National Risk Assessment (ML/TF/PF)

National Risk Assessment

Gov.gg

Introduction

All jurisdictions are subject to money laundering and terrorist financing risks, and the now widespread concept of a national risk assessment ("NRA") has evolved to meet the international requirement of the FATF for jurisdictions to identify, assess and understand the risks they face. In turn, this better equips governments, their civil servants and the relevant operational authorities to mitigate the risks such as the risks of Bailiwick of Guernsey businesses being used to facilitate terrorist financing and the laundering of proceeds-generating crimes like corruption (including illicit enrichment).

In December 2023, the Bailiwick of Guernsey carried out its second NRA ("NRA2") of the money laundering and terrorist financing risks it faces. The NRA2 has developed the first NRA based on the further knowledge and findings of Bailiwick authorities and includes the Bailiwick’s first assessment of the risks of financing of proliferation of weapons of mass destruction.

A National Strategy for combatting financial crime has also been issued reflecting the Bailiwick’s long-standing commitment to the prevention of money laundering, terrorist financing and proliferation financing.

Money Laundering

Money laundering is the act by which the proceeds of crime are made to appear legitimate. The UN Convention Against Transnational Organized Crime defines money laundering at Article 6 as:

“The conversion or transfer of property, knowing that such property is the proceeds of crime, for the purpose of concealing or disguising the illicit origin of the property or of helping any person who is involved in the commission of the predicate offence to evade the legal consequences of his or her action; or the concealment or disguise of the true nature, source, location, disposition, movement or ownership of or rights with respect to property, knowing that such property is the proceeds of crime.”

As with the first NRA, the finding of the NRA2 with regard to money laundering risks is that, as an international finance centre with a low domestic crime rate, Guernsey's greatest money laundering risks come from the laundering of the proceeds of foreign criminality. The NRA2 found that the most common foreign predicate offences for money laundering within the jurisdiction are bribery and corruption, fraud and tax evasion, followed by drug trafficking. The money laundering risks from domestic criminality, while much lower, primarily arise from drug trafficking and fraud, followed by tax evasion.

Further details regarding these and other predicate offences are provided below:

Bribery and Corruption

Definitions of bribery and corruption vary. The UK’s Bribery Act 2010 (“the Bribery Act”) explains that an individual is guilty of an offence if they “offer, promise or give an advantage, directly or indirectly, to another person, intending that a person is rewarded for, or induced to, perform a relevant function or activity improperly.”

The United Nations Secretariat has previously outlined that corruption “encompasses any act or omission that misuses official authority or seeks to influence the misuse of official authority in order to obtain an undue benefit for oneself or a third party.”

Indicators of bribery and corruption include, but are not limited to:

  • any complex, unusual, or large transactions or unusual patterns of transactions that have no apparent or viable economic or lawful purpose;
  • charitable or political donations or sponsorships; and
  • payments to unknown third parties.

Management of a firm’s bribery and corruption risk is pertinent to ensure that firms comply with the Prevention of Corruption (Bailiwick of Guernsey) Law, 2003. Firms must also not risk contravening bribery and corruption legislation of other jurisdictions, or which apply to firms in other ways, for example, the Bribery Act which has extraterritorial reach.  

The extra-territorial reach of the Bribery Act means that a foreign company, including a Guernsey company, which carries on any “part of a business” in the UK could be prosecuted under the Bribery Act for failing to prevent bribery committed by any of its employees, agents or other representatives, even if the bribery takes place outside the UK and involves non-UK persons. The Bribery Act also applies to British citizens working anywhere in the world, even if the company for which they work does not carry out business anywhere in the UK.

The use of Guernsey to launder the proceeds of corruption is most likely to arise from:

  1. Business relationships that are linked to sensitive industries (e.g., pharmaceuticals or mining)
  2. Business relationships that are linked to countries with poor economic situations where there is a lack of opportunity to earn money legitimately and an absence of effective anti-corruption mechanisms. Even where such countries have established anti-corruption bodies, these bodies are themselves often affected by corruption.

The FATF has provided guidance on combatting corruption as a predicate crime and crime within itself:

FATF: The use of the FATF Recommendations to Combat Corruption

FATF: Laundering the proceeds of corruption

Fraud

The United Nations Secretariat has described that fraud “encompasses any act or omission whereby an individual or entity knowingly misrepresents or conceals a material fact in order to obtain an undue benefit or advantage for himself, herself, itself, or a third party, or to cause another to act to his or her detriment.” Fraud offences refer to those under the Fraud (Bailiwick of Guernsey) Law, 2009 or similar legislation elsewhere.

Examples of commonplace fraud cases include identity theft, which involves stealing personal information in order to impersonate another to further personal aims and phishing, which entails the sending of suspicious emails, sometimes even purporting to be from banks or building societies, with the aim of deceiving people into giving out personal information or clicking on malicious links. The latter is an example of cybercrime, which is expanded on in the Cybercrime section below.

Other examples of fraud include:

  • Insurance fraud
  • Lending fraud (e.g., mortgage fraud)
  • Embezzlement/misappropriation of funds
  • Payment instrument fraud (e.g., credit card, cheque fraud)
  • VAT/GST fraud
  • Benefit fraud
  • Investment fraud (e.g., Ponzi and pyramid schemes)

The FATF’s report on the laundering of VAT carousel provides an overview of fraud as a predicate crime:

FATF: Laundering the Proceeds of VAT Carousel Fraud Report

Tax Evasion

Tax evasion is also a type of fraud. The Organisation for Economic Co-operation and Development ("OECD") defines tax evasion as “illegal arrangements where liability to tax is hidden or ignored, i.e., the taxpayer pays less tax than he is legally obligated to pay by hiding income or information from the tax authorities.” 

VAT/GST fraud is also a  form of tax evasion.

The NRA considers that Guernsey may be used for foreign tax evasion in two situations:

  1. Where parties wish to move assets out of their legal ownership or out of their home jurisdiction to mislead tax authorities in that jurisdiction about the extent of their tax liabilities; and
  2. Where parties who have previously committed tax evasion in their home jurisdiction use Guernsey to hold or administer property that comprises, or represents, the additional tax that would have been paid if tax evasion had not occurred.

Drug Trafficking

The United Nations Office on Drugs and Crime ("UNODC") defines drug trafficking as a “global illicit trade involving the cultivation, manufacture, distribution and sale of substances which are subject to drug prohibition laws.

The money laundering threats from domestic criminality principally relate to drug trafficking and fraud, followed by tax evasion, which are the most significant domestic proceeds-generating crimes. These offences usually involve small-scale activity that is carried out entirely within the jurisdiction and generates low levels of proceeds. However, there have been a small number of drug trafficking cases involving organised criminal groups and these cases typically generate higher levels of proceeds. The laundering of the proceeds of these crimes is most likely to involve the retail banking sector and the use of cash, a typical pattern for laundering being “smurfing”, i.e., making several low value cash payments in order to avoid arousing suspicion.

Guernsey’s geographical location requires the purchase, transportation and onward supply of illicit drugs to be planned and coordinated, either by domestic or international organised crime groups.  The threat of foreign proceeds of crime is low and is much higher on the domestic front.

The following FATF reports provide case studies on drug trafficking’s impact on financial flows:

FATF: Financial Flows Linked to the Production and Trafficking of Afghan Opiates

FATF: Money Laundering from Fentanyl and Synthetic Opioids

Insider Dealing and Market Manipulation

FATF describes insider dealing as involving “situations where the person who buys and sells securities, whether a company insider or not, does so in violation of a fiduciary duty or other relationship of trust and confidence, while in possession of material, non-public information about the security.

Potential indicators of insider trading include:

  • when a customer makes a large purchase or sale of a security just before news that affects the price of that security is released
  • if a customer is known to have family and friends who work for the securities issuer

Insider dealing offences are criminalised under the Company Securities (Insider Dealing) (Bailiwick of Guernsey) Law 1996.

FATF states that market manipulation refers to “the conduct that is intended to deceive investors by controlling or artificially affecting the market for a security. In particular, the manipulator’s purpose is to drive the price of a security up or down in order to profit from price differentials.

Potential indicators of Market Manipulation include:

  • a customer engaging in large or repeated trading in securities that are illiquid, low priced, or difficult to price
  • the officers or insiders of the issuing company are associated with other low priced, illiquid, or low volume companies
  • the issuing company has no apparent business, revenues or products

The most pervasive market manipulation involves what is colloquially referred to as a 'pump-and-dump' scheme. This involves advertising a company’s stock with false or misleading statements, often in conjunction with securities trades that raise the price of the security or make it appear as if the securities trading volume is higher than it actually is. The security price is artificially raised and then sold for profit. Often the underlying security is low priced, illiquid and trades with little volume.

Other examples of potential insider trading and market manipulation are anti-trust/cartel or anti-competition violations and boiler room scams.

The FATF provides a report on vulnerabilities within the securities sector which illustrates the impact of insider dealing and market manipulation:

FATF: Money Laundering and Terrorist Financing in the Securities Sector 

Cybercrime

Cybercrime is a broad term used to cover all crimes that: take place online, are committed using computers or are facilitated by online technology.

The UK's National Crime Agency ("NCA") describes the threat of ransomware deployment as "the greatest cyber serious and organised crime threat to the UK and its use threatens Critical National Infrastructure and poses a risk to national security. Ransomware attacks can have a significant impact on victims due to financial, data and service losses, which can lead to business closure, inaccessible public services and compromised customer data".

Other cyber threats include:

  • Malware, such as malicious software being installed on a system to gather confidential information.
  • Phishing, such as emails being sent asking for personal or banking details.
  • Hacking, such as email account passwords.

The NCA and the UK National Cyber Security Centre provide details regarding the threat from cybercrime and how to protect yourself against it.

The FATF provided a report on Countering Ransomware Financing which provides a list of potential risk indicators that can help public and private sector entities identify suspicious activities related to ransomware. The FATF also produced a report which focuses on illicit financing arising from fraud that is enabled through or conducted in the cyber environment.

FATF: Countering Ransomware Financing

FATF: Illicit Financial Flows from Cyber-Enabled Fraud

Terrorist Financing

Terrorist financing refers to the unlawful and wilful provision or collection of funds and other related materials with the intention, or knowledge, that they will be used by a terrorist or terrorist organisation. 

Terrorist financing is recognised to have three distinct stages:

  1. Raising funds for the purpose of terrorist financing
  2. Moving the funds in some way
  3. Using the funds for terrorist aims e.g., to purchase materials for a terrorist attack

Guernsey’s status as an International Finance Centre leaves it exposed to the threat of being used in the second stage, the movement of funds linked to terrorist activity, due to its cross-border business. Guernsey could be used either as a transit jurisdiction for funds or as a jurisdiction from which the movements of funds elsewhere is controlled. In 2019 the States of Guernsey issued Guidance on terrorist financing risks to the Bailiwick, and in January 2024, the States of Guernsey issued updated Guidance via THEMIS. In December 2023, Bailiwick Authorities delivered a presentation on the Terrorist Financing Risks within the Bailiwick, the slides for which can be found here.

The NRA notes that terrorist financing from cross-border business is more likely to occur as secondary terrorist financing, where the proceeds of crime are used to fund terrorism i.e., money laundering is a predicate offence for terrorism. There is also a risk that funds raised in Guernsey for legitimate purposes may be diverted to support foreign terrorism. However, these risks are much lower than the money laundering risks.

Further, the NRA describes that Guernsey’s potential exposure to terrorist financing in these ways has been considered by looking at business links with focus countries, i.e., countries that present particular risks of terrorism or terrorist financing. These focus countries include:

  • Countries that present active terrorism or terrorist financing threats, either because there are areas of conflict within their borders, or because sections of the population are actively targeted by terrorist organisations for support and cover.
  • Countries that have strong geographical or other links to countries that have an active terrorism or terrorist financing threat.
  • Countries with a secondary terrorism or terrorist financing threat, i.e., where there may not be an active terrorism or terrorist financing threat but where there is a heightened threat of crimes whose proceeds are typically used by organised criminal groups to fund terrorism (i.e., corruption, drug trafficking, hijacking or kidnapping, benefit fraud, environmental crimes such as illegal logging and ivory dealing, human trafficking and modern slavery).

The NRA considers that the risk of funds being raised or sent into Guernsey to support domestic terrorist activity is extremely low. Guernsey’s profile makes it unlikely that domestic terrorist activity would occur. 

FATF provides the following guidance to countries in implementing the requirements of Recommendation 5, regarding measures to assist countries in fulfilling the legal requirements of the International Convention for the Suppression of the Financing of Terrorism and relevant United Nations Security Council Resolutions:

FATF: Terrorist Financing Risk Assessment Guidance

Proliferation Financing

The Financial Action Task Force ("FATF") defines proliferation financing as "providing funds or financial services which are used, in whole or in part, for the manufacture, acquisition, possession, development, export, trans-shipment, brokering, transport, transfer, stockpiling or use of nuclear, chemical or biological weapons and their means of delivery and related materials (including both technologies and dual use goods used for non-legitimate purposes), in contravention of national laws or, where applicable, international obligations.".

Guernsey has enacted legislation criminalising proliferation and proliferation financing and has issued Guidance on Combatting Proliferation and Proliferation Financing (“the Guidance”) outlining the legal obligations in the Bailiwick concerning proliferation and proliferation financing which provides practical guidance on good practices to identify, assess, manage and reduce the risks of proliferation and proliferation financing. The Guidance emphasises that such practices involve more than screening databases against lists of individuals and entities subject to international sanctions.

The NRA sets out that there have been no indications to date of Guernsey being used for financing of proliferation – or for proliferation itself. Guernsey’s context and demographic profile means that domestic proliferation activity or financing of proliferation activity of any sort is very unlikely to take place. As such, the assessment of the risks of financing of proliferation of weapons of mass destruction finds that the risks are the same or lower than the jurisdiction's terrorist financing risks.

Further Information/Guidance

Further information and guidance in respect of Proliferation Financing can be found on the Commission's Proliferation Financing page.

The FATF provides further guidance on assessing and mitigating the risk of proliferation financing:

FATF: Guidance on Proliferation Financing Risk Assessment and Mitigation

NRA Presentations & Workshops Slides

On 23 January 2024, representatives of the States of Guernsey, the Commission, the Alderney Gambling Control Commission, the Financial Intelligence Service and the Guernsey Registry hosted presentations and workshops on the NRA2. The slides which accompanied these sessions can be found below.

In 2020, presentations and workshops on the NRA were held for the private sector by representatives of the States of Guernsey, the Commission and the Financial Intelligence Service. The aim of these sessions was to give an overview of the money laundering and terrorist financing threats and provide initial guidance on how reporting entities should apply the NRA report to their businesses. The slides which accompanied these sessions can be found below:

NRA2 Presentation January 2024 - Law Officers of The Crown 523.8KB -
NRA2 Presentation January 2024 - GFSC 1.3MB -
NRA2 Presentation January 2024 - Guernsey Registry 237.4KB -
NRA2 Presentation January 2024 - FIU 1.5MB -
NRA2 Presentation January 2024 - AGCC 184.3KB -
NRA Workshop - September 2020 1.1MB -
NRA Presentation February 2020 - Policy & Resources Slides 649.7KB -
NRA Presentation February 2020 - GFSC Slides 252.6KB -
NRA Presentation February 2020 - FIS Slides 792.9KB -