Statement 25 May 2020 – 1/2020

On a simplified customer due diligence procedure – private road maintenance associations and joint ownership associations managing common water areas

FIVA/6/01.02/2020

Introduction

The Financial Supervision Authority (FIN-FSA) has received numerous contacts and questions about how supervised entities should adjust their customer due diligence measures to the risks posed by money laundering (ML) and terrorist financing (TF) when the customer is a private road maintenance association. The FIN-FSA has become aware that in some cases private road maintenance associations have been required to have a business ID for banking purposes. Similar questions have also been raised in relation to joint ownership associations managing common water areas.

Following the numerous enquiries it has received, the FIN-FSA has decided to publish this statement.

Simplified procedure for customer due diligence

Customer due diligence (CDD) is a key obligation under the Money Laundering Act. Based on a risk-based approach, supervised entities shall establish their CDD procedures and the minimum criteria to be observed in their customer relationships. A risk-based approach to CDD means that supervised entities adjust their CDD measures to the risks posed by the services provided to customers and by the ML/TF risk they have identified.

Supervised entities may follow a simplified due diligence (SDD) procedure if, based on their own risk assessment, they consider that a customer relationship or individual transaction involves a low risk of money laundering and terrorist financing. Unlike before, the current Money Laundering Act (28.6.2017/444) no longer defines in more detail the cases in which supervised entities may follow an SDD procedure.

A Government decree will lay down more detailed provisions on the customers, products, services, payment transactions, delivery methods or geographical risk factors that may involve a low risk of money laundering or terrorist financing, and the procedures to be followed in such situations.

The Guidelines on ML/TF risk factors and simplified and enhanced customer due diligence, published on 26 June 2017 by the European Supervisory Authorities, also provide tools for assessing the risks of money laundering and terrorist financing related to the activities and customer relationships of supervised entities. These guidelines are currently being updated. For more information on this issue, see the FIN-FSA’s supervision release 14/2020, published on 1 April 2020.

Private road maintenance associations

When assessing the ML/TF risks associated with private road maintenance associations and considering whether private road maintenance associations should be registered in the Business Information System, the risk assessment should take into account, among others, the following factors

  • the private road maintenance association is a body, consisting of road stakeholders established in a legal road survey, that is responsible for the maintenance of a private road.
  • the road stakeholders are obliged by law to contribute to the costs of construction and maintenance of a private road.
  • the payment traffic of the private road maintenance association is generally low and is typically limited almost exclusively to road fees charged from road stakeholders and charges arising from private road maintenance.
  • the activities of the private road maintenance association are not typically the activities prescribed in section 3 of the Business Information Act (244/2001) and do not therefore generally fulfil the requirements for registration under the Act.
    • however, when the private road maintenance association has a payroll or the private road maintenance association is liable for value-added tax on sales of wood, for example, the requirements for registration under the Business Information Act are fulfilled and a business ID is granted to the private road maintenance association.

The FIN-FSA considers that when a private road maintenance association only engages in private road maintenance activities and there are no other special factors that would increase the ML/TF risk associated with customer relationships, the ML/TF risk associated with the customer relationships of the private road maintenance association is low. However, in order for the supervised entity to be able to assess whether there are special factors associated with the private road maintenance association’s customer relationships that would increase the ML/TF risk, the supervised entity must ensure that it has sufficient information about the private road maintenance association and the nature and extent of its activities. This information is also necessary to enable the supervised entity to identify unusual or suspicious transactions. In situations where the ML/TF risk associated with the private road maintenance association’s customer relationships is low, supervised entities may follow a simplified customer due diligence procedure.

The FIN-FSA also considers that, in order to establish or continue a customer relationship, a private road maintenance association need not be registered in the Business Information System other than when the private road maintenance association engages in activities prescribed in section 3 of the Business Information Act and the requirements for registration are therefore fulfilled.

Joint ownership associations managing common water areas

When assessing the ML/TF risks associated with a joint ownership association managing a common water area, the risk assessment should take into account, among others, the following factors

  • the joint ownership association managing a common water area consists of property owners who have a share in a common water area.
  • the joint ownership association may be organised, in which case the association has rules and holds meetings in accordance with the rules, or unorganised, in which case it meets as necessary at the invitation of any shareholder.
  • for most joint ownership associations, the most important source of income consists of income received from the transfer of fishing rights. The joint ownership association may also receive income by collecting fees from shareholders or by selling natural products (gravel, forest etc.) or land (reliction area) from the common area. The joint ownership association typically incurs expenses from administration, arranging fishing, supervising fishing, management of fish stocks and the common area, and representation of interests.
  • the joint ownership association may also apply for various grants and project financing, for example, for water area restoration or fish stock management. 
  • the activities of the joint ownership association are not in all cases the activities prescribed in section 3 of the Business Information Act (244/2001) and do not therefore always fulfil the requirements for registration under the Act.

The FIN-FSA considers that when a joint ownership association managing a common water area only engages in water area management and activities customarily related to the fishing associated with this, and there are no other special factors that would increase the ML/TF risk associated with customer relationships, the ML/TF risk associated with the customer relationships of the joint ownership association is low. However, in order for the supervised entity to be able to assess whether there are special factors associated with the customer relationships of a joint ownership association managing a common water area that would increase the ML/TF risk, the supervised entity must ensure that it has sufficient information about the joint ownership association and the nature and extent of its activities. This information is also necessary to enable the supervised entity to identify unusual or suspicious transactions. In situations where the ML/TF risk associated with the customer relationships of joint ownership associations managing common water areas is low, supervised entities may follow a simplified customer due diligence procedure.

The FIN-FSA also considers that, in order to establish or continue a customer relationship, a joint ownership association managing a common water area need not be registered in the Business Information System other than when the joint ownership association engages in activities prescribed in section 3 of the Business Information Act and the requirements for registration are therefore fulfilled.

Conclusion

In addition to the that fact a Government Decree will lay down more detailed provisions on the simplified customer due diligence procedure, the FIN-FSA is also currently updating regulations and guidelines related to customer due diligence and the prevention of money laundering and terrorist financing. In connection with the update, the aim is to provide more detailed guidelines on situations where a simplified customer due diligence procedure is justified due to the low risk of money laundering and terrorist financing associated with customer relationships or individual transactions.

The FIN-FSA emphasises that, under the Money Laundering Act, supervised entities can already follow a simplified due diligence procedure if, based on their own risk assessment, they consider that customer relationships or individual transactions involve a low risk of money laundering and terrorist financing. The simplified due diligence procedure does not permit non-compliance with the mandatory provisions of the Money Laundering Act; it is primarily a matter of easing the customer due diligence procedure. Supervised entities may adjust the amount, timing or type of CDD measures in a way that is commensurate to the low risk they have identified in their risk assessment.

When supervised entities adjust the quantity of CDD information obtained from customers so that they obtain from customers only the CDD information that is necessary and essential for establishing and maintaining a customer relationship taking into account the low ML/TF risk associated with the customer relationship, the supervised entities’ risk-based approach steers towards measures, which are proportionate in relation to the ML/TF risks. Then, in cases where the risk associated with a customer relationship has been assessed as low, an unnecessarily extensive amount of information in relation to the nature and extent of the customer relationship and the ML/TF risk associated with the customer relationship, will not be collected from customers. However, when adjusting the amount of CDD information, supervised entities should always ensure that they obtain sufficient information about the nature of the business relationship to enable them to identify any unusual or suspicious transactions.

Validity of the statement

The FIN-FSA will re-assess the necessity of this statement at the stage when the Government decree has laid down more detailed provisions on the customers, products, services, payment transactions, delivery methods or geographical risk factors that may involve a low risk of money laundering or terrorist financing, and the procedures to be followed in such situations.

For further information, please contact

Jonna Ekström, Senior Legal Advisor, tel. +358 9 183 5531 or jonna.ekstrom(at)finanssivalvonta.fi