Trust Offices - topics 2014

De Nederlandsche Bank (hereafter DNB) has published the Trust Offices Newsletter three times a year since 2012. DNB publishes the Trust Offices Newsletter in order to ‘clarify the mutual expectations between DNB and the trust offices’. In the newsletter DNB clarifies its perspective on current topics and themes. 

In this news item we pay special attention to the topics in the November 2013 newsletter and to other themes relevant to trust offices.
 

Within the trust sector DNB performs mainly thematic investigations, which means that the biggest risks within the sector will be looked at in order to determine where further investigation is needed and enforcement where necessary. This year, DNB has investigated the risks surrounding the service to limited partnerships (LPs).

Risks
Based on earlier investigations DNB has established that when using LPs there is a heightened risk of misuse, such as fraud or money laundering. Reasons for this heightened risk include:

• The complexity of the structures the LPs are part of.
• The often limited involvement of the trust office in the structure in question. In many cases the partners of LPs will consist of foreign legal persons whereby the role of the trust office is limited, making it more difficult to perform for instance a thorough examination of the origin and the destination of the means and the purpose of the structure.
• Certain jurisdiction where LPs are in considerable use such as currently in Central- and South America.

Focal points
It is very important for the trust offices to keep this heightened risk in mind and to take the necessary measures to control these risks. For instance a thorough investigation should be carried out looking into the purpose of the structure. This investigation cannot simply be settled by means of a standard declaration. For instance, an extra requirement could be that the purpose of the structure has to be supported by a report from a respected tax consultancy.

In addition, the trust office will have to make good arrangements with the customer and put these in writing in order to comply with its transaction monitoring requirements. In many cases the trust office is not an administrator of the general partner of the LP and therefore often has limited involvement in transactions.
 

At the end of 2013, DNB announced that it will start investigating the function separation in small trust offices. Function separation means that certain tasks are organised in such a way that there is a clear separation between implementing and monitoring functions.

DNB considers an adequate function separation a key element for trust offices to guarantee their role as gatekeeper. For smaller trust offices a function separation is often difficult in practice due to the limited number of people working there. Therefore, they will need to find another way to comply with the requirements of function separation. In this respect this could be done by an external compliance officer or another form of supervision, for instance a commissioner who is charged only with the supervision.

The division of roles needs to be adequately and precisely described in the procedure handbook, which is mandatory for trust offices. It is crucial that the external compliance officer is actively involved in the main processes, such as the customer acceptance process, in order for the function separation to be realised not only on paper but also in practice. Apart from a role in the acceptance process it is also essential to enable the external compliance officer to perform monitoring activities and an advisory role on a regular basis.

Transaction monitoring
In 2013 DNB concluded its theme-based investigation ‘ongoing due diligence’ into trust offices. The supervisor especially looked at how trust offices deal with the integrity risks of their customers and whether they monitor these continually. Next to trust offices banks and insurers were also investigated.

‘Ongoing due diligence’
In practice it regularly appears to be the case that trust offices pay too much attention to the customer acceptance process but that they do not always keep an eye on the duties arising from the Wtt and the Wwft after accepting the customer. DNB calls this ‘ongoing due diligence’, consisting of the following parts:

1. a) Updating customers data.
2. b) Screening against sanction lists.
3. c) Monitoring transactions.
4. d) Reporting unusual transactions.

DNB’s investigation shows that on average trust offices score sufficiently well in parts a) and b) but not in parts c) and d). Below we will briefly explain the implications of these parts and what trust offices need to pay attention to in order to comply.

1) Updating customers data
During the acceptance process the trust office builds up a file containing data relating to the customers investigation, the trust office needs to take the necessary measures to keep these data up-to-date. In general, it will be the relation manager’s task to signal any changes and to update the file accordingly.

Furthermore, a periodic file review based on risk-based review planning is essential. This makes it possible, for instance, to review high-risk customers every six months or year and to check low-risk or average-risk customers once every two years.

2) Screening against sanction lists
Apart from keeping the file up-to-date, the trust office also needs to periodically verify whether its relations appear on sanction lists. These activities can also be carried out in a risk-based way; with the frequency of screening carried out in accordance with customer’s risk profile. In any event screening has to take place at the same time as a periodic review or in the event of a change in structure.

3) Monitoring transactions
As indicated above, DNB’s investigation shows that this is one of the elements of the ‘ongoing due diligence’ which does not score satisfactorily. For instance, the depth and method of monitoring do not always appear to correspond with the customer’s risk profile. To ensure adequate transaction monitoring the following aspects are important:

• Attributing the right risk profile based on clear and unambiguous criteria.
• Drawing up a complete and solid transaction profile.
• Asking the right questions when performing a transaction, checking for instance whether the transaction in question fits within the transaction profile of the customer. A useful tool is a good checklist with concrete criteria. This also ensures that the evaluation of the transaction is registered properly.

The recently modified DNB ‘Guideline Wwft and SW’ offers valuable assistance when applying the legal requirements and further implementation of the above-mentioned aspects.

4) Reporting unusual transactions
According to the DNB, trust offices report too few unusual transactions, there are a number of reasons for this:

• Transaction monitoring is not always adequate, as indicated above. Logically, there is a strong link between the monitoring process and the low number of reports; if unusual transactions cannot be detected they cannot be reported either.
• The role of the trust office as service provider. The trust office is responsible for monitoring transactions and for reporting possible unusual transactions. It is often also involved in performing these transactions as administrator. Furthermore, trust offices appear to misunderstand the consequences of reporting; some think that this means they have to part company with a customer. This is by far not always the case.

As indicated earlier there is a strong link between reporting and monitoring transactions. It is important for trust offices to set up clear and adequate monitoring process and to train their employees and inform them of their obligation to and the consequences of reporting.
 

On1 October 2013 the consultation text for the new Regulation sound operational management (hereafter “Rib Wtt”) was published and replaces the existing Rib.

The new Rib Wtt has a number of modifications and extensions, particularly with regard to the following topics:

1. Customers evaluation
2. Internal control on the compliance of legal requirements
3. Analysing and confronting integrity risks
4. Training of personnel

A number of the most important changes are mentioned below and explained where possible.

1) Customer investigation
The new Rib Wtt has a separate paragraph dedicated to customer investigation and with an explanation of its purpose. This in turn helps the employer have a better connection with the structure and the stipulations of the customer investigation in the Wwft (that do not apply to trust offices). For instance, there are specific rules included when dealing with trusts and partnerships; the old Rib contained only general stipulations for the determination of the identity of interested parties.

2) Internal control regarding the compliance of legal requirements
The terms ‘compliance function’ and ‘audit function’ are introduced in the new Wtt. The compliance function is aimed at the supervision of the compliance of the Wtt, the Rib Wtt and the own procedure handbook. The audit function is aimed at the adequate performance of the compliance function; ‘controlling the control’. The function is more important when those charged with the compliance function are also involved with commercial activities. This will particularly be the case for smaller and medium-sized offices, whereas larger trust offices will generally have a separate compliance department that is not involved with commercial activities.

3) Analysing and confronting integrity risks
The new Rib Wtt also introduces explicit norms for the analysis and tackling of integrity risks. Among other things, it stipulates that the trust office ensures that integrity risks are identified (analysis) and controlled adequately. Furthermore, the explanatory notes of the Rib Wtt stress that this obligation does not only apply to the moment of customer acceptance, but remains an on-going duty afterwards. For each change in the structure or of relevant circumstances the trust office has to decide what this means for the integrity analysis and this will have to be recorded explicitly.

4) Training of personnel
Art. 26 of the concept Rib Wtt contains an explicit duty for trust offices to ensure that everybody working for a trust office has sufficient knowledge of the Wtt and the accompanying regulations, when relevant to the activities. This duty also applies to external employees; the trust office has to ensure that the knowledge of these staff members meets relevant requirements.

Conclusion
It is important for trust offices to make an impact analysis of the new Rib Wtt on activities and, where necessary, adapt their procedure handbook and organisation. In addition, trust offices will have to take a critical look at the methods of transaction monitoring and the reporting of unusual transactions.

We can help you evaluate the performed analysis or help you carry out this analysis yourself. Furthermore, we can help you think about the best ways to adapt your organisation to meet and continue to meet the requirements of the Wtt and the new Rib Wtt. As external compliance officer, we can also help you realise the desired function separation and offer the necessary support.

For more information on this subject please contact Charco & Dique on: 020-4165403 or e-mail: info@charcoendique.nl