The Dutch money laundering and...

The Dutch money laundering and terrorist financing prevention act explained

On the first of August, 2018, the Dutch money laundering and terrorist financing prevention act (Dutch: Wwft) has been in force for ten years. The main purpose of the Wwft is to keep the financial system clean; the law aims to prevent the financial system from being used for the criminal purposes of money laundering and terrorist financing. Money laundering means that illegally obtained assets are made legal to obscure the illegal origin. Financing of terrorism occurs when capital is used in order to facilitate terrorist activities. According to the Wwft, organisations are obligated to report unusual transactions. These reports contribute to the detection and prosecution of money laundering and terrorist financing. The Wwft has a great impact on organisations that are active in the Netherlands. Organisations actively have to take measures in order to prevent money laundering and terrorist financing from happening. This article will discuss which institutions fall within the scope of the Wwft, which obligations these institutions have according to the Wwft and what the consequences are when institutions do not comply with the Wwft.

1. Institutions that fall within the scope of the Wwft

Certain institutions are obligated to comply with the provisions from the Wwft. In order to assess whether an institution is subject to the Wwft, the type of institution and the activities performed by the institution are examined. An institution that is subject to the Wwft may be required to perform a customer due diligence or to report a transaction. The following institutions might be subject to the Wwft:

sellers of goods;
intermediaries in the purchase and sale of goods;
appraisers of real estate;
real estate agents and intermediaries in real estate;
pawnshop operators and providers of domicile;
financial institutions;
independent professionals.[1]

Sellers of goods

Sellers of goods are obligated to conduct client due diligence when the price of the goods to be sold amounts to €15,000 or more and this payment is made in cash. It does not matter whether the payment takes places in terms or at once. When a cash payment of €25,000 or more takes place when selling specific goods, such as ships, vehicles and jewellery, the seller must always report this transaction. When a payment is not made in cash, there is no Wwft obligation. However, a cash deposit on the vendor’s bank account is seen as a payment in cash.

Intermediaries in the purchase and sale of goods

If you mediate in the purchase or sale of certain goods, you are subject to the Wwft and are obligated to conduct client due diligence. This includes the sale and purchase of vehicles, ships, jewellery, art objects and antiques. Is does not matter how high the price to be paid is and whether the price was paid in cash. When a transaction with a cash payment of €25,000 or more occurs, this transaction must always be reported.

Appraisers of real estate

When an appraiser assesses immovable property and discovers unusual facts and circumstances that may concern money laundering or terrorist financing, this transaction must be reported. However, appraisers are not obligated to conduct client due diligence.

Real estate agents and intermediaries in real estate

Persons who mediate in the purchase and sale of immovable property are subject to the Wwft and must conduct client due diligence for each assignment. The obligation to perform a client due diligence also applies with regard to the counterparty of the client. If there is a suspicion that a transaction may involve money laundering or the financing of terrorism, this transaction must be reported. This also applies to transactions in which an amount of €15,000 or more is received in cash. It does not matter whether this amount is for the real estate agent or for a third party.

Pawnshop operators and providers of domicile

Pawnshop operators who offer professional or business pledges must conduct client due diligence with each transaction. If a transaction is unusual, this transaction must be reported. This also applies to all transactions that amount to €25,000 or more. Providers of domicile who make an address or postal address available to third parties on a business or professional basis, must also conduct client due diligence for each client. If it is suspected that there may be money laundering or terrorist financing involved with providing the domicile, the transaction must be reported.

Financial institutions

Financial institutions include banks, exchange offices, casinos, trust offices, investment institutions and certain insurers. These institutions must always conduct client due diligence and they must report unusual transactions. However, different rules may apply to banks.

Independent professionals

The category of independent professionals includes the following persons: notaries, lawyers, accountants, tax advisers and administrative offices. These professional groups must perform client due diligence and report unusual transactions.

Institutions or professionals who independently carry out activities on a professional basis, which correspond to the activities carried out by the institutions mentioned above, may also be subject to the Wwft. This can include the following activities:

advising companies on capital structure, business strategy and related activities;
consultancy and service provision in the field of mergers and acquisitions of companies;
the establishment or management of companies or legal entities;
buying or selling companies, legal entities or shares in companies;
the full or partial acquisition of companies or legal entities;
tax related activities.

In order to determine whether or not an institution is subject to the Wwft, it is important to keep the activities the institution performs in mind. If an institution only provides information, the institution is in principle not subject to the Wwft. If an institution offers advice to clients, the institution may be subject to the Wwft. However, there is a thin line between providing information and providing advice. Also, the mandatory client due diligence has to take place before an institution enters into a business agreement with a client. When an institution initially thinks that only information needs to be provided to a client, but later on it appears that advice has been given or should be given as well, the obligation of conducting the prior client due diligence is not met. It is also very risky to divide the activities of an institution into activities that are subject to the Wwft and activities that are not subject to the Wwft, since the boundary between these activities is very vague. In addition, it may also be the case that separate activities are not subject to the Wwft, but that these activities entail a Wwft obligation when they are joined together. It is therefore important to determine in advance whether or not your institution is subject to the Wwft.

Under certain circumstances, an institution may fall within the scope of the Dutch Trust Office Supervision Act (Wtt) rather than the Wwft. The Wtt contains stricter requirements with regard to client due diligence and institutions that are subject to the Wtt are in need of a permit in order to conduct their activities. According to the Wtt, institutions that provide domicile and that conduct additional activities as well, are subject to the Wtt. These additional activities consist of providing legal advise, taking care of tax declarations, conducting activities with regard to the drafting, assessing and monitoring of annual accounts or maintaining the administration or acquiring a director for a corporation or legal entity. In practice, providing domicile and conducting additional activities are often managed by two different institutions, to make sure that these institutions do not fall within the scope of the Wtt. However, this will no longer be possible when the amended Wtt will come into effect. After this legislative amendment comes into force, institutions that devide the proving of domicile and the conducting of additional activities between two institutions will also be subject to the Wtt. This concerns institutions that conduct additional activities themselves, but refer the client to another institution for the providing or domicile (or vice versa) as well as institutions that act as intermediaries by bringing a client in contact with various parties that can provide domicile and can conduct additional activities.[2] It is important that institutions have a good overview on their activities, in order to determine which law applies to them.

2. Client due diligence

According to the Wwft, an institution that is subject to the Wwft must conduct client due diligence. Client due diligence has to be performed before the institution enters into a business agreement with the client and before services are provided. Client due diligence entails, among other things, that an institution must request the identity of its clients, has to check this information, record it and retain it for five years.

Client due diligence according to the Wwft is risk-oriented. This means that an institution has to take the risks with regard to the nature and size of its own company and the risks with regard to the specific business relation or transacting into account. The intensity of the due diligence must be in accordance with these risks.[3] The Wwft entails three levels of client due diligence: standard, simplified and enhanced. Based on the risks, an institution must determine which of the aforementioned client due diligences must be performed. In addition to the risk based interpretation of client due diligence that must be carried out in standard cases, a risk assessment may also prove to be a reason for performing a simplified or enhanced client due diligence. When assessing the risks, the following points have to be taken into account: the clients, the countries and geographical reasons where the institution operates and the products and services delivered.[4]

The Wwft does not specify which measures institutions must take in order to balance the client due diligence with the risk-sensitivity of the transaction. However, it is of importance for institutions to establish risk based procedures in order to determine with which intensity client due diligence has to be performed. For example, the following measures can be implemented: establishing a risk matrix, formulating a risk policy or profile, installing procedures for client acceptation, taking internal control measures or a combination of these measures. Furthermore, it is recommended to perform file management and to keep a record of all transactions and corresponding risk assessments. The responsible authority with regard to the Wwft, the Financial Intelligence Unit (FIU), can request an institution to provide its identification and assessment of the risks with regard to money laundering and terrorist financing. An institution is obligated to comply with such a request.[5] The Wwft also contains pointers that indicate with which intensity client due diligence has to be conducted.

2.1 Standard client due diligence

Normally, institutions must conduct standard client due diligence. This due diligence consists of the following elements:

determining, verifying and recording the identity of the client;
determining, verifying and recording the identity of the Ultimate Beneficiary Owner (UBO);
determining and recording the purpose and the nature of the assignment or transaction.

Identity of the client

In order to know to whom the services are provided, the identity of the client must be determined before the institution starts providing its services. In order to identify the client, the client needs to be asked for his identity details. Subsequently, the identity of the client must be verified. For a natural person, this verification can be done by requesting an original passport, driving license or identity card. Clients who are legal entities must be requested to provide an extract from the trade register or other reliable documents or data that are customary in the international traffic. This information must then be retained by the institution for five years.

Identity of the UBO

If the client is a legal person, partnership, foundation or trust, the UBO must be identified and verified. The UBO of a legal person is a natural person who:

holds an interest of more than 25% in the capital of the client; or
can exercise 25% or more of the shares or voting rights in the general meeting of shareholders of the client; or
can exercise actual control in a client; or
is the beneficiary of 25% or more of the assets of a foundation or trust; or
has special control over 25% or more of the clients’ assets.

The UBO of a partnership is the natural person who, on dissolution of the partnership, is entitled to a share in the assets of 25% or more or is entitled to a share in the profits of 25% or more. With a trust, the adjuster(s) and the trustee(s) must be identified.

When the identity of the UBO is determined, this identity must be verified. An institution must assess the risks with regard to money laundering and terrorist financing; verification of the UBO has to take place according to these risks. This is called risk-based verification. The most profound form of verification is to determine by means of underlying documents, such as deeds, contracts and registrations in public registers or other reliable sources, that the UBO in question is actually authorized for 25% or more. This information can be requested when there is a high risk with regard to money laundering and terrorist financing. When there is a low risk, an institution can have the client sign an UBO-declaration. By signing this declaration, the client confirms the correctness of the identity of the UBO.

Purpose and nature of the assignment or transaction

Institutions must conduct research on the background and purpose of an intended business relationship or transaction. This should prevent the services of institutions from being used for money laundering or the financing of terrorism. The investigation on the nature of the assignment or transaction should be risk-based.[6] When the nature of the assignment or transaction has been determined, this must be recorded in a register.

2.2 Simplified client due diligence

It is also possible that an institution complies with the Wwft by conducting simplified client due diligence. As already discussed, the intensity of conducting client due diligence will be determined on the basis of a risk analysis. If this analysis shows that the risk of money laundering and terrorist financing is low, simplified client due diligence can be performed. According to the Wwft, simplified client due diligence is in any case sufficient if the client is a bank, life insurer or other financial institution, listed company or EU government institution. In such cases, only the identity of the client and the purpose and nature of the transaction need to be determined and recorded in the manner as described in 2.1. Verification of the client and identification and verification of the UBO are not necessary in this case.

2.3 Enhanced client due diligence

It may also be the case that enhanced client due diligence must be conducted. This is the case when the risk of money laundering and terrorist financing is high. According to the Wwft, enhanced client due diligence must be conducted in the following situations:

in advance, there is a suspicion of an increased risk of money laundering or terrorist financing;
the client is not physically present at the identification;
the client or UBO is a politically exposed person.

Suspicion of an increased risk of money laundering or terrorist financing

When the risk analysis shows that there is a high risk of money laundering and financing of terrorism, enhanced client due diligence must be performed. This enhanced client due diligence can for example be conducted by requesting a Certificate of Good Behaviour from the client, by further investigating the authorities and functions of the board of directors and proxies or by investigating the origin and destination of funds, including the requesting of bank statements. The measures that must be taken depend on the situation.

The client is not physically present at the identification

If a client is not physically present at the identification, this results in a higher risk of money laundering and terrorist financing. In that case, measures must be taken to compensate this specific risk. The Wwft indicates which options institutions have to compensate the risk:

identifying the client on the basis of additional documents, data or information (for example a notarised copy of the passport or apostilles);
assessing the authenticity of the documents submitted;
ensuring that the first payment related to the business relationship or transaction is made on behalf of or at the expense of an account of the client with a bank that has a registered office in a Member State or with a bank in a designated state that holds a license to conduct business in this state.

If an identification payment is made, we speak of derived identification. This means that an institution may use the data from earlier performed client due diligence. Derived identification is permitted because the bank where the identification payment takes place is also an institution that is subject to the Wwft or to similar supervision in another Member State. In principle, the client is already identified by the bank when executing this identification payment.

The client or UBO is a politically exposed person

Politically exposed persons (PEP’s) are persons who occupy a prominent political position in the Netherlands or abroad, or have held such a position up to one year ago, and

live abroad (regardless whether or not they have the Dutch nationality or another nationality);

live in the Netherlands but do not have the Dutch nationality.

Whether a person is a PEP must be investigated both for the client and for any UBO of the client. The following persons are in any case PEP’s:

heads of state, heads of government, ministers and state secretaries;
parliamentarians;
members of high judicial authorities;
members of audit offices and management boards of central banks;
ambassadors, chargé d’affaires and senior army officers;
members of administrative bodies, both executive and supervisory;
organs of public companies;
immediate family members or close associates of the above persons.[7]

When a PEP is involved, the institution should collect and verify more data to sufficiently reduce and control the high risk of money laundering and terrorist financing.[8]

3. Reporting an unusual transaction

When the client due diligence is completed, the institution must determine whether the proposed transaction is unusual. If this is the case, and there could be money laundering or terrorist financing involved, the transaction must be reported.

If the client due diligence did not provide the data prescribed by law or if there are indications of involvement in money laundering or terrorist financing, the transaction must be reported to the FIU. This is according to the Wwft. The Dutch authorities have established subjective and objective indications on the basis of which institutions can determine whether there is an unusual transaction. If one of the indicators is at issue, it is assumed that the transaction is unusual. This transaction must then be reported to the FIU as soon as possible. The following indicators are established:

Subjective indicators

A transaction in which the institution has reason to assume that it can relate to money laundering or terrorist financing. Various risk countries have also been identified by the Financial Action Task Force.

Objective indicators

Transactions that are reported to the police or Public Prosecution Service in connection with money laundering or terrorist financing must also be reported to the FIU; after all, there is the assumption that these transactions may be related to money laundering and terrorist financing.
A transaction by or for the benefit of a (legal) person residing or having its registered address in a state that is designated by ministerial regulation as a state with strategic shortcomings in the prevention of money laundering and the financing of terrorism.
A transaction in which one or more vehicles, ships, art objects or jewellery are sold for a (partial) cash payment, in which the amount to be paid in cash amounts to € 25,000 or more.
A transaction for an amount of € 15,000 or more, in which exchange of cash takes place for another currency or from small to large denominations.
A cash deposit for an amount of € 15,000 or more in favour of a credit card or a pre-paid payment instrument.
The use of a credit card or a pre-paid payment instrument in connection with a transaction for an amount of € 15,000 or more.
A transaction for an amount of € 15,000 or more, paid to or through the institution in cash, with checks to bearer, with a pre-paid instrument or with similar means of payment.
A transaction in which a good or several goods are brought under the control of a pawnshop, with the amount made available by the pawnshop in exchange amounting to €25,000 or more.
A transaction for an amount of € 15,000 or more, paid to or through the institution in cash, with checks, with a pre-paid instrument or in foreign currency.
Depositing coins, banknotes or other valuables for an amount of € 15,000 or more.
A giro payment transaction for an amount of € 15,000 or more.
A money transfer for an amount of €2,000 or more, unless it concerns a money transfer from an institution that leaves the settlement for this transfer to another institution that is subject to the obligation to report unusual transaction, deriving from the Wwft.[9]

Not all indicators apply to all institutions. It depends on the type of institution which indicators apply to the institution. When one of the transactions as described above takes place at a certain institution, this is regarded an unusual transaction. This transaction must be reported to the FIU. The FIU registers the report as an unusual transaction report. The FIU then assesses whether the unusual transaction is suspicious and must be investigated by a criminal investigation authority or a security service.

4. Indemnification

If an institution reports an unusual transaction to the FIU, this report entails indemnification. According to the Wwft, data or information provided to the FIU in good faith in the context of a report, cannot serve as a basis for or for the purpose of an investigation or prosecution of the institution that reported with regard to a suspicion of money laundering or terrorist financing by this institution. Furthermore, these data cannot serve as indictment. This also applies to data provided to the FIU by an institution, in the reasonable assumption that this would entail compliance with the obligation to report deriving from the Wwft. This means that the information that an institution has provided to the FIU, in the context of a report of an unusual transaction, cannot be used against the institution in a criminal investigation on money laundering or terrorist financing. This indemnity also applies to persons who work for the institution that provided the data and information to the FIU. By reporting an unusual transaction in good faith, criminal indemnity is granted.

Furthermore, an institution that has reported an unusual transaction or provided additional information on the basis of the Wwft is not liable for any damage that a third party suffered as a result. This means that an institution cannot be held liable for the damage that a client suffers as a result of the report of the unusual transaction. Therefore, by complying with the obligation to report an unusual transaction, civil indemnification is granted to the institution as well. This civil indemnification also applies to persons who work for the institution that has reported the unusual transaction or provided the information to the FIU.

5. Other obligations deriving from the Wwft

In addition to the obligation to conduct client due diligence and to report unusual transactions to the FIU, the Wwft also incurs an obligation of confidentiality and a training obligation for institutions.

Obligation of confidentiality

The obligation of confidentiality entails that an institution cannot inform anyone about a report to the FIU and about the suspicion that money laundering or terrorist financing is involved in a transaction. The institution is even prohibited to inform the concerning client of this. The reason for this is that the FIU will initiate an investigation into the unusual transaction. The obligation of confidentiality is installed to prevent parties that are being researched from being given the opportunity to, for example, dispose of evidence.

Training obligation

According to the Wwft, institutions have a training obligation. This training obligation entails that employees of the institution must be familiar with the provisions of the Wwft, insofar as this is relevant for the performance of their duties. Employees must also be able to properly conduct client due diligence and to recognize an unusual transaction. Periodic training must be followed in order to achieve this.

6. Consequences of non-compliance with the Wwft

Various obligations derive from the Wwft: conducting client due diligence, reporting unusual transactions, an obligation of confidentiality and a training obligation. Various data must also be recorded and stored and an institution must take measures to reduce the risk of money laundering and terrorist financing.

If an institution does not comply with the obligations listed above, measures will be taken. Depending on the type of institution, the supervision of compliance with the Wwft is carried out by the Tax Authorities / Bureau Supervision Wwft, the Dutch Central Bank, the Dutch Authority for the Financial Markets, the Financial Supervision Office or the Dutch Bar Association. These supervisors carry out supervisory investigations to check whether an institution is complying correctly with the provisions of the Wwft. In these investigations, the outline and existence of a risk policy is assessed. The investigation also aims to ensure that institutions actually report unusual transactions. If the provisions of the Wwft are violated, the supervisory authorities are authorized to impose an order subject to an incremental penalty or an administrative fine. They also have the possibility to instruct an institution to follow a certain course of action concerning the development of internal procedures and the training of employees.

If an institution has failed to report an unusual transaction, a violation of the Wwft will occur. It does not matter whether the failure to report was deliberately or accidentally. If an institution violates the Wwft, this entails an economic offence according to the Dutch Economic Offenses Act. The FIU may also conduct further investigations into the reporting behaviour of an institution. In serious cases, the supervisory authorities may even report the violation to the Dutch public prosecutor, who can then start a criminal investigation on the institution. The institution will then be prosecuted because it has not complied with the provisions of the Wwft.

7. Conclusion

The Wwft is a law that applies to many institutions. Therefore, it is important for these institutions to know which obligations they need to fulfill in order to comply with the Wwft. Conducting client due diligence, reporting unusual transactions, the obligation of confidentiality and the training obligation derive from the Wwft. These obligations have been established to ensure that the risk of money laundering and terrorist financing is as small as possible and that immediate action can be taken when there is a suspicion that these activities are taking place. For institutions, it is important to assess the risks and to take measures accordingly. Depending on the type of institution and the activities that an institution carries out, different rules may apply.

The Wwft does not only entail that institutions must comply with the obligations deriving from the Wwft, but also comes with other consequences for institutions. When a report to the FIU is made in good faith, criminal and civil indemnification is granted to the institution. In that case, the information provided by the institution cannot be used against it. Civil liability for damage of the client deriving from a report to the FIU is also excluded. On the other hand, there are consequences when the Wwft is violated. In the worst case, an institution can even be criminally prosecuted. Therefore, it is very important for institutions to comply with the provisions of the Wwft, not only to reduce the risk of money laundering and the financing of terrorism, but also to protect themselves.
_____________________________

[1] ‘Wat is de Wwft’, Belastingdienst 09-07-2018, www.belastingdienst.nl.

[2] Kamerstukken II 2017/18, 34 910, 7 (Nota van Wijziging).

[3] Kamerstukken II 2017/18, 34 808, 3, p. 3 (MvT).

[4] Kamerstukken II 2017/18, 34 808, 3, p. 3 (MvT).

[5] Kamerstukken II 2017/18, 34 808, 3, p. 8 (MvT).

[6] Kamerstukken II 2017/18, 34 808, 3, p. 3 (MvT).

[7] ‘Wat is een PEP’, Autoriteit Financiele Markten 09-07-2018, www.afm.nl.

[8] Kamerstukken II 2017/18, 34 808, 3, p. 4 (MvT).

[9] ‘Meldergroepen’, FIU 09-07-2018, www.fiu-nederland.nl.