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Financial advisors struggle to implement EU money laundering legislation.

As with many financial service providers in the EU, the definition of financial adviser differs, often significantly, from one country to another. In its very basic sense--i.e. the provision of financial advice pure and simple, without the add-on of other services that could involve the handling of client money--the profession of fee-paid advisor is a limited one and probably confined to only a few thousand people in Luxembourg, Germany, the Netherlands and the UK. But even in these countries the normal practice is for financial advisers to act also as financial intermediaries with one foot in services like brokerage, banking and insurance. The distinction is important in assessing how far practitioners are affected by AML legislation.

"If (advisers) are providing a service where they invest or manage or supply or other things like that, then they would be covered by the legislation. However it may be that they purely offer advice and don't provide any of the services which are set out, and then it's much more questionable whether there is any obligation under the FATF requirements to report," said Mr John Carson, acting executive secretary of the Financial Action Task Force, the leading global anti-money laundering agency. "It comes down to what they actually do," he told MLB. "The pure adviser probably wouldn't be covered, though of course there may be obligations under the EU directives."

This latter point is made clear in the formal guidance issued to financial advisers by the UK's Joint Money Laundering Steering Group (JMLSG), made up of leading financial service trade associations, which takes its cue from the three EU money laundering directives passed since 1991, though most relevantly from the 2nd of 2003 and the 3rd which is being implemented in 2007. The JMLSG notes that "in practice there is unlikely to be any involvement (of financial advisers) in the placement stage of money laundering" though it sees "considerable scope" for them to be drawn in to the layering and integration stages. Most financial advice business is conducted on a face-to-face basis and "some criminals may seek to use financial advisers as the first step in integrating their criminal property into the financial system."

The main risk faced by financial advisers is aiding and abetting those trying to carry out these primary offences, says the JMLSG which spells out the dangers if advice is given recklessly: "Clearly, the risk of being involved in money laundering or terrorist financing will increase when dealing with certain types of customer, such as offshore trusts/companies, politically exposed persons and customers from higher risk or non-FATF countries or jurisdictions," it says.

This advice is clearly good for any kind of financial service provider though the message to financial advisers seems to carry a strong emphasis on "know your client" disciplines. "We don't set out exact rules. We don't require financial advisers to do specific things. But they must be able to show that their firm or business has not been used for money laundering, and Know Your Customer is important," says Ms Abi Jones, FSA spokeswoman.

This was echoed by Ms Linda Chandler, anti-money laundering specialist at the Association of Independent Financial Advisers in London. "The EU directives have meant nothing really new for the UK as financial advisers have been doing this reporting since 1994 under UK legislation," she said. The reporting "is not so onerous." But the Know Your Customer requirements remain at the centre of legal demands on the profession.

The UK's AML legislation for all financial services has become risk-based recently, targeting high profile cases and putting greater demand on subjective calls by senior management engaged in AML. This contrasts with the more "shotgun" approach of many continental countries where financial advisers, usually firmly tied to the handling of client money, have become subject to the full application of the 2nd and 3rd EU directives, as transposed into national legislation, only in the past year or two. For many of them the requirement to file SARs and to demand exacting ID from their clients has come as a highly disagreeable surprise.

"This is the least popular piece of legislation in the entire universe," says Mr Vincent J.Derudder, general secretary of the European Federation of Financial Advisers and Financial Intermediaries which lists about 300,000 members including advisers, agents, brokers and financial planners. "The EU legislation itself is quite reasonable but the problem is that when it's transposed by the local regulator it becomes completely unreasonable and unmanageable. It varies from country to country but in some of them people are doing nothing but compliance, compliance, compliance. Luxembourg is one of them for example, and it's the same in Switzerland, Italy, France and Spain," Mr Derudder told MLB.

"You can impose a regulation on people as long as they understand it and see that there's a benefit to it. But to the little guy investing, say, 10,000 euros it becomes completely unreasonable. The problem is the detail required, the amount of paperwork. Some small clients have a feeling that they are being taken for crooks and fraudsters. The restaurant owner, the GP , the normal middle-class person, doesn't want to be asked all these questions," said Mr Derudder. "The average man does not understand about money laundering and his immediate reaction is that we are working for the tax man."

More or less the same view was expressed at the 5th international forum of CIFA, the Swiss-based convention of independent financial advisors, in Geneva on April 23-25 this year. Delegates were told that regulation of the financial sector in Europe cost over Euros 16 billion a year "but the EU directives are totally useless, they don't make any difference, they present no barriers to money launderers," Mr Pierre Christodoulidis, CIFA executive president, told MLB. He said that what was now required from financial advisers was the same as was already being asked from banks and others "in duplicate and even triplicate."

It would be imprudent to assume that all EU financial advisers respect the AML laws of their countries but it is probably worth pointing out that nowhere does there seem to be incontrovertible evidence that they have ever facilitated money laundering on any scale.
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Author:Osborn, Alan
Publication:International News
Date:May 1, 2007
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