READ
Verdict: Origin of capital legitimate but still an unusual transaction
Date:March 29, 2022
Periodically, one of our legal consultants briefly discusses a relevant supervisory decision of the Dutch Authority for the Financial Markets (AFM), the Dutch Central Bank (DNB) or the Dutch Data Protection Authority (AP). This is always done by asking the same three questions and in plain language so that the issue is easily understood by the non-lawyers among us.
This time, we reflect on a ruling by the Trade and Industry Appeals Tribunal (abbreviated as CBb in Dutch). This ruling was handed down in response to a decision by the District Court of Rotterdam on 21 October 2021 regarding an administrative fine of €4,750 imposed by the Financial Supervision Office (BFT in Dutch) for violating Sections 3, 8 and 16 of the Anti-Money Laundering and Anti-Terrorist Financing Act (Wwft in Dutch). The CBb’s ruling was published on 2 November 2021.
Table of Contents
What was going on here?
One of the parties, A, is an accounting and consultancy firm whose clients are mostly SMEs, including B, a care facility. As an accounting and consultancy firm, A is subject to the Wwft. Following reports of fraud by B, the BFT initiated an investigation. This revealed that B is being run via company X, which is also a client of A. Further, the shareholder of X is company Y. In fact, the director of Y is the sole shareholder of X.
According to the BFT, one of the issues discovered by the investigation into A’s file on X was that A had not satisfied its monitoring obligation, as outlined in Section 3(2), preamble and (d), of the Wwft (the periodic review). A had wrongfully failed to perform enhanced customer due diligence, as referred to in Section 8(1) of the Wwft. The BFT also alleged that A had neglected to report unusual transactions to the Financial Intelligence Unit (FIU-NL) in a timely fashion, as stated in Section 16(1) of the Wwft. The BFT additionally argued that A had violated this same section with regard to company Y.
The BFT arrived at this decision because considerable amounts of cash were withdrawn at X during the period 2013-2016 and were then settled in the current account of Y. The BFT alleged that A should have recognised that withdrawals of this scope at a care facility — financed largely with healthcare funds and whose normal business operations do not include withdrawing such large amounts — indicate a higher risk of money laundering.
Moreover, the annual accounts of Y indicated that a real estate investment was made on behalf of its subsidiary, X. The investigation by the BFT did not determine the purpose of this investment. The BFT believed that such an investment of care facility funds is not in line with normal business operations, and, taken together with the resulting current account receivable, this should have been a reason for A to consider it an unusual transaction.
What was the court’s verdict?
The court found no grounds for the ruling that A should have doubted the legal origin of the funds withdrawn in cash and those invested in Turkish real estate. In the court’s opinion, the fact that these transactions and the ensuing current account receivable may not be in line with normal business operations at a care facility and are therefore — also in light of the Wwft guideline examples cited by the BFT — unusual in that respect, does not, without any doubt as to the legal origin of the funds provide sufficient grounds for the BFT’s opinion that A:
- should have recognised a higher risk of money laundering (and therefore has inadequately observed its monitoring obligation);
- should have performed enhanced customer due diligence; and
- had reason to believe that these transactions could be related to money laundering.
The BFT’s decision to impose a fine was nullified. The court found that the BFT had not demonstrated its alleged Wwft violations beyond a reasonable doubt and was therefore not authorised to impose an administrative fine on A.
What was the CBb’s verdict?
The BFT appealed the District Court of Rotterdam’s ruling. Contrary to the court’s findings, the BFT opined that even when there was no doubt about the legal origin of cash withdrawals, there was still a higher risk of money laundering and such transactions should still be considered unusual. Considering that certain sizable cash withdrawals were made at a care facility, A:
- should have recognised a higher risk of money laundering;
- should have modified this customer’s risk profile; and
- should have subsequently performed enhanced customer due diligence.
Moreover, the BFT believed that A should have recognised the need to report an unusual transaction. Given that the withdrawal of €432,000 for real estate investments in Turkey does not align with the normal business operations of a care facility and that the resulting current account receivable was transferred to the holding company, A should most certainly have flagged this as an unusual transaction. According to the BFT, the criminal seizure of X’s books and the results of an investigation by the Healthcare Inspectorate (IGZ) provided a further indication of a higher risk of money laundering and an additional reason to assume that the transaction could be related to money laundering.
Accounting and consultancy firm A should have recognised the need to report an unusual transaction
The CBb stated, first and foremost, that the fact that A was aware of X’s revenue streams and had no reason to question the legal origin of these funds did not prevent a reasoned opinion, based on other indications, that there was a higher risk of money laundering. The BFT had rightly pointed this out. Considering this, the CBb needed to assess whether the BFT had demonstrated beyond a reasonable doubt that A had committed the offences stated in the amending decision.
The CBb did not regard the cash withdrawals, the cash transactions and the fact that these transactions are not common practice at a care facility as sufficient indication that the money involved was directly or indirectly the proceeds of any crime. However, the CBb did find that the “substantial investment” in foreign real estate was not in line with the normal business operations of the care facility and/or the holding company. Moreover, this investment was not listed under the name of the company itself.
The CBb therefore ruled that A had every reason to report this as an unusual transaction. By refraining from immediately reporting this transaction, A had not satisfied Section 16(1) of the Wwft. Therefore, the CBb deemed one violation of Section 16(1) of the Wwft to be proven and saw cause to reduce the fine, considering €2,000 appropriate and called for.
What does this teach us?
The Wwft contains provisions for the prevention of money laundering and the financing of terrorism. Briefly (and to the extent it is relevant in this case), money laundering concerns the acquisition, possession, transfer, sale or use of an object that the person involved knows or should reasonably suspect originates — directly or indirectly — from a criminal offence (see Sections 420bis and 420quarter of the Dutch Criminal Code).
When Wwft institutions conduct customer due diligence, they look at the origin of the funds used in the provision of services or the origin of their customers’ capital, among other matters. It may therefore be the case, according to the CBb, that the institution has established that the origin of the capital is legitimate, but later, when monitoring transactions, it may see evidence indicating money laundering. This then needs to be investigated to determine if there is an unusual transaction that must be reported to the FIU-NL.
We therefore advise that you ensure your transaction monitoring is organised properly and conducted regularly. If a potentially unusual transaction is discovered, investigate it and document demonstrably or reproducibly your considerations for reporting or not reporting it to the FIU-NL. Recording the reasons not to report is particularly important here, especially in this type of case in which the regulator conducts targeted file investigations.
Latest insights
READ MORE