markets- The major challenges faced by the financial institutes because of the proceeds of crime are in the management of the assets, liabilities, and operations. Therefore, if Emmanuel is found to be criminal and was laundering proceeds of crime, then the company might have to face undermining of the integrity of financial markets because the crime committed by Emmanuel will increase the financial stability of their competitors while decreasing their own. The crime committed by Emmanuel might also lead to a failure of the company all at once. Therefore, one criminal offense can lead to failure of the truthfulness of the financial market. The crime committed by Emmanuel can affect entire financial markets of the jurisdiction of England and Wales. In addition to that, more or less, the entire number of financial markets might have to deal with the impact of Emanuel’s criminal offense.

Undermining the private legal sector- This is one of the consequences that the firm may face due to the criminal activity performed by Emanuel. It is said to be the most severe microeconomic influences of laundering of money that may felt within the private sector; financial launders like Emanuel commonly utilize front firms that co-mingle the proceeds of illegal activities with legal capital to put out of sight the ill-gotten revenues. For instance, in the United States of America, a well-planned crime gas used pizza parlors to cover proceeds from drug trafficking. These front firms have penetrated to considerable illegal funds, facilitating them to subsidize front firm services and products at certain levels with good rates that are below market.

Financial distortion and volatility- Money launderers generally are not fond of income creation as their investments but instead in securing their proceeds. Hence, they finance their capital in activities that are not inevitably financially advantageous to the firm where the funds are located. Moreover, to some level that financial crime and money laundering redirect capital from sound investments to poor investments that put out of sight their proceeds, financial growth can suffer¹⁴. However, this will have a massive effect on the growth rates of the firm as they can suffer substantially from financial instability while operating their business. Because the instability of rate caused by financial crime will directly affect the credibility of the firm’s financial system and thus, there will occur a sustainable long-term decline of growth¹⁵.

Risks of privatization efforts- Financial crime and money laundering make threats for the efforts of a number of states to initiate reforms into their financial system by privatization. Thus, the firms that are recognized for criminal offenses have the monetary ability to outbid legal buyers for previously nationalized ventures. Moreover, when the plans of privatization are often financially helpful, they can also provide as a vehicle to launder funds. However, the risks of privatization efforts generally reflect issues like the problem of price, finance, negative industrial relations, and a high-cost economy. Thus, sudden changes might occur in the liabilities and assets of the firm that are inadvertently practiced in money laundering that will take a risk for the firm. On the other hand, it has been known as of the research that the money laundering and financial crime news draws the attention of the public authority, which may have a negative impact on the organization. In this case, the pressure on auditing for the firm will increase, and the reputation of the firm will be damaged.

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