Edition 45, Finance

New Federal Law for the Prevention and Identification of Operations with Illegally Acquired Funds in Small and Medium-sized Companies

By: C. P. C. José Frank González1

Closer than ever to the employer and the professionals…

On October 17, 2012, the Ministry of Finance and Public Credit published the Federal Law for the Prevention and Identification of Operations with Illegally Acquired Funds (LFPIORPI) in the Official Journal of the Federation, which should go into effect nine months after the date of publication.

When we hear someone speak about this issue, we generally refer to the financial system as the main one affected by these transactions. However, it is important to note that the objective of this law is not only to protect the financial system, but also the national economy, by establishing measures and procedures to prevent and detect acts or operations that involve illegally acquired funds, better known as “money laundering.”

This Law adopts the most advanced international standards in the field of prevention of money laundering and at the same time establishes a state-of-the-art system to protect the national economy through inter-institutional coordination to obtain useful elements to prevent and investigate the crime of operations with illegally acquired funds, the financial structures of the criminal organizations, and the way to avoid the use of funds to finance them.

Mexico also complies with the Recommendations of the Financial Action Task Force on Money Laundering (GAFI by its French acronym) that relates to certain non-financial businesses and professions.

But, what exactly is the Law? Where does all this come from? What is the impact on Mexican companies, whether or not they are in the financial sector? Who is required to comply with this Law? What are my obligations? What kind of responsibilities do I incur?

What is money laundering?

Money laundering is defined as the process in which the illegal source of money or the proceeds derived from this illicit activity is concealed in order to make its origins appear legal. From this definition, it’s worth highlighting the following elements:

  1. It is a process.
  2. The existence of an illegal source is hidden.
  3. The goal is to make it appear legal.

Money laundering has three stages:

  1. Placement: The money derived from illegal activities is introduced into the financial system or into the economy with the purpose of hiding or disguising its origin.
  2. Layering: Different transactions are performed within the economy in order to avoid the tracking and auditing of the funds.
  3. Integration: There is an attempt to reinsert the laundered money into the economy, through operations and/or legitimate businesses.In this stage, the launderer gets the real benefit of the illicit activity, despite losses or inherent expenses.

1Certified Public Accountant from the Mexican Institute of Public Accountants A. C. (IMCP), a graduate of the ITAM, with graduate courses in Taxes and in Corporate and Stock Market Finances. He received his Certification in National and International Accounting from the Mexican Institute of Public Accountants A.C. (IMCP). General Director of Grupo GSG Mefintax and Grupo Montes Pirineos. Sr. Partner of GSG Consultores Asociados, S. C. and MEFINTAX México, S. C., firms specializing in consulting and accounting training (national and international), fiscal, financial, corporate governance and SOX. jfgonzali@gmail.com Twitter: @jfgonzal GSG Consultores

Some background….

With the purpose of facilitating the prevention and deterrence of crimes of Operations with Illegally Acquired Funds – commonly known as money laundering – and of Terrorism and its financing, the Financial Intelligence Unit was created through a decree published in the Official Journal of the Federation on May 7, 2004.

The Financial Intelligence Unit is the national central authority to:

  • Receive reports on financial operations;
  • Analyze financial and economic operations and other related information; and
  • Disseminate intelligence reports and other useful documents to detect operations probably linked to money laundering or terrorist financing.

The main tasks of the Financial Intelligence Unit are to implement and follow up on mechanisms for the prevention and detection of acts, omissions and operations, which could encourage or help in any way the commission of the following offenses set forth in the Federal Criminal Code:

  • Operations with Illegally Acquired Funds (Article 400 bis)
  • Domestic terrorism and its financing (Article 139) and
  • International terrorism and its financing (148 bis)

The unit’s mission is to successfully contribute to the achievement of the aims of the Mexican State directed at:

  • Preventing Operations with Illegally Acquired Funds and Terrorism and its financing;
  • Punishing those who carry it out; and
  • Converting as many of the funds involved in favor of the State.

And where is the detail?

Purposes of the Law:

  • Establish elements to investigate and prosecute the crime of Operations with Illegally Acquired Funds – those crimes related to this and the financial structures – and to avoid the use of resources that finance it.
  • Protect the financial system and national economy.

Main measures:

  • Restriction on the use of cash, in some operations, and linked to certain goods.
  • Subject the Prevention of Money Laundering rules to those conducting “Vulnerable Activities.”

But the most important thing is precisely this: Vulnerable Activities.

What are Vulnerable Activities?

  • Activities related to raffles, lottery or gambling
  • Issuance or trade of service cards, credit or pre-paid cards, or traveler’s checks.
  • Offering of loans
  • Real estate services
  • Buying and selling precious stones and metals, jewelry, watches and works of art
  • Sale or lease of cars, boats or planes
  • Transfer or custody of money or securities
  • Armored car services
  • Rendering of independent professional services when offered or provided to a client or on behalf of a third party in any of the following operations:
    • Real estate transactions
    • Administration and management of securities or assets
    • Management of bank accounts, savings accounts or stocks
    • Incorporation, spin-off, merger, operation and administration of legal entities
    • Public brokers (notaries and real estate operators)
    • Customs agents
    • Nonprofit organizations
    • Renting of real estate

If you are conducting Vulnerable Activities, what are your obligations?

  • Identify customers and users with those who conduct the Activities that are subject to supervision and verify their identity based on credentials or official documentation, and obtain copies of such documentation;
  • Request from each customer or user who participates in Vulnerable Activities information on whether they are aware of the existence of the owner or beneficiary and, if applicable, request that they provide official documentation that identifies him or her;
  • Preserve, retain, safeguard and prevent the destruction or concealment of information and documentation supporting a Vulnerable Activity, as well as that which identifies their customers or users, and which must be stored physically or electronically, for a period of five years from the date of completion of the Vulnerable Activity.
  • Provide the necessary assistance for carrying out verification visits, as set forth in the Law, and
  • File notices in the Finance Ministry in accordance with the time and in the form required by the Law.

What sanctions can you be subjected to?

  • Several types of economic sanctions are established in case of failure to comply with the obligations of the Law, which have the character of tax credits.
  • Providing false information, documentation, data or images, or altering or modifying them is punishable with imprisonment or a fine.
  • Misusing information obtained from the application of the Law or disclosing or divulging it without authorization is also punishable by law.

As you can see, it is necessary to identify if, as a result of your activity at any time, you fall into any of the Vulnerable Activities (which in some cases is very common in the business world) that require you to comply with the respective provisions. If you fail to do so, you run the risk of committing a serious mistake with severe consequences for the person who is responsible. Remember: “Ignorance of the law does not exempt us from responsibilities.” ?

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