Aircraft Leasing Update: Are You a 'Schedule 2 Firm'?

The Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Act 2018 amends existing anti-money laundering and counter terrorism-financing legislation (the AML/CTF Acts) by introducing a new category of activities to be covered by the scope of the legislation known as ‘Schedule 2 activities’.

With effect from 26 November 2018, businesses offering one or more ‘Schedule 2 activities’ are required to register with the Central Bank as a ‘Schedule 2 firm’.

In particular, aircraft financiers and lessors not otherwise regulated by the Central Bank and engaging in activities such as lending, trading for own account or financial leasing, may come within the ambit of the registration requirements.

We recommend that Irish businesses review the list of Schedule 2 activities to determine if it could be considered to offer any of the activities as services. In the event of carrying on one or more ‘Schedule 2 activities’, the next task is to analyse the obligations and registration requirements with the Central Bank as a ‘Schedule 2 firm’ and achieve compliance as soon as possible.

What is a ‘Schedule 2 firm’?

The obligation to register with the Central Bank applies to those offering one or more of the ‘Schedule 2 activities’ and who are not otherwise authorised or licensed to operate by the Central Bank. Banks and credit institutions currently registered with the Central Bank are not required to take any further action.

What are the ‘Schedule 2 activities’?

The ‘Schedule 2 activities’ most relevant to businesses operating in the aviation industry include, but are not limited to:

• Lending

• Financial leasing

• Payment services

• Guarantees and commitments, and

• Trading on own account in money market instruments, foreign exchange, exchange and interest-rate instruments, transferable securities

The individual categories of Schedule 2 activities are not defined in any great detail in the AML/CTF legislation and potentially have wide and general application.

Exemptions

There are two exemptions to the obligation to register as a ‘Schedule 2 firm’:

• If the firm only carries out trading on its own account, and its customers (if any) are members of the same group of companies, or
• Where the firm has low level of activity (de minimis thresholds) i.e. if accumulatively the firm, in relation to the relevant activity, has:

1. An annual turnover of less than €70,000

2. The total of any single transaction, or series of linked transactions in relation to the activities listed above does not exceed €1,000

3. The Activities do not exceed 5% of turnover

4. The Activities are directly related to and ancillary to the entity’s main business activities, and

5. The Activities are only provided to customers of the entity’s main business activities, rather than the public in general

Registration as a 'Schedule 2 firm'

The first task for those engaged in lending, leasing and other financial services is to assess if the business is offering any of the ‘Schedule 2 activities’. If yes and the exemptions do not apply, then the application is made by completing a short registration form available at the Central Bank website. The Central Bank has published guidance to assist with the completion of the registration form.

A ‘Schedule 2 firm’ is required to declare when registering that it has appropriate AML/CTF Control Frameworks in place to comply with its obligations under the AML/CTF Acts.

Once registered, a registered ‘Schedule 2 firm’ has certain on-going obligations to inform and notify the Central Bank if any of the following occur:

• Offering additional Activities, as per statutory defined term

• Discontinuing Activities

• Material changes to existing Activities

• Change in ownership, either direct and/or indirect

• Change in legal or trading name

• Change of address, and

• Change to principal contact details

Currently, no statutory time period is specified within which registration must be completed. There is no filing fee prescribed by the AML/CTF Acts.

Consequences of failure to register as a ‘Schedule 2 firm’

A Schedule 2 firm which fails to register with the Central Bank is liable either:

• On summary conviction, to a class A fine (up to €5,000) or imprisonment for a term not exceeding 12 months (or both), or

• On conviction on indictment to a fine or imprisonment for a term not exceeding 5 years (or both)

The Central Bank is the prosecuting and enforcement authority for non-compliance with the AML/CTF Acts. The threat or commencement of prosecution for breach or non-compliance, rather than the maximum permitted fines, is likely to be more significant for large institutions and publicly listed companies, when consideration is given to the extensive compliance and reporting obligations as well as media and public relations impact involved.

Practical implications for financiers and lessors

• Financiers and lessors offering any of the ‘Schedule 2 activities’ (unless exempt) must register with the Central Bank as a ‘Schedule 2 firm’.

• ‘Schedule 2 firms’ may need to consider introducing or supplementing existing policies, practices, procedures and control frameworks to demonstrate an ability to comply with the various obligations imposed by the AML/CTF Acts.

• The Central Bank currently maintains a number of public access registers containing details of financial services licenced and authorised businesses operating in Ireland. It is possible that the Central Bank may set up a register of ‘Schedule 2 firms’ accessible by the general public.

For more information on registering as a ‘Schedule 2 firm’ and the potential consequences for non-compliance with this requirement, contact a member of our Aviation, International Asset Finance team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.