- Introduction
The continuing evolution of technology over the past decades has brought about momentous changes in every area of life. From the economy, to culture, to personal relationships everything seems to have been absorbed by it, and crime is no exception to this change, indeed it evolves by adapting.
In fact, criminal infiltration emerges in increasingly less violent forms favoring, on the contrary, more privileged areas. It is here that the financial sector, not surprisingly, becomes the leading crime scene.
Fraud, scams, fencing, drug trafficking, usury, and bankruptcy crimes are just a few examples of illicit activities that generate huge sums of money that need to be “cleaned up” in order to circulate again in financial and economic circuits. This “cleaning up” activity is more commonly known as “Money Laundering” and the yachting sector is one of the most affected by it.
According to an article published by Gabriel Vedrenne of ACAMS, based on the NRA and Reports published by SICCFIN, the Monaco based central authority responsible for the fight against money laundering, terrorist financing and corruption:
“More and more cases linked to yacht sales and charters are appearing in suspicious transaction reports and financial institutions have shown a new reluctance to open and maintain accounts for the industry, wrote the official, who described the development as an expression of the banking sector’s vigilance…An analysis of customers in this sector shows that one in eight is a politically exposed person,” officials warned in an NRA ahead of the guidance. “This already high proportion could rise when professionals are truly able to identify their customers accurately, which is not currently the case for most of them.”
But what is money laundering and why is it important?
Money laundering is the illegal process by which large amounts of money generated by criminal activities, are placed into the legal economy, disguising their illegal origin. In particular, the process of laundering money follows three specific steps:
- The Placement is the phase in which illegal profits are introduced into the financial system (i.e. breaking up large amounts of cash into less conspicuous smaller sums that are then deposited directly into a bank account);
- The Layering which regards a series of conversions or movements of the funds by the launder to distance them from their source (the launderer might simply wire the funds through a series of accounts at various banks across the globe);
- The Integration which is the final step by which the funds re-enter the legitimate economy (the launderer might choose to invest the funds into real estate, luxury assets, or business ventures).
The covert nature of this process requires each time a payment is made, significant sums of money are moved or invested that the “payer/investor” provides a range of information enabling those who are in charge of executing the transaction to have a comprehensive picture of the client, the economic situation and the origin of the funds. This collection of information is called “Know Your Customer (KYC)” and represents the main duty to which all obliged entities by the Anti Money Laundering Regulations are required to comply with.
The next few articles will briefly outline KYC operations, in the yachting industry, by answering the questions:
Who are the obligated entities?
What are KYC activities?
How KYC activities shall be performed
What brokers or superyacht builders should do?
- Who are the obliged entities?
Obliged entities are the subjects required by the Anti- Money Laundering Regulations to apply Customer Due diligence (also CDD). Each national regulation defines and provides for a list of persons obliged which, in general, may be classified into 4 categories: (i) credit institution, (ii) financial institution, (iii) professional, (iv) providers of gambling services. Yacht professionals and yacht builders are included in the generic category of Professionals and they may be defined as any natural or legal person[1], acting as an intermediary or carrying out:
- Purchase or sale of new vessels
- Purchase or sale of used vessels
- Chartering or leasing of vessels
- Administrative management of leisure or commercial vessels.
On the other side, CDD measures shall be applied to any customer defined as any natural or legal person/entity involved in a transaction with the Yacht Professional and receiving commercial or other services in return for payment. This is commonly referred as the stakeholder represented by the Yacht Professional as:
- A person who has appointed the Yacht Professional to build or purchase a vessel
- A person who has appointed the Yacht Professional to sell a vessel
- An owner who has appointed the Yacht Professional to charter a vessel
- The charterer of a vessel chartered by the Yacht Professional
- What are KYC activities?
Customer Due Diligence or KYC check is the process of identifying and verifying the Client’s identity. In particular, it involves:
- Identification of the Client and all parties involved in the relationship/deal/transaction (Agent, Beneficial Owner, Representatives);
- Verification of their identities and information by collecting documents;
- Checking lists of sanction and frozen assets;
- Collection and assessment of information related to the purpose of the business relationship, the source of the Client’s wealth and the origin of the funds used in the business relationship or transaction.
Such activities shall be performed in specific moments of the business relationship and specifically:
- When establishing a new business relationship;
- When carrying out an occasional transaction exceeding regulatory thresholds (commonly amounting to EUR 10/15,000 or more), whether that transaction is carried out in a single operation or in several operations which appear to be linked;
- When there is a suspicion of ML/TF
- During the business relationship (ongoing due diligence).
The identification of the Client and the Beneficial Owner, for natural persons, is carried out by obtaining identity data of the Client, upon presentation of a currently valid official document with a photograph of the Client and collecting information of the Beneficial Owner (natural person on whose behalf a transaction/operation/deal is carried out).
The verification of data is carried out by keeping a copy of the original document of the Client and checking the truthfulness of identifying data only where there are doubts or inconsistencies.
Similarly, the above applies also to legal persons, notwithstanding that the identification, verification and collection of data and information are related to the Company along with the legal representative(s) and the Ultimate Beneficial Owner (UBO), and any other party involved.
In this regard, AML national regulations provide for specific rules for the identification of the Ultimate Beneficial Owner who is the natural person (or persons) to whom is attributable direct or indirect ownership of the entity or its control.
The last step of the KYC process consists of collecting information on the purpose of the business relationship and socio-economic background of the Client. This obligation applies to the business relationship, but may also apply to occasional transactions/deal especially when a significant amount of money is involved. In particular, Yacht Professionals shall obtain information on:
- the purpose of the business relationship
- the source of the Client’s wealth
- the origin of the funds used
- How KYC activities shall be performed?
Upon identifying and classifying the risks, the Yacht Professional will be able to assess the inherent risks to which their company is exposed and adapt procedures and internal control measures commensurate with the risks identified. The purpose of this exercise is to adjust the standard process of KYC (Standard Due Diligence) to each Client according to the resulting risk profile (low- medium – high), which will determine a Simplified Due Diligence or an Enhanced Due Diligence.
The Simplified Due Diligence may be applied in two specific situations:
-
- If, following a risk analysis, the business relationship or transaction appears to pose a low risk and there is no suspicion of ML/TF
- If the Client is a person or organization identified by law (in general company whose securities are traded on a regulated market, public authority or public organization carrying out public functions, in accordance with the law of the European Union).
When applying simplified due diligence measures, Yacht Professionals are still required to apply standard due diligence measures when identifying and verifying the identity of the Client. However, they may defer the verification of the Client’s identity and simplify the gathering of information on the purpose and nature of the business relationship, and the Client’s socio-economic background.
On the contrary, the Enhanced due diligence is required when the ML/TF risk is classified as to be high. Such circumstances are specifically identified by law, in the following cases:
- High risk related to business relationship, product or transaction[2];
- Client not physically present
- Political Exposed Persons (PEPs[3])
- Relationship with High Risk States or Jurisdictions[4]
This Enhanced Due Diligence consists in strengthening all the procedures mentioned above which may be summarized in:
-
- Conducting enhanced identification and verification of the identity of the parties involved (relying on multiple sources of information, or carry out a detailed analysis of the documents obtained);
- Collecting more detailed information about the Client’s socio-economic background (obtaining supporting evidence and use a screening database where possible);
- Carrying out enhanced ongoing due diligence;
- Review and update Client documents and information more frequently.
Conclusions: What brokers or superyacht builders should do?
The yachting industry is regarded as high risk in consideration of the average yacht price or the charter fees; the owning structures that many owners or buyers put in place to minimize the VAT and custom duties impact; the countries where some owners are based and the business they may be involved in.
Brokers, yacht builders or yacht managers should not consider KYC and AML compliance as an additional bureaucratical hurdle in the way to sign a deal. At times, the detailed knowledge of a potential client at early stage saves efforts and money in as much as the broker or the super yacht builder could ascertain whether a client is really interested in purchasing or chartering a yacht. These days most legitimate and genuinely interested clients are aware that they shall provide KYC documents and many of them have the package ready as they do it also in other areas of their business. Those who are reluctant in providing information may have some reasons for not disclosing it and the Yacht Professional shall be aware that this represents a risk factor as well as a specific obligation to refrain from performing the deal due to the impossibility of performing the customer due diligence.
It is almost certain that if KYC is not duly carried out, sooner or later, problems will surface and it could be too late. The deal will collapse at the last minute maybe because the bank may refuse to send the money to the seller or to the builder. Therefore, KYC is not a sterile exercise, rather it shall be seen as a helpful tool to prevent bad surprises.
It is essential that Yacht Professionals ensure that the money is received from the corporate entity or person whose name is on the contract, and that a full disclosure of who is the UBO is obtained before signing the contract. Unfortunately, the sentence “it’s one of my companies” it is not enough and not requesting more information may put the broker or the super yacht builder at serious risks.
As problems may arise even years after the closing or the chartering of a yacht, perhaps as a result of an investigation or a trial, it is of paramount importance to screen the client, collect the documents and keep them updated to prevent any possible liabilities that may arise even at a later stage.
In conclusion, AML compliance and KYC are part of the daily business life of those involved with the yachting industry and no one can ignore it. Therefore, there is no point in being shy with a client or not insisting to obtain the correct KYC documents as otherwise the consequences may be very serious for the Yacht Professionals.
Milan, February 1, 2023
HOW WE CAN HELP
Whether you are looking to build, buy, sell or charter a yacht or seeking legal advice regarding AML/KYC issues, PG Legal offers qualified legal assistance throughout the entire process providing services that include drafting and reviewing LOIs, contracts, KYC documents, assisting on complex AML matters. PG Legal works closely with a network of law firms based in the major yachting hubs such as Monaco, Miami, Palm Beach, Dubai, London, Palma de Mallorca that can structure your transactions and advice in case any issue arises with regards to AML and KYC matters.
For more on this, please feel free to contact:
Avv. Gianfranco Puopolo
Partner & Head of Yachting Team
E: g.puopolo@pglegal.it
Avv. Valentina Groccia
Associate, Yachting Team
E: groccia@pglegal.it
PG Legal Yachting Team is based in:
Milan
3 Via Sant’Andrea
20121 Milan
T: +39027601339
Rome
14 Via Ombrone
00198 Rome
T: +39068841535
Also in Genoa, Naples and Dublin
For more information about the Yachting Team:
https://www.pglegal.it/luxury-assets/
______________________________________
[1] In this regard, it is worth of note that they are obliged to fulfil AML obligations, even where other bodies or professionals that are also subject to AML Regulations (banks, notaries, lawyers, etc.) are involved in the relevant transactions.
[2] If, based on a Customer risk assessment, the Client is classified as having a HIGH RISK of ML
[3] Politically Exposed Persons (“PEPs”) are by nature high ML/TF-C risk Clients, given their position of influence and increased exposure to the risk of corruption. They may be:
- persons who have held at least one prominent public function in the past year;
- Relatives of PEPs: Spouse, ascendants and their spouses, descendants and their spouses (or persons considered as equivalent to such categories);
- Associates of PEPs: natural persons having close business relationship with a PEP, or who are Beneficial Owner jointly with a PEP, or Beneficial Owners of a legal entity created, de facto, in the interests of a PEP.
[4] States or jurisdictions with strategic deficiencies in their regimes to counter money laundering, terrorist financing, or corruption that pose a significant threat to the proper functioning of the financial system.