On 7 July the Guernsey Financial Services Commission issued its report on a thematic review that it had undertaken on source-of-funds (SOF) or source-of-wealth (SOW) matters in the bailiwick’s private wealth management sector, among other sectors. Its findings were reasonably positive.

The thematic review occurred in the second half of last year. It involved 47 firms, including private banks, trust and corporate service providers, investment managers and law firms. It focused on the practices of the sectors most exposed to the threat of laundering illicit funds, where many high-risk factors are likely to be present.

The GFSC reviewed the SOW, SOF and beneficial ownership records of 107 high-risk relationships, 30% of which were with foreign "politically-exposed persons" (PEPs) and summarised their findings in the thematic review. It found that 90% of firms ask all customers at the "take on" stage how they made their money and all firms periodically considered the plausibility of their customers’ SOW and SOF.

Although the GFSC spotted certain deficiencies in the way in which six of the firms that it visited established and understood SOW and SOF, there were no cases which caused it to question any customers' and beneficial owners' identities, reinforcing the favourable results of its thematic review of beneficial ownership last year.

The GFSC's rulebook or 'handbook' contains rules that govern the SOW and SOF and calls on firms to take a risk-based approach to 'corroborating' them. When trying to avoid the risk that they may find themselves handling the proceeds of corruption, firms are particularly vexed by their relationships with PEPs in view of Guernsey's extended definition of the term 'PEP.' The Thematic Review uses some case studies to spot problems and recommends areas for improvement - it therefore ought to be useful to all regulated firms in the Bailiwick’s private wealth management sector.

The GFSC strongly encourages all firms to take a risk-based approach to the job of establishing SOW and SOF, calibrating their efforts to take account of risk factors associated with the customer, his economic activity, his connections with this-or-that country, the products and services of any firm that he might own and the way in which it delivers them.

There are extensive examples of these factors in section 3.17 of the Handbook on Countering Financial Crime and Terrorist Financing. The GFSC encourages all firms, regardless of their sectors, to undertake the following steps at the commencement of each relationship and when significant new funds are coming in.

• Ascertain at the outset how the customer generated his or her total net worth and that of the particular funds to be used in the business relationship or transaction.
• Take into account the various risk factors present in the relationship (including the customer, country, product/service and deliver channel risks, and their cumulative effect) when considering the extent to which this information should be corroborated by further information and official documents from the customer, appropriate third parties and/or independent open sources.
• Consider if this make sense against the information that the firm knows about the customer and the intended purpose and rationale for the business relationship or occasional transaction.

In its paper the GFSC said that on some occasions firms had relied on open sources to corroborate otherwise sketchy information that had come from customers. It regards this as insufficient. Instead it wants firms to follow the following three steps.

A Gather information about SOW and SOF from the customer.
B Apply a risk-based approach when determining the extent to which that information is corroborate and whether it is commensurate with the risk factors present in the relationship.
C Check to see that the information and documents obtained under steps A and B make sense in the light of all the information that the firm knows about the customer from its wider 'due diligence,' including open source checks.

Broadly speaking, the thematic review is positive about Guernsey and shows that the island’s financial services industry holds to high standards in the fight against money laundering. However, as with any endeavour, there is room for improvement.

* Elena Gogh can be reached on +44 1481 746185 or at e.gogh@babbelegal.com