‘Fit and Proper’ tests – what does it mean for the Money

Service Business sector?

The 2007 Money Laundering Regulations (MLR) introduce a new requirement for
Money Service Businesses to demonstrate that their managers are ‘fit and proper’
people – but how are businesses going to be asked to comply with this legislation –
and how can the Factiva Public Figures & Associates service help?

One of the most important new requirements in the 2007 MLR’s, which come into
force in December 2007 will be the obligation on business owners, directors, senior
managers and nominated officers (MLRO’s) within an Money Service Business (MSB)
to demonstrate that the they are ‘fit and proper’ people – and that they can thus be
trusted to exercise authority in a financial business sector which is collectively
processing billions of pounds of customers money each year.

There has long been some disquiet that the law regulating MSB’s has not been
sufficiently tough to prevent criminals from being allowed to have a controlling
influence in trading money service businesses.

Part of the problem has been that the 2003 Money Laundering Regulations defined
very narrowly the information which applicants for Money Service Business were
required to provide to the regulatory authority (HM Revenue and Customs) at the
time of registration. Even in cases where there was a prior conviction for money
laundering activity by an applicant for money service business, the 2003 MLR’s gave
the regulator few powers to actually prevent an applicant from seeking (and being
granted) an MSB registration.

The 2007 MLR’s change all this. The obligation to complete a ‘fit and proper’ test
starts with effect from 15th December 2007 and will apply to all individuals who are
already responsible for the management of existing registered Money Service
Businesses, plus any companies seeking to be registered as an MSB after 15th
December.

The 2007 MLR’s require that the test should be completed by anyone involved in the
management of an MSB. The definition of management responsibility is not entirely
prescribed, but includes all directors, owners and money laundering reporting
officers. However, anyone who exercises authority in a company (however
indirectly) is also required to complete an application form under the ‘fit and proper’
test.
The 2007 MLR’s make it plain that any criminal convictions under a wide range of
offences will mean that an applicant will be considered to be not a ‘fit and proper’
person and will fail the ‘fit and proper’ test.

This includes convictions under the Terrorism Act 2000 and 2006, any convictions
under the Proceeds of Crime Act (Part 7), convictions under the Fraud Act or the VAT
Act as well as the ‘common law offence of cheating the public revenue’.

Individuals who have been declared bankrupt (and not discharged) will be barred
under the ‘fit and proper’ test. As will all disqualified company directors.

It is clear that the ‘fit and proper’ test will be a minefield for many businesses. And
the specific manner in which HMRC will apply it to the MSB sector makes it even
more challenging.

HMRC have produced sample application forms which will be used for the ‘fit and
proper’ test. The application process is complicated on a number of levels.

All individuals who have more than a 25% ownership share of an MSB will be
required to complete an application form; the test will also be applied to businesses
where the directors/owners are not resident in the UK. Based on research carried
out the UKMTA, nearly 30% of companies have some overseas shareholders. 18%
have overseas directors.

The variety of offences referred to in UK law is significant – it will be a challenge for

an individual who may have been convicted of a minor drugs offence 10 years ago to
know whether this offence should be declared.

And an array of other offences are also covered and will require to be disclosed
including: (among others) improper importation of goods, trade mark offences, copy
right offences, etc. Only a detailed understanding of what the law says will allow
relevant individuals to know how they should comply with the application process.

The application forms also state that ‘equivalent offences’ in another country must
also be declared. HMRC have indicated that they will review all forms submitted.
Any failure by even one individual sitting the ‘fit and proper’ test will automatically
mean that the applicant business will not be registered and will have to cease trading
as an MSB.

So – what does the ‘fit and proper’ test mean for applicant business – and how
should they be preparing themselves?
It is important to note that once a ‘fit and proper’ form is submitted, any change in
the information must be reported to HMRC within 30 days – so, if for example, an
MSB was to be found guilty of a contravention of the Terrorism Act (perhaps for
reasons of a failure to identify a funds transfer to an individual on the Bank of
England Sanctions list) then a failure to notify of the change of status of the relevant
director or directors (i.e. their conviction for an offence under the Terrorism Act)
would be a criminal offence and would put at risk the MSB registration of the
company as a whole.

Checking the names of relevant directors, owners and shareholders against the
Factiva Public Figures & Associates database would enable MSBs to maximize their
compliance efforts and prevent reputational risk.

Factiva Public Figures & Associates, from Dow Jones provides the most detailed
and accurate global coverage of senior Politically Exposed Persons and their close
associations available today. The service also provides global Sanction and Law
Enforcement data updated on a daily basis by a dedicated global research team
working to the editorial standards of Dow Jones.

For many businesses, their very existence will be decided by the ‘fit and proper’ test
process – taking precautions now by making the right enquiries could well save no
end of heartache and trouble further down the line.

One final point: successful completion of the ‘fit and proper’ test will not mean that
MSB’s have been ‘licensed’ – the ‘fit and proper’ test will not give successful MSB’s
the same level of regulatory cover as would apply to Financial Services Authority
regulated firms.

The ‘fit and proper’ test only relates to issue around Anti Money Laundering; there is
still a gap in regulation regarding obligations of firms towards their customers – this
will not be filled until the EU Payment Services Directive is implemented into the UK
(November 2009 at the latest).

*The information in this article has been provided by the UK Money Transmitters Association. For more
information on the UKMTA, contact Dominic Thorncroft on 0207 735 6222 or at
dominic.thorncroft@ukmta.org. All data and/or information in this article are copyright of © 2007 Factiva,
Inc. All rights reserved