The Law on Prevention and Combat of Money Laundering (the Law) was ratified by the National Assembly on June 18, 2012 and will take full effect from January 1, 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 from the 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 awareness of the subject.
While current regulations are said to be generally ineffective, no AML case has so far been reported, this 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, organisations related to criminals to avoid legal liabilities by legalising 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 to legalise the origin of the property.
Hence, supporting money laundering activities which are not serious enough to be qualified as a crime will also be exposed to administrative sanctions and civil liabilities. Currently, the maximum penalty of VND30 million for AML regulation violations under Decree 74 has long been considered insignificant when compared to the ptential benefits of money laundering activities. Hence, the government has been advised to create higher penalties to deter such violations.
Extended scope of the Law’s application
The new Law covers a much more comprehensive range of individuals and organisations that are subject to the Law. Apart from the subjects mentioned in previous regulations such as financial institutions and individuals /organisations operating in the areas of insurance, legalised gambling, real estate and legal services, the Law also regulates those who provide financial and accounting advisory services, investment management and advisory services, investment trusts, as well as 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, when providing 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. Besides customer identification, which is already 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 clients, goods / services in use and places of residence / head-office.
Additional evaluations shall be applied on customers and transactions which are classified in the high-risk range. Said high-risk customers and transactions include politically exposed foreigners, agent banking operations, transactions relating to new-technology, transactions with individuals and organisations from countries and territories on the warning list and introduced business.
The modern risk-based AML management approach was first applied in the 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 and stock brokers 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 reinforces Circular 41 by introducing the definition of foreign individual clients having political influence - typically those holding high ranking positions in foreign countries and organisations.
Subjects 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’ assets. In addition, in agent banking operations, reporting subjects shall take measures to evaluate the conducting AML of the partner bank. However, 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 a clear stipulation on suspicious transactions applied to particular sectors and transaction types will help money launderers to avoid the surveillance of state agencies may still be under 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 environments, 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 national economic development.
Interim measures 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 lists, 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 have the obligation to apply measures to delay questionable transactions for no longer than three days and report the issue to the competent authority. This change indicates the intention of the Law that business people and practitioners must participate more actively in combating 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 centre for receiving, requesting and disseminating analysis to the competent authorities, disclosure of financial information concerning suspected proceeds of crime, in order to counter money laundering.
After full consideration, the National Assembly decided that such an FIU will not be established, and the functions of AML authorities will be distributed to various ministries and ministerial agencies such as the State Bank, the ministries of Public Security, Finance, Construction and 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.