ECSH33315 - When customer due diligence is required: out of scope activity

Whilst conducting customer due diligence (CDD) checks, you may come across certain scenarios where CDD has been done by the business, but you should not include it in your records testing. This can be for several reasons.

Out of scope for the purposes of The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017)

You may find that the business has applied due diligence measures across their business, including activities which are out of scope for supervision. For example, a high value dealer (HVD) may apply CDD measures to all transactions exceeding 10,000 euros regardless of the method of payment; however, only transactions which are in scope must be selected to test compliance with MLR 2017.

If you are conducting a compliance check to an art market participant (AMP), you should be aware of the definition of a work of art for the purposes of MLR 2017, as some pieces the business deals in may be out of scope. For example, an auction house sells a mixture of paintings and antiques, the antiques will not be in scope, and you will not be able to ask for information or documents relating to these transactions.

Businesses may also be required to verify customers identity under other legislation. For example, an HVD dealing in precious metals and stones may be required to verify the identity of customers for VAT exemption purposes relating to investment gold. It is important to understand the additional measures which have been taken to prevent money laundering and terrorist financing, rather than simply photocopying ID for its statutory VAT records.

Although the business might have carried out CDD on a transaction, if they are not in scope, you should not test them.

If you establish that the business is not currently carrying out any relevant activity and never has, follow the guidance in ECSH34020 What if you're unable to check the business's compliance with MLR 2017. If the business was carrying out relevant activity, but has since stopped, you should continue with risk-based testing to consider the business’s compliance with the relevant requirements in force at the time.

 

Out of scope for the scope of the compliance check

You should be aware of the scope of the compliance check. From your initial review of the case, you should have established the scope of the compliance check. For example, the Project Initiation Document sets out that the project is regarding Money Service Businesses (MSB) activity, and this should be your focus for testing. If you establish that the business also conducts relevant activity in another sector, for example, estate agency business work, you should check with the Sector Specialists whether you should be conducting transaction testing for this second sector or not.

Activity you must not test:

Agent checks

If you are conducting a check to an MSB agent, the business may carry out activities for more than one principal. You should only check the transactions in relation to the activity of the principal who is the subject of the compliance check. For more information, see ECSH32635.

 

Multiple supervisors

If a business is supervised by multiple supervisors, you must only test the relevant activity supervised by HMRC. For example, if a trust or company service provider (TCSP) is also a law firm, for which the activity is supervised by a professional body. You can only test the compliance of the work that is in scope as a TCSP. For more information on businesses with multiple supervisors and dual supervision, see ECSH42000.