Risk guidance published by HMRC* highlights the importance of identifying if funds have come from a high-risk jurisdiction. An alternative term is 'high-risk third country', a.k.a. HRTC.
Why is establishing if a customer or transaction is associated with a high-risk jurisdiction important?
According to the risk guidance:
"Such locations are “more likely to be linked to money laundering and terrorist financing.”
In practical terms, this means that it’s important to identity the ‘source of funds’ and associated jurisdiction.
Top tip: ‘Source of funds’ (SoF) is different to ‘source of wealth’ (SoW). Whereas the former (SoF) is the origin of the payment – such as a bank account, the latter (SoW) is how the money was attained – for example, inheritance, investments and salary.
Before you start your search, note that the HMRC risk guidance also states:
“It is not only the country that the customer is based in that may be the risk, it could also be neighbouring countries as money laundering or terrorist financing often involves the movement of funds across borders.”
The ArtAML™ platform automatically checks for high risk jurisdictions, and countries that border high-risk jurisdictions, in association with:
- Residential address (for private individuals and the UBOs of companies)
- Registered address (for companies)
- Source of funds (for all types of customer)
- Reliance partner (the Art Market Participant or regulated business upon whose AML checks you’re relying)
If a high-risk (or bordering) jurisdiction is identified in our platform, a red flag is raised, which triggers conducting Enhanced Due Diligence. You will need to take a risk-based approach based on information related to the transaction, in context of the risks your own business faces of being a target of ML/TF activities.
Not yet using ArtAML™ for compliance checks? Or need to do a manual high-risk jurisdiction check?
High-risk jurisdictions have changed since June 2021 with countries being added and removed over time. To see the latest list of high-risk jurisdictions visit our blog.
How does the Financial Action Task Force (FATF) play a role with an individual country or area updating their HRJ list?
The Financial Action Task Force (FATF) is an international organisation that leads the way in determining which countries pose such risks. In general terms, the FATF plays a pivotal role in shaping international AML standards and promoting AML efforts worldwide. FATF issues recommendations and guidance that serve as essential references for governments and regulators alike in managing AML risks. Its work includes identifying high-risk jurisdictions and issuing recommendations for their improvement. This takes place three times annually, typically in February, June and October.
What is the difference between a high-risk jurisdiction being on the black list or grey list?
Black lists are more severe than grey lists, and are used to identify and mitigate potential risks. Black lists are used to block access to services such as websites, email addresses, and nations, anti-virus software and firewalls, and email service providers to block spam. Grey list countries are considered high-risk or suspicious, but are not yet black listed and serve as a warning.
A note on Russia** (think: sales, purchases and consignments of art):
While the Russian Federation and Belarus have not been added to lists of high-risk jurisdictions, the Financial Action Task Force (FATF) warns:
"the FATF continues to call upon all jurisdictions to remain vigilant of threats to the integrity, safety and security of the international financial system arising from the Russian Federation’s aggression in Ukraine. The FATF reiterates that all jurisdictions should be vigilant to possible emerging risks from the circumvention of measures taken in order to protect the international financial system.”
Source: gov.uk
*HMRC's Risk Guidance for the art market was published in June 2021. See our dedicated post that provides an overview via https://artaml.com/hmrcs-risk-guidance-for-the-art-market-a-must-read/ .
**It is illegal to transact in luxury goods if the final destination is Russia / Belarus. Moreover, UK businesses are not to transact if the customer is “connected with Russia”. Read more in our Luxury Goods Ban blog post.