Risk Assessment Guide. Money Laundering and Terrorist Financing. November 24, Vassilios Sparakis. Head of

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1 Risk Assessment Guide Mney Laundering and Terrrist Financing Nvember 24, 2014 Vassilis Sparakis Head f Special Unit fr the Preventin f Mney Laundering I. INTRODUCTION Organized crime and terrrism are glbal prblems, with serius scial and ecnmic repercussins fr each cuntry in the wrld, including Greece. Mney Laundering (ML) allws criminals t cnceal the rigin f their illicit funds and then use them withut suspicin. In ur cuntry the law prviding fr the preventin and suppressin f mney laundering and terrrist financing is 3691/2008. Frm time t time, all cuntries are assessed by internatinal bdies n the basis f mutual evaluatins f whether they are effectively dealing with Mney Laundering and Terrrist Financing. As can be seen frm the cnsultatins made fr the 4th ML/TF Directive, particular emphasis has been placed n the issue f risk assessment. Fr the next assessment f ur cuntry, it will be necessary that risk assessments be made at the level f the state, the cmpetent authrities and the persns under the bligatin f Law 3691/2008 f the ML/TF, the results f which shuld have been used t imprve the preventin f ML/TF. II. Which is the Guide and is it useful? ML/TF risk assessment is a useful tl t enable a cmpany t develp adequate and efficient anti-ml/tf prcedures. It invlves identifying and assessing risks that the business is reasnably expecting t face in relatin t ML/TF. When the risk assessment is cmpleted, the firm can then prcess its prcedures s that its due diligence are prprtinate t the degree f risk fr ML/TF.

2 With this apprach, prvided by Article 13 (10) f Law 3691/2008, ML/TF risks can be minimized while saving human resurces and time. During the inspectins carried ut by the Special Unit ver the last tw years fr the purpse f evaluating the prcedures applied by the persns under the supervisin f the Hellenic Capital Market Cmmissin (L. 3691/2008) fr dealing with ML/TF (hereinafter referred t as "the Cmpanies"), the fllwing were bserved: Generally, cmpanies shwed increasing interest in the issue f dealing with ML/TF, which resulted in an imprvement in the applied prcedures. Hwever, it was fund that in the prcedures f several Cmpanies the due diligence freseen d nt have an extent prprtinal t the degree f risk invlved in each business relatinship and transactin. Fr example, sme cmpanies applied inadequate due diligence fr high-risk ML/TF cases, while ther cmpanies applied excessive due diligence fr very lw-risk ML/TF cases. This Guide is designed t help Cmpanies perfrm the annual risk assessment prvided fr in paragraph 2(d) f article 8 f the Decisin 1/506/ f the Hellenic Capital Market Cmmissin. Fr this purpse, examples f risk assessment and prpsals are made t imprve the prcedures applied by the cmpanies fr dealing with ML/TF. The implementatin f this Guide fr cnducting the freseen risk assessment is nt cmpulsry. Cmpanies can apply alternative risk assessment methds. III. Cntents The Guide cntains the fllwing sectins: A. Determinatin f risks. B. Risk assessment and examples f hw risk assessment is used t adjust prcedures and address these risks effectively. A. Determinatin f risks

3 Risk identificatin includes identifying the Cmpany's factrs that may be susceptible t ML/TF. In rder t identify the factrs f the cmpany that may be susceptible t ML/TF, the fllwing can be cnsidered: the nature, size and cmplexity f the Cmpany's activities prducts and services it ffers the way it ffers its prducts and services the Cmpany's custmers gegraphic factrs ther risk factrs. Belw is a mre detailed explanatin f these factrs. A 1. The nature, size and cmplexity f the Cmpany's activities The size and cmplexity f a business play a decisive rle in hw attractive r vulnerable a cmpany is fr ML/TF. Because a large business is less likely t knw all its custmers well, it culd pssibly be easier t use fr ML/TF cmpared t a small business. Similarly, a cmpany with presence in many regins (with branches and/r dealers) cnducting cmplex transactins in dmestic and freign markets, culd ffer greater pprtunities t thse wishing t launder mney than a simple dmestic business. This situatin makes it difficult t identify affiliated custmers and favrs thse wh have the aim f making (virtual) prfits by ding pre-arranged transactins with each ther.

4 A 2. The prducts and services ffered by the Cmpany Sme prducts and services are appealing fr ML/TF. In examining whether the prducts and services ffered by the Cmpany are susceptible r attractive fr ML/TF, it is prpsed t address issues such as: Des the prduct allw payments t third parties? The use f scarecrws t cver up the illicit rigin f funds is a well-knwn ML/TF methd. Example: Transactins thrugh cmmn investment shares r cbeneficiaries in mutual fund shares. Des the prduct allw fr cash cllectin r payment? Des the prduct allw the transfer f prfits between cnnected custmers thrugh pre-arranged transactins? A 3. The way the Cmpany ffers its prducts and services The way the Cmpany ffers its prducts and services affects its vulnerability r attractiveness fr ML/TF. Des the Cmpany enter int cntracts via mail r internet, executes rders fr transactins r transfers f funds by telephne r internet etc? (Custmers withut physical presence). In these cases, it is difficult t verify the identity f the beneficial wner f the accunt. A 4. Cmpany Custmers Sme types f custmers pse a higher risk f ML/TF, amng them: Clients with ccupatins that are widely knwn t be related t criminal activity r tax evasin. Custmers wh use cmplex business structures that d nt ffer bvius ecnmic benefits. Cnnected custmers wh cnduct crdinated transactins. Custmers wh are plitically expsed (PEPs).

5 Custmers invlved in businesses with high levels f crruptin. Clients whse surce f funds cannt easily be verified. Clients transferring their prtflis frm cmpany t cmpany. Custmers wh engage in business thrugh third parties such as accuntants, lawyers, r ther prfessinals. Clients wh are nn-prfit rganizatins. Clients invlved in ccasinal r ne-time transactins abve a certain threshld. Types f clients whse characteristics may indicate a lwer risk f ML/TF may als be: Custmers wh have a fixed incme frm a knwn surce (e.g. emplyees, retirees) and Clients with a lng-term business relatinship with the Cmpany, wh carry ut very small value transactins and/r maintain a very small prtfli. Persns such as thse described in article 17 f Law 3691/2008 (Credit institutins, financial institutins, listed cmpanies, public authrities and rganizatins, etc.) A 5. Gegraphical risk factrs Cuntries with a higher risk f ML/TF are: cuntries subject t sanctins, trade exclusin r similar impsed, fr example by the United Natins cuntries identified by reliable surces, such as the FATF, as nt having adequate prcedures t prevent ML/TF cuntries, identified by reliable surces, that supprt ML cuntries, identified by reliable surces, that have significant levels f crruptin cuntries that are tax havens and

6 cuntries assciated with drug prductin and/r trafficking A 6. Other risk factrs. Cperatin with ther financial institutins r natural persns nt subject t the supervisin f a cmpetent authrity. Staff expertise in ML/TF issues. Adequacy f the Cmpany's technical means (especially cmputerized prgrams) fr dealing with ML/TF (nly fr Cmpanies with a very large number f custmers and a large vlume f transactins). B. Risk assessment and examples f hw risk assessment is used t adjust prcedures and address these risks effectively. The ML/TF risk assessment results in a certain grade fr each risk. Fr the purpse f calculating the degree f risk, accunt shall be taken f the impact that the risk may entail and the likelihd f that risk ccurring. This calculatin is made fr each grup f risk factrs with similar characteristics as fllws: B. Risk assessment and examples - Example A Suppse that Cmpany A has a large number f custmers with nrmal/medium risk, wh are inactive fr a lng time, have n prtfli r have a very lw value prtfli (< 15,000). (These d nt include thse wh previusly had large funds fr which certificatin f their rigin is required). The Cmpany, fr the purpse f assessing the risk f these clients fr ML/TF, cnsidered as fllws: Even if it is likely that a client's funds cme frm criminal activity, their value is s small (< 15,000) that their circulatin wuld have relatively minr effects (scial, ecnmic). Thus, based n the table belw, these custmers have a lw degree f risk (1). (Relative line and clumn meeting pint)

7 Pssibility Very likely Medium 2 High 3 Very High 5 f risk appearance Likely Lw 1 Medium 2 High 3 Unlikely Lw 1 Lw 1 Medium 2 Lw Medium High Risk effects PROPOSAL A As a result f this assessment, the Cmpany decided fr these custmers t adjust the extent f due diligence prvided fr in its written internal prcedures accrding t the degree f risk. In particular, it has decided t reduce the frequency f updating their identificatin dcuments (e.g. update every 12 years) and nt t ask the Tax Authrities t certify the rigin f this small capital (based n Article 13 (1) (f) that the rigin f funds is ascertained if required). In rder t adjust these due diligence, the Cmpany has prvided fr its new prcedures a new custmer risk categry, the Medium Risk categry A, t which the abve mentined clients belng. The remaining Medium Risk categry clients are included in a new Medium Risk categry B. Thus, in its written internal prcedures, it prvided fr different due diligence depending n the degree f risk fr each categry (Medium A - Risk Level 1, Medium B - Risk Level 2).

8 It is therefre prpsed t categrize the custmer grup, which has the same characteristics, int a separate risk categry, in which categry specific due diligence crrespnd. All types f custmers, which we expect t have the same due diligence, can be included in the same risk categry. Cases where, fr clients f the same risk categry, sme cmpanies prvide fr reduced r increased due diligence, are nt recmmended, as they may lead t a vilatin f HCMC Decisin 1/506/2009. Fr example, if we believe abut a custmer, wh has been included in the nrmal/medium risk class, that we need t apply increased due diligence, then we shuld mve him t the high-risk categry. Belw is a table with the assessment f the types f custmers that Cmpany A is reasnably expected t have. B. Risk Assessment and Examples - Risk Rating Table f the Types f Custmers Expected by the Cmpany A. Risk grup CUSTOMERS Danger Chance t appear Impact Degree f danger Handling / due diligence Inactive rdinary (medium / nrmal) risk custmers with prtflis f <15,000 Likely Small Lw 1 Inclusin in a separate categry. Updating dcuments every 12 years. Certificatin f surce f capital is nt required. Custmers at increased risk f tax evasin (eg freelancers) Very likely Mderate High 3 Other custmers (alng with sme freelancers) Very likely Small Medium 2 Usual due diligence Clmbian high-earners (Nt very high-risk resident) Very likely Great Very high 5 Very high due diligence

9 Offshre cmpanies The parameter is nt being cnsidered The parameter is nt being cnsidered High 3 Nn-residents Nt cnsidered Nt cnsidered High 3 Plitically persns expsed Nt cnsidered Nt cnsidered High 3 Custmers withut physical presence Nt cnsidered Nt cnsidered High 3 The ther high risk custmers (frm 1/506/2009 Art. 2 para. 6 as it stands) Nt cnsidered Nt cnsidered High 3 B. Risk assessment and examples - Example B Cmpany B ffers, amng the prducts and services it ffers t its custmers, the executin f rders fr transactins n derivative prducts with very late expiratin dates, n the Greek and freign stck exchanges. The Cmpany, fr the risk assessment f these prducts fr ML/TF, cnsidered as fllws: It is well knwn that due t the lw marketability f such derivative prducts, there is usually very much fluctuatin in their prices, which can be explited by sme fr ML/TF, transferring large prfits frm ne client t anther thrugh pre-arranged transactins. It therefre estimates that the ML/TF risk is likely and the impact can be large. Thus, based n the risk rating table (frm the previus example) these prducts get a high degree f risk (3). B. Risk assessment and examples - Example B Risk assessment f prducts and services expected by the Cmpany Β. Risk grup PRODUCTS SERVICES AND

10 Danger Chance t appear Impact Degree danger f Handling / due diligence Out-f-rder derivatives Likely Great High 3 Other prducts and services... As a result f the risk assessment f these prducts, Cmpany B prvided, amng thers, in its prcedures increased mnitring f transactins in these prducts in rder t prevent pre-agreed transactins and/r their identificatin and reprting t the Special Unit fr the Preventin f Mney Laundering. In this way, the risk assessment f the ther factrs reasnably related t the Cmpany can be made and, n the basis f the resulting risk levels, the necessary mdificatins can be made t the ML/TF preventin prcedures. Risk assessment and regular reassessment f ML/TF preventin prcedures are necessary because the risks change ver time - fr example, there are changes in the custmer base, prducts and services, the business practices f the cmpanies and the legislative framewrk. Accrding t paragraph 2(d) f article 8 f the Decisin 1/506/ f the Hellenic Capital Market Cmmissin, the risk assessment is carried ut n an annual basis. If in the fllwing years there are n changes t the Cmpany's risks, then a simple nte frm the Cmpany is sufficient fr each year that n changes have been nted. IV. SUMMARY Recently, the issue f the ML/TF risk assessment, which shuld nw be carried ut at the level f the state, the cmpetent authrities and the liable persns, is f great imprtance in the wrld 3691/2008. The risk assessment will result in a cmprehensive table f risk scres f all thse factrs that reasnably affect each Cmpany.

11 On the basis f risk ratings resulting frm the risk assessment, Cmpanies make the necessary mdificatins t the prcedures they apply t deal with ML/TF. The risk assessment is carried ut n a yearly basis t ensure that the prcedures applied adequately address all the ML/TF risks.