AML law against money laundering and terrorist financing

What the AML law regulates

The AML Act, or the Act on Certain Measures to Prevent the Legalization of the Proceeds of Crime and the Financing of Terrorism, regulates measures and procedures to prevent the legalization of the proceeds of crime (money laundering) and the financing of terrorism. This law implements international standards and European Union directives in the area of combating money laundering and terrorist financing. Unfortunately, it also introduces a lot of red tape.

The main areas covered by the law include:

• Obliged persons: definition of entities that are obliged to comply with anti-money laundering and counter-terrorist financing measures.
• Customer identification and control: Obligation on obliged persons to identify and control customers when establishing a business relationship, conducting transactions above a certain limit, suspicious transactions, etc.
• Reporting obligation: Obligation for obliged persons to report suspicious transactions to the competent authority.
• Internal regulations and training: Obliged persons are required to establish internal procedures and staff training to ensure compliance with anti-money laundering and counter-terrorist financing measures.
• Penalties: Establishment of penalties for breaches of obligations under this Law.

In recent years, however, the rules against money laundering have become significantly stricter not only in the Czech Republic but also at the level of the entire European Union. AML is no longer “just” a Czech law, but part of a broader European framework aimed at unifying rules across Member States and more effectively preventing the laundering of proceeds of crime and terrorist financing. For entrepreneurs and companies this means only one thing – obligations are expanding, controls are tightening and ignorance of the rules can have very tangible consequences.

What is terrorism

Let’s be clear about what terrorism is. Terrorism are activities that use violence or the threat of violence to achieve certain goals (usually political, religious, ideological or social). The main goal of terrorist attacks is to create a climate of fear and insecurity in society, often targeting civilians or symbolic targets. Terrorism can take many forms, including bombings, kidnappings, assassinations, cyber-attacks or biological attacks.

Terrorism often takes place within a terrorist organisation, which is a group of individuals who plan and carry out terrorist acts. Terrorist organisations often have a rigid structure and hierarchy, with clear roles and responsibilities for their members. Terrorist organisations unlawfully use force and violence against persons or property to intimidate or coerce governments and civilians to achieve political, religious or ideological objectives. Terrorist organisations tend to be religiously motivated (Al-Qaeda, Hezbollah, Hamas), but there are also terrorist organisations without a religious objective (ETA, IRA).

The counter-terrorism policy of most democratic countries focuses on preventing appeasement of terrorists, countering them and international cooperation. Isolation of states that support terrorism is also an important aspect.

Who commits terrorist financing

Terrorist financing is committed by anyone who collects or provides money or other property knowing that it will be used to carry out a terrorist attack, commit an act of terror, participate in a terrorist group, support or promote terrorism, threaten to commit an act of terrorism, or assist in such acts. This may also include support for persons or groups preparing to commit such acts. Similarly, it includes the provision of reward or compensation to the perpetrators of the above acts, including the raising of funds for such reward or compensation for the perpetrators or persons close to them.

What is dirty money

Dirty money is money obtained illegally, for example from drug trafficking, corruption, extortion, fraud, human trafficking or theft. This money is called ‘dirty’ because its origin is illegal and its possession and use is also illegal. The process by which the perpetrators attempt to ‘clean’ or disguise the origin of these illegally obtained funds is called money laundering. Václav Klaus is credited with saying that he does not know dirty money. But in fact he has said that he cannot distinguish it from clean money. However, this is precisely the essence of AML regulation.

Who commits money laundering

The law defines money laundering, or laundering of the proceeds of crime, as the process by which someone tries to conceal the illegal origin of economic benefits derived from crime to make it appear that they were obtained legally. This process includes, but is not limited to:

• The conversion or transfer of property knowing that it is derived from criminal activity, in order to hide or disguise its origin or to help the person involved in the activity to avoid legal consequences.
• Concealing or disguising the true nature, source, location, movement or disposal of property, or a change in the rights relating to property, knowing that the property originates from criminal activity.
• Acquiring, possessing, using or otherwise disposing of property knowing that it is the proceeds of crime.
• Criminal conspiracy or other form of cooperation to carry out the above activities.

Who is affected by money laundering: Obliged persons under the AML Act

Money laundering mainly affects so-called obliged persons under the AML Act. These are natural and legal persons who carry out certain activities that can be misused for money laundering. The full list of obliged persons can be found in the law, but generally includes:

• Credit institutions: banks and credit unions.
• Financial institutions: Central depositories, investment persons, pension companies, payment service providers and electronic money providers, providers and intermediaries of various loans, insurance companies, reinsurance companies, insurance intermediaries and claims adjusters (life insurance), persons purchasing or trading in debts or claims, money changers, persons providing postal services with financial content, advisers to businesses on capital issues, money brokers, providers of safekeeping of valuables and safe deposit box rental.
• Gambling operators: Except lottery and raffle operators without remote access.
• Persons dealing in real estate: Buyers or sellers of real estate or real estate agents.
• Auditors, accountants and tax advisers
• Bailiffs: In custody of money, securities or other property.
• Notaries and attorneys: In custody or administration of money, securities, business holdings or client property. Or in the formation, management or operation of a business corporation, trust or similar arrangement.
• Persons providing services in connection with corporations and trusts.
• Dealers in works of art, cultural relics and objects of cultural value.
• Persons dealing in second-hand goods or pawnbrokers.
• Persons providing services related to virtual currencies.
• Trustees or persons in a similar position with a trust.
• Insolvency and restructuring trustees.
• Dealers in precious metals or precious stones.

It is therefore clear from the list of obliged persons that there are many common professions among them, such as insurers, estate agents, money changers, accountants, pawnbrokers, and even owners of e-shops that allow payments with virtual currencies.

Obligations of obliged persons

These persons have a number of obligations, which fall into several basic categories:

Identification of the client

• To carry out client identification when entering into a business relationship when carrying out a transaction exceeding EUR 1,000, in the event of a suspicious transaction, etc.
• Verify the identity of the client through valid identity documents.
• Obtain information on the beneficial owner for legal persons.

Working with the beneficial owner is now an integral part of AML obligations. Obliged persons must verify who actually controls the company and who ultimately benefits from the business transactions. It is not enough to rely on the formal entry in the registers – the responsibility for the accuracy of the data lies with the obliged person. Inconsistencies in the registration of beneficial owners may lead not only to fines but also to refusal of business cooperation by banks or investors.

Client control

• Carry out ongoing client checks throughout the duration of the business relationship.
• Evaluate the risks associated with the client and its transactions.
• Update and verify the information obtained about the client.

Not to execute a trade

• Do not proceed with a trade if the client refuses to provide requested identification information or cooperate with the review.
• Do not execute a trade if there is any doubt about the truth or completeness of the information provided.

Keep the information

• Retain records of client identifications and checks made for five or ten years after the trade has taken place or the business relationship has ended.

Report suspicious business

• Promptly report all suspicious trades and transactions to the Financial Analysis Unit (FAU).

Delay the execution of a client’s order

• Delay the execution of a client order if the transaction is suspected to be related to money laundering or terrorist financing and inform the FAO.

Information obligation

• Provide the FAU with all requested information and documentation related to suspicious transactions and clients.

Duty of confidentiality

• Maintain confidentiality of all facts learned in the performance of their duties under the AML Law and not to disclose information about the notification of suspicious transactions.

Develop a risk assessment

• Conduct an assessment of the risks associated with individual clients, products and services and put in place measures to minimise them.
• Establish and implement internal control mechanisms and communication procedures to ensure compliance with AML obligations.
• Develop and implement a system of internal policies and procedures to prevent money laundering and terrorist financing.

Identify a contact person

• Designate a contact person responsible for communication with the FAU and for compliance with AML obligations.

Identify the person in charge

• Identify the person responsible for conducting internal controls and for overseeing compliance with AML obligations.

Train staff

• Provide regular training to employees on their obligations under the AML Law and on money laundering and terrorist financing methods.
• Update staff knowledge of changes in legislation and new money laundering methods.

Not sure if the AML law applies to you or if you have your obligations set up correctly? It is in the area of AML that businesses make the most mistakes, which only become apparent when it is too late. At Affordable Advocate , we can help you quickly assess whether AML applies to you and get everything in place to avoid fines and problems with banks.

Summary

The AML Act focuses on defining obligated persons to include a wide range of institutions and professions, from banks and insurance companies to real estate agents and precious metals dealers. Obliged persons have a number of obligations, including identifying customers, maintaining records, reporting suspicious transactions, delaying orders when money laundering or terrorist financing is suspected, and maintaining confidentiality. These obligations are key to effectively combating money laundering and terrorist financing, and compliance with them contributes to the safety and stability of the financial system.