Resolution No. JPRF-F-2022-049: Reforming the Standard for the Prevention, Detection, and Eradication of Money Laundering and Terrorist Financing in Popular and Solidarity Economy Financial Entities

Resolution No. JPRF-F-2022-049 THE FINANCIAL POLICY AND REGULATION BOARD CONSIDERING:

That Article 226 of the Constitution of the Republic of Ecuador prescribes that state institutions, their agencies, dependencies, public servants, and persons acting under state authority shall exercise only the competencies and powers attributed to them in the Constitution and the law;

That Article 13 of the Organic Monetary and Financial Code, Book I, reformed by the Organic Law Reforming the Organic Monetary and Financial Code for the Defense of Dollarization, published in the Official Register Supplement No. 443 of May 3, 2021, created the Financial Policy and Regulation Board, part of the Executive Branch, as a public law legal entity with administrative, financial, and operational autonomy, responsible for formulating credit, financial, securities, insurance, and prepaid comprehensive health care service policy and regulation;

That Article 14 of the aforementioned Code, referring to the scope of the Financial Policy and Regulation Board, determines that this collegiate body is responsible for formulating financial policy; issuing regulations that allow maintaining the integrity, solidity, sustainability, and stability of the national financial system; and also, issuing micro-prudential regulations for the national financial sector, based on proposals presented by the respective superintendencies, within their areas of competence and without prejudice to their independence;

That Article 14.1 ibidem, in letter a) of number 15, states that it is the responsibility of the Financial Policy and Regulation Board to fulfill the duty and exercise the power to establish, within the framework of its competencies, any measure that contributes to "preventing and seeking to eradicate fraudulent and prohibited practices, including money laundering and the financing of crimes such as terrorism, considering current and applicable international standards";

That, as established in Articles 150 and 151 of the Organic Monetary and Financial Code, Book I, entities of the national financial system are subject to the regulation issued by the Financial Policy and Regulation Board, which must recognize the nature and particular characteristics of each of the sectors of the national financial system;

That Article 444 of the aforementioned Code mandates that popular and solidarity financial entities are subject to the regulation of the Financial Policy and Regulation Board and the control of the Superintendence of Popular and Solidarity Economy, who, in the policies they issue, will keep in mind the nature and characteristics specific to the popular and solidarity financial sector;

That the Organic Law for the Prevention, Detection, and Eradication of the Crime of Money Laundering and the Financing of Crimes, in its Articles 9 and 10, states that the Monetary and Financial Policy and Regulation Board will exercise leadership in matters of money laundering and crime financing prevention, and that, in exercise of the powers established by law, it will issue public policies, regulation, and monetary, credit, exchange, financial, insurance, and securities supervision for the prevention of money laundering and crime financing; for which, it determined that it will have, among others, the following attributes: design and approve policies, standards, and plans for the prevention and control of money laundering and crime financing;

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and issue and apply preventive measures against money laundering in the sectors of economic and financial activity under its competence;

That the Twenty-Ninth General Provision of Book 1 of the Organic Monetary and Financial Code, Book I, added by the Organic Law Reforming the Organic Monetary and Financial Code for the Defense of Dollarization, provides:

"In existing legislation where reference is made to the 'Monetary and Financial Policy and Regulation Board', replace it with 'Financial Policy and Regulation Board'.";

That the Fifty-Fourth Transitional Provision of the aforementioned Code, added by the Organic Law Reforming the Organic Monetary and Financial Code for the Defense of Dollarization, provides:

"Transitional Regime of Resolutions of the Codification of the Monetary and Financial Policy and Regulation Board. The resolutions contained in the Codification of Monetary, Financial, Securities, and Insurance Resolutions of the Monetary and Financial Policy and Regulation Board, and the norms issued by control bodies, will remain in force until the Monetary Policy and Regulation Board and the Financial Policy and Regulation Board decide what is appropriate, within their areas of competence.";

That Article 9 of the Organic Monetary and Financial Code, Book I, states that regulatory and control bodies have the duty to coordinate actions for the fulfillment of their purposes and to make effective the enjoyment and exercise of rights recognized in the Constitution;

That in the Codification of Monetary, Financial, Securities, and Insurance Resolutions, in Book I "Monetary and Financial System", Title II "National Financial System", Chapter XXXVI "Popular and Solidarity Financial Sector", Section XI, is contained the so-called "Standard for the Prevention, Detection, and Eradication of the Crime of Money Laundering and the Financing of Crimes in the Financial Entities of the Popular and Solidarity Economy";

That the penultimate paragraph of the same Article 14.1 ibidem determines that the Superintendent of Popular and Solidarity Economy may propose regulation projects for consideration by the Financial Policy and Regulation Board, backed by the respective technical reports;

That, through Office No. SEPS-SEP-2022-00009-O of March 30, 2022, the General Secretary of the Superintendence of Popular and Solidarity Economy forwards to the Financial Policy and Regulation Board Office No. SEPS-SGD-2022-09282-OF of March 29, 2022, signed by the Superintendent of Popular and Solidarity Economy, through which it directs to the Board a proposal for "reform to the Standard for the Prevention, Detection, and Eradication of the Crime of Money Laundering and the Financing of Crimes in the Financial Entities of the Popular and Solidarity Economy"; attaching for this purpose, Technical Report No. SEPS-INR-DNPLA-2022-0062 of March 18, 2022, signed by the National Risk Intendant of the Superintendence of Popular and Solidarity Economy; the Legal Report s/n of March 25, 2022, signed by the National Director of Standards of the Superintendence of Popular and Solidarity Economy; and, the corresponding draft resolution;

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That, the Technical Secretariat of the Financial Policy and Regulation Board, through Memorandum No. JPRF-SETEC-2022-0083-M of December 12, 2022, forwards to the President of the Board the following reports:

i) Technical Report No. JPRF-CT-2022-0041 of December 12, 2022, issued by the Technical Coordination of the Board, through which the Technical Secretariat proposes reforming the Standard for the Prevention, Detection, and Eradication of the Crime of Money Laundering and the Financing of Crimes in the Financial Entities of the Popular and Solidarity Economy, codified in Book I "Monetary and Financial System", Title II "National Financial System", Chapter XXXVI "Popular and Solidarity Financial Sector", Section XI, of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, in order for the aforementioned standard to align with the recommendations of the Financial Action Task Force (FATF) and the operability of this sector in matters of money laundering and crime financing prevention;

ii) Legal Report No. JPRF-CJ-2022-0050 of December 12, 2022, issued by the Legal Coordination of the Board, which concludes that: a) the Financial Policy and Regulation Board, as responsible for the formulation of policy and regulation of the financial system, has legal competence to establish, within the framework of its competencies, any measure that contributes to preventing and seeking to eradicate fraudulent and prohibited practices, including money laundering and the financing of crimes such as terrorism, considering current and applicable international standards, in accordance with letter a) of number 15 of Article 14.1 of the Organic Monetary and Financial Code, Book I; b) the Superintendent of Popular and Solidarity Economy has the power to propose regulation projects to the Financial Policy and Regulation Board, within the framework of its competencies, in accordance with the penultimate paragraph of Article 14.1 of the Organic Monetary and Financial Code, Book I; and c) the reform of the standard of the Codification of Monetary, Financial, Securities, and Insurance Resolutions is legally viable in light of the legal considerations exposed by the Legal Coordination in the aforementioned report, in the terms indicated in Report No. JPRF-CT-2022-0041 of December 12, 2022, issued by the Technical Coordination of this Board;

That, the Financial Policy and Regulation Board, in ordinary session convened by technological means on December 13, 2022, and carried out via video conference on December 15, 2022, reviewed Memorandum No. JPRF-SETEC-2022-0083-M of December 12, 2022, issued by the Technical Secretariat of the Board; as well as the aforementioned reports from the Technical Coordination and the Legal Coordination, in addition to the corresponding draft resolution;

That, the Financial Policy and Regulation Board, in ordinary session convened by technological means on December 13, 2022, and carried out via video conference on December 15, 2022, reviewed and approved the following Resolution; and,

In exercise of its functions,

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RESOLVES:

ARTICLE 1.- Substitute the text of number 30 of Article 189 of Section XI "Standard for the Prevention, Detection, and Eradication of the Crime of Money Laundering and the Financing of Crimes in the Financial Entities of the Popular and Solidarity Economy", Chapter XXXVI "Popular and Solidarity Financial Sector", Title II "National Financial System", Book I "Monetary and Financial System" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, with the following:

"30. Risk Profile.- It is the risk condition presented by counterparties both due to their behavior and their transactionality, which may expose the entity to the occurrence of events with implications in money laundering and the financing of crimes, such as terrorism and other crimes."

ARTICLE 2.- Substitute the text of number 44 of Article 189 of Section XI "Standard for the Prevention, Detection, and Eradication of the Crime of Money Laundering and the Financing of Crimes in the Financial Entities of the Popular and Solidarity Economy", Chapter XXXVI "Popular and Solidarity Financial Sector", Title II "National Financial System", Book I "Monetary and Financial System" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, with the following:

"44. Alert Signals.- These are those elements or signs that evidence the particular behaviors of counterparties, or the atypical situations presented by operations or transactions, which may cover activities of money laundering or the financing of crimes such as terrorism and other crimes."

ARTICLE 3.- Substitute the text of Article 194 of Section XI "Standard for the Prevention, Detection, and Eradication of the Crime of Money Laundering and the Financing of Crimes in the Financial Entities of the Popular and Solidarity Economy", Chapter XXXVI "Popular and Solidarity Financial Sector", Title II "National Financial System", Book I "Monetary and Financial System" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, with the following:

"Art. 194.- Money Laundering and Crime Financing Prevention Manual.- It is the document in which the policies, procedures, and controls adopted by the entity will be recorded, and which will provide mechanisms for the administration of money laundering and crime financing risk. Its implementation may be verified through on-site and/or off-site supervisions, or according to the mechanism established for this purpose by the Superintendence. The Money Laundering and Crime Financing Prevention Manual must be elaborated by the entity according to the guide provided by the Superintendence. Both the manual and any updates made must be registered with this Control Body."

ARTICLE 4.- Substitute the text of letter a) of Article 199 of Section XI "Standard for the Prevention, Detection, and Eradication of the Crime of Money Laundering and the Financing of Crimes in the Financial Entities of the Popular and Solidarity Economy", Chapter XXXVI "Popular and Solidarity Financial Sector", Title II "National Financial System", Book I "Monetary and Financial System" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, with the following:

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"a) Clients.- Entities must manage the risks associated with clients or counterparties, their behavior, background, and activities, at the start and throughout the commercial or contractual relationship. The analysis associated with this risk factor must incorporate the characteristics of counterparties, such as nationality, residence, economic activity; as well as the real or estimated transactional volume;"

ARTICLE 5.- Substitute the text of number 17 of Article 206 of Section XI "Standard for the Prevention, Detection, and Eradication of the Crime of Money Laundering and the Financing of Crimes in the Financial Entities of the Popular and Solidarity Economy", Chapter XXXVI "Popular and Solidarity Financial Sector", Title II "National Financial System", Book I "Monetary and Financial System" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, with the following:

"17. Identify their counterparties in relation to the lists of the United Nations Security Council, as well as with other national and international lists defined for the prevention of the crime of money laundering and the financing of crimes such as terrorism; and, 18. Treatment that, due to their transactional and risk profile, the entity must implement for: a. Natural or legal persons who have requested to join as clients, partners, or employees, as applicable; and, b. The other counterparties."

ARTICLE 6.- Substitute the text of Article 207 of Section XI "Standard for the Prevention, Detection, and Eradication of the Crime of Money Laundering and the Financing of Crimes in the Financial Entities of the Popular and Solidarity Economy", Chapter XXXVI "Popular and Solidarity Financial Sector", Title II "National Financial System", Book I "Monetary and Financial System" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, with the following:

"Art. 207.- Due Diligence.- Entities shall adopt: a) Mechanisms that allow them to apply due diligence to all their counterparties, and to the transactions carried out by the entity at the start and during the commercial relationship, based on the risk profile obtained in the application of the entity's risk management methodology; and, b) Due diligence measures when counterparties carry out occasional transactions greater than USD 10,000.00 (Ten thousand 00/100 United States dollars), even if the transaction is carried out in a single operation or in several operations that appear to be linked."

ARTICLE 7.- Incorporate the following text, as the final paragraph of Article 208 of Section XI "Standard for the Prevention, Detection, and Eradication of the Crime of Money Laundering and the Financing of Crimes in the Financial Entities of the Popular and Solidarity Economy", Chapter XXXVI "Popular and Solidarity Financial Sector", Title II "National Financial System", Book I "Monetary and Financial System" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions:

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"The simplified measures applied by entities must be proportional to the lower risk factors, but are not acceptable when suspicions of money laundering or crime financing arise, or when specific scenarios of higher risks are presented."

ARTICLE 8.- In Article 214 of Section XI "Standard for the Prevention, Detection, and Eradication of the Crime of Money Laundering and the Financing of Crimes in the Financial Entities of the Popular and Solidarity Economy", Chapter XXXVI "Popular and Solidarity Financial Sector", Title II "National Financial System", Book I "Monetary and Financial System" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, replace the title of the article "Identification Procedures" with the following: "Identification Forms".

ARTICLE 9.- Incorporate the following article immediately after Article 214 of Section XI "Standard for the Prevention, Detection, and Eradication of the Crime of Money Laundering and the Financing of Crimes in the Financial Entities of the Popular and Solidarity Economy", Chapter XXXVI "Popular and Solidarity Financial Sector", Title II "National Financial System", Book I "Monetary and Financial System" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions:

"Art. 214.1.- Procedures to identify counterparties and transactions.- Entities shall have clearly defined procedures to know the identity of their counterparties, permanent or occasional; as well as the origin of the resources with which they operate, applying procedures that allow, at least: a. Evaluate the transactions carried out throughout the commercial relationship to ensure that the transactions made correspond to the entity's knowledge of the counterparties, regarding the origin of the funds of the operations; and, that the net worth level is related to the economic activities they carry out; b. Identify and analyze the sources of repayment in cases of early cancellations due to the sale of goods and/or services on credit, arising from productive and/or commercialization activities, when such cancellations are repetitive; c. Define procedures for the application of the lawfulness of funds and the entity's power to exempt counterparties from the obligation to sign the corresponding declaration, an exception that must be contemplated in the Money Laundering and Crime Financing Prevention Manual such as Terrorism; and, whose responsibility falls on the controlled entity, which must previously perform the risk analysis of the counterparties and the detailed analysis of the transactional and behavioral profile; d. Verify the information declared by counterparties and reinforce control measures, especially if the entities have doubts about their veracity, observe inconsistencies in the data obtained previously, or know that the recipient of the resources from a transaction is not the final beneficiary; and, e. Verify if each of the counterparties are on national and international control lists, especially those of specific countries designated as high risk by the international organization Financial Action Task Force (FATF)."

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ARTICLE 10.- Substitute the text of the second paragraph of Article 218 of Section XI "Standard for the Prevention, Detection, and Eradication of the Crime of Money Laundering and the Financing of Crimes in the Financial Entities of the Popular and Solidarity Economy", Chapter XXXVI "Popular and Solidarity Financial Sector", Title II "National Financial System", Book I "Monetary and Financial System" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, with the following:

"The person responsible for managing human resources must keep employee information updated and establish internal procedures for their hiring."

ARTICLE 11.- Substitute the text of number 7 of Article 227 of Section XI "Standard for the Prevention, Detection, and Eradication of the Crime of Money Laundering and the Financing of Crimes in the Financial Entities of the Popular and Solidarity Economy", Chapter XXXVI "Popular and Solidarity Financial Sector", Title II "National Financial System", Book I "Monetary and Financial System" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, with the following:

"7. Establish and apply disciplinary and corrective measures for anyone who violates reserve and confidentiality provisions, the manual, policies, and procedures for the prevention of money laundering and crime financing such as terrorism, internal regulations, and other provisions on the matter;"

ARTICLE 12.- Incorporate the following numbers immediately after number 9 of Article 227 of Section XI "Standard for the Prevention, Detection, and Eradication of the Crime of Money Laundering and the Financing of Crimes in the Financial Entities of the Popular and Solidarity Economy", Chapter XXXVI "Popular and Solidarity Financial Sector", Title II "National Financial System", Book I "Monetary and Financial System" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions:

"10. Review the annual report of the compliance officer as of December 31 of the previous year. The approved report and a certified copy of the minutes must be sent to the Superintendence by January 31 of each year, in the manner it determines; and, 11. Review internal audit reports on money laundering and crime financing such as terrorism risk and ensure compliance with the recommendations issued."

ARTICLE 13.- Substitute the text of numbers 18 and following of Article 228 of Section XI "Standard for the Prevention, Detection, and Eradication of the Crime of Money Laundering and the Financing of Crimes in the Financial Entities of the Popular and Solidarity Economy", Chapter XXXVI "Popular and Solidarity Financial Sector", Title II "National Financial System", Book I "Monetary and Financial System" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, with the following text, and delete the final paragraph:

"18. Document the