Must exchange institutions perform a sanctions check when effecting cash exchange transactions?
Yes, pursuant to the Sanctions Act (Sanctiewet 1977 – Sw) in conjunction with the Regulation on Supervision pursuant to the Sanctions Act (Regeling toezicht sanctiewet – Rtsw), institutions offering a currency exchange transaction (exchange institutions) must perform a sanctions check for each transaction they effect. No sanctions check can be performed without prior identification. In general, it is sufficient to check the customer's passport or a copy of the passport. There are two types of cash exchange transactions.
- A transaction in which cash is exchanged from one currency to another
- A transaction in which a euro amount is exchanged from one denomination to another
For the first type, the obligation to perform a sanctions check applies in analogy to the obligation to establish and verify a customer's identify on a risk basis in an exchange transaction between two currencies. The check must therefore be performed if the transaction involves an amount of EUR 2,000 or more.
For the second type, the obligation to perform a sanctions check applies in analogy to the obligation to establish and verify a customer's identify on a risk basis in euro exchanges from one denomination to another. The check must therefore be performed for every transaction.
The Rtsw requires that institutions take measures to verify whether their customers appear on one or more sanctions lists. Sanctions lists include EU Decisions and Regulations, Decisions by the Dutch Minister of Foreign Affairs based on the Regulation on Sanctions for the Suppression of Terrorism (Sanctieregeling terrorisme 2007-II or the “national terrorism list”) or UN Security Council Resolutions.
Pursuant to the Sw, a sanctions check must be performed for each transaction. No sanctions check can be performed without prior establishment and verification of a customer's identity. We conducted an examination among exchange institutions in January 2019. This revealed that exchange institutions fail to perform these sanctions checks. We have asked them why, to which they responded that they must process large numbers of small cash exchange transactions of customers who present themselves at the counter. The majority of these transactions involve amounts below or equal to EUR 2,000. They believe it takes too much time to check every single customer.
However, this is not a valid reason for not complying with the provisions of the Sw. As mentioned above, no sanctions check can be performed without prior establishment and verification of a customer's identity. We consider it necessary that a customer's identity is established and verified for foreign exchange transactions of EUR 2,000 or more and for all exchange transactions from one euro denomination to another.
The obligation to perform a sanctions check applies in analogy to the obligation to establish and verify a customer's identity. This means an exchange institution is obliged to perform a sanctions check before effecting a currency exchange transaction of EUR 2,000 or more. In addition, the risk inherent in exchange transactions from one euro denomination to another is so high that a sanctions check must always be performed.
Customer identification must be documented, so that it can be reproduced. The documented details allow for an effective check against the sanctions lists. In practice, we find that exchange institutions verify the identity of their customers on the basis of an identity document, reducing the risk of entering into a relationship with a person who in reality turns out to be someone else.
How to act if there is a “hit” against a sanctions list
An exchange institution must follow this procedure:
- Someone calls upon the exchange institution to use its services.
- If the transaction involves an amount of EUR 2,000 or more or if it involves exchanging a euro amount from one denomination to another, the customer's identity must be established and verified.
- The customer's name must be checked against various sanctions lists.
- In the event of a hit, the customer must be told that no exchange transaction can take place. From that moment onwards, no financial services may be provided to the person concerned.
- Any outstanding balances must be frozen until the Minister of Finance grants dispensation, the obligation ceases to exist, or until notice to the contrary from the Minister of Finance or DNB is received.
- The customer's past transactions must also be investigated to assess whether any transactions were effected that give cause to suspect that they may be related to money laundering or terrorist financing.
- If the exchange institution suspects money laundering or terrorist financing, it must notify FIU-NL.
- If there is an actual hit, the exchange institution must notify us without delay. There is a specific template for notification purposes. The exchange institution must report the following details:
- Name, street address and town, and contact person of the institution making the notification
- The EU regulation or Dutch sanctions regime that applies
- Name, place of residence, place of birth and date of birth of the person on the sanctions list
- The action which the exchange institution has taken
- Itemisation of the frozen funds and assets Note: the currencies involved must also be stated.
Sanctions check on legal entities
Section 1(b) of the Rtsw defines a customer very broadly: “any party involved in a financial service or financial transaction”. In the context of business customers, this also includes representatives and ultimate beneficial owners (UBOs) (see also our Guidance on the Wwft and the Sw). It must be investigated which persons are involved.
In the case of business customers, you can check UBOs' identities against the sanctions lists using an extract from the Chamber of Commerce's Trade Register. A UBO is defined as a person who holds 25% or more of the ownership rights to or control over the entity in question. Your efforts should allow you to demonstrate that the UBO is not subject to sanctions. For foundations and other non-profit organisations it is crucial to identify those in control, which typically are directors or representatives.
It may be difficult to establish the identity of a UBO, for instance in the case of foreign legal entities or UBOs, foundations or non-profit organisations. In situations involving foreign entities, exchange institutions may decide to use systems specialising in investigations of foreign UBOs.
Sanctions check on existing customers
The Sw requires that exchange institutions are able to detect at any time whether customers or transactions are affected by a sanctions regime. In respect of regular customers, this implies that an exchange institution must check its customer base against the sanctions lists on a regular basis, more specifically with a risk-based frequency.
Relevant laws and regulations
- Section 3(1) and (2) of the Sw in conjunction with Section 2(1) and (2) of the Rtsw
- Section 16 of the Wwft