July 5 2012 | Tony Nguyen (Managing Director) and Linh Nguyen (Associate) | Lexology
The Law on prevention and combat of money laundering (the Law) has been ratified by the National Assembly 18 June, 2012 and will take full effect as from 1st Jan 2013. Having attracted the attention of many members of Parliament, scholars and business people, the Law is regarded as being a timely reaction to warnings and recommendations of Financial Action Task Force (FATF). Scattered regulations in by-law documents (Decree 74/2005/ND-CP (Decree 74), Circular 22/2009/TT-NHNN (Circular 22), Circular 148/2010/TT-BTC (Circular 148), Circular 12/2011/TT-BXD (Circular 12), Circular 41/2011/TT-NHNN (Circular 41)) are now adjusted and incorporated into the Law to form a comprehensive legal instrument regarding anti-money laundering (AML) as well as to strengthen the awareness towards this subject.
While current regulations are said to be generally ineffective (e.g. no AML case has so far been reported), his article will highlight the most important changes under the Law and the practical aspects of those new regulations.
Extended definition of money-laundering
In comparison to the definition given by Decree 74 being enforced at present, The Law brings about a broader definition on money-laundering. Instead of listing specific money laundering activities, the new definition refers to the activities specified in the Penal Code and also provides two additional activities classified as money laundering, i.e. (i) supporting individuals, organizations related to criminals to avoid legal liabilities by legalizing origin of property acquired from criminal activity, and (ii) possessing property which have been known as properties acquired from criminal activity at the time of receiving the property in order to legalize the origin of the property.
By this way, supporting activities in money laundering which are not serious enough to be qualified as crime will also be exposed to administrative sanctions and civil liabilities. Currently, the maximum penalty of 30 million dong for violations of AML regulations under Decree 74 has long been considered next to nothing as compared to illegal benefits from supporting money laundering activities. Hence, the Government is recommended to do math harder on setting out penalty amounts which are strong enough to deter such violations.
Extended scope of the Law’s application
Not simply gathering up the previous regulations, the new Law covers a much more comprehensive range of those individuals and organizations that are subject to the Law. A part from the subjects mentioned in previous regulations such as financial institutions and individuals/organizations operating in the areas of insurance, casino/lottery, real estate and legal services, the Law also regulates those who provide financial and accounting advisory services, investment management and advisory services, investment trust, incorporation, operation, management and secretarial services for businesses. Under the Law, these reporting subjects shall have the responsibility to apply the Customer Due Diligence (CDD) and reporting procedures (which are provided with heavy details in the Law) when providing their services to clients.
AML management with risk-based customer classification
Article 12 of the Law provides an additional responsibility to financial institutions and designated non-financial businesses and professions (reporting subjects). Besides customer identification, which have already been required by sub-law regulations, under the new law, reporting subjects will have to produce internal regulations on customer classification based on risk exposure by types of customer/client, goods/services in use, and places of residence/head-office, then additional evaluation shall be applied on customers and transactions which are classified in high-risk range. Said high-risk customers and transactions include politically exposed foreigners, agent banking operation, transactions relating to new-technology, transactions with individuals and organizations come from countries, territories in warning list, introduced business.
The modern risk-based AML management approach was first applied in banking sector in Circular 41. Under the Law, this approach is extended to other sectors. As a result, not only financial institutions but also real estate agents, real estate floors, insurance companies, stock brokers, etc. will have to establish an AML management system in place with risk-based customer classification to fully comply with the Law.
Copying the politically exposed person (PEP) concept in the FATF’s 40 Recommendations, the Law reinstates the Circular 41 by introducing the definition of foreign individual clients having political influence (who are holding high ranking positions in foreign concerning agents and organizations). The report subjects shall have the obligation to establish an enhanced due diligence on the PEP and their family members, including measures to identify the origin of the clients’ asset. Besides, in agent banking operation, reporting subjects shall have measures to evaluate the conducting AML of the partner bank. The provisions on enhanced due diligence are unclear and apparently, the enforceability of the same would be questionable since the capacity of businesses and financial institutions in Vietnam to conduct this origin tracking is still limited.
Suspicious transactions reports (STRs) regime
All known signals of suspicious transactions in current legal documents have been incorporated into the Law, therefore the argument whether clear stipulation on suspicious transactions applied to particular sectors and transaction types will help money launderer to avoid the surveillance of state agencies may still be a debate. However, in addition to said particular signals, the Law also provides some basic signals for suspicious transactions, which will help facilitate the STR procedure in more general business environment, including new potential sectors having money laundering activities.
As suggested by many members of Parliament, the designated thresholds for transactions to be reported to State Bank currently provided in Decree 74 and its guiding circulars have been removed from the Law and they will be decided by the Government from time to time based on the national economic development.
Interim measure(s) is no longer an option but an obligation
A new important provision of the Law is that conducting interim measures (on transactions in which involving parties are on black list or there is reason to believe such transactions are related to crime) is now a responsibility, not a right or a choice of reporting subjects as provided by the existing regulations (Art.11 Decree 74, Art. 11 Circular 148). Consequently, reporting subjects has the obligation to apply measures to delay such transaction in question (for no longer than 3 days) and report the same to the competent authority. This change indicates the intention of the Law that business people and practitioners must participate more actively in the combat of money laundering.
There will not be a national Financial Intelligence Unit (FIU)
One of FATF’s recommendations is that countries should establish an FIU that serves as a national center for receiving, requesting analysis and dissemination to the competent authorities, disclosures of financial information concerning suspected proceeds of crime, or required by national legislation, in order to counter money laundering. After a full consideration the National Assembly decided that such a FIU will not be established, and the functions of AML authority are distributed to various ministries and ministerial agencies such as the SBV, the Ministry of Public Security, the Ministry of Finance, the Ministry of Construction, and the Ministry of Justice. Many gaps and overlapping issues in cooperation among such agencies are inevitable, which will certainly cause difficulties to reporting subjects in their compliance with AML regulations.
In short, while the focus of AML remains with banking, insurance, securities, real estate, prize – winning and casino sectors, the Law presents more general provisions and new detailed requirements on combating money laundering. However, the remedies and sanctions are not yet addressed with adequate measures and the enforceability of many provisions is still questionable.