What is Money Laundering? Objectives:

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1 XM Compliance

2 What is Money Laundering? Objectives: What is money laundering? Why do criminals launder money and what are the consequences? What is Xpress Money s Compliance Policy statement? What are Xpress Money s key compliance policies and its role in the fight against money laundering? What are the three stages of money laundering?

3 What is Money Laundering? Money laundering is the process of concealing the nature, the identity, the source and the destination of illegally obtained money. It involves three different stages: Placement Layering Integration

4 States in Money Laundering: Criminals avoid record keeping requirement and Paper trail by structuring, bribing employees or having front business to open accounts. Structuring often known as smurfing, it is the method of placement by which cash is broken into smaller deposits of money. It is used to defeat suspicion of Money Laundering and to avoid Anti Money Laundering reporting and record keeping requirements. Placement involves physically placing illegally obtained money into the financial system or the retail economy. Money is most vulnerable to detection and seizure during placement. Layering involves separating the illegally obtained money from its criminal source by layering it through a series of financial transactions, which makes it difficult to trace the money back to its original source. Integration involves moving the proceeds into a seemingly legitimate form. Integration may include the purchase of automobiles, businesses, real estate, etc. so that the money can be used without detection of its criminal source

5 Pictorial Example:

6 Where Does Dirty Money Come From? Let's start by having a common understanding of the definition of money laundering and the scale of the problem. Every year, huge amounts of funds are generated from illegal activities such as drug trafficking, tax evasion, people smuggling, theft, arms trafficking and corrupt practices. These funds are mostly in the form of cash. According to IMF (International Money fund), $600 billion are laundered each year

7 Why do Criminals Launder Money & What Are the Consequences? There are several reasons why people launder money. These include: Hiding wealth: criminals can hide illegally accumulated wealth to avoid its seizure by authorities Avoiding prosecution: criminals can avoid prosecution by distancing themselves from the illegal funds Evading taxes: criminals can evade taxes that would be imposed on earnings from the funds Increasing profits: criminals can increase profits by reinvesting the illegal funds in businesses Becoming legitimate: criminals can use the laundered funds to build up a business and provide legitimacy to this business.

8 Economic & Socio Consequences: There are severe economic and social consequences of money laundering. These include: Undermine financial systems: money laundering expands the black economy, undermines the financial system and raises questions of credibility and transparency Expand crime: money laundering encourages crime because it enables criminals to effectively use and deploy their illegal funds Criminalize' society: criminals can increase profits by reinvesting the illegal funds in businesses Reduce revenue and control: money laundering diminishes government tax revenue and weakens government control over the economy.

9 What is Xpress Money s Compliance Policy Statement? Our Policy is to stop criminals from using our services and products for the purpose of laundering money gained from any criminal activity and terrorist funding.

10 What are XM s Key Compliance Policies & its Role in Fight Against Money Laundering? Develop relationships with regulators and law enforcement Analyse money laundering and associated laws for each country Approve country restrictions and transaction limits Monitor transactions randomly Review, implement and communicate policies and procedures Train Xpress Money staff and agents Not knowingly launder money Not advise customers on how to avoid identification, record keeping or reporting requirements Not processing a transaction unless we believe it has legitimate purpose Comply with the laws of both countries involved in the transaction. Refuse obviously suspicious transactions Report suspicious transactions.

11 What are XM s key Compliance Policies & its Role in Fight Against Money Laundering? Not split transactions to avoid government identification and reporting requirements or any Xpress Money policy. Not knowingly record false names or information Not create false records Not accept non-cash payments, except as allowed by special agreement with Xpress Money Cooperate with local regulators and law enforcement bodies Not use consumer information collected for the purpose of managing Compliance or other risks for marketing or any other purpose Maintain records in accordance with the law and Xpress Money Policy

12 What are Agent s Responsibilities? Comply with Local laws and regulations. Comply with Xpress Money Policy & Procedures. Implement and enhance internal Policies, Procedures and controls. Train Employees. Maintain record keeping and reporting requirements. Monitor Transactions. The agent has to advice the compliance officer for any suspicious activity and describes the situation. The compliance officer files the reports and sends it to the regulatory authority.

13 Money Laundering - SUMMARY Definition: Money laundering refers to the process by which illegal funds and assets are converted into seemingly legitimate funds and assets. Sources: The funds come from drug trafficking, tax evasion, people smuggling, theft, arms trafficking, corrupt practices and other illegal activities. Effects: By laundering these illegal funds, the role and power of criminals is substantially strengthened. Placement: The first stage of the money laundering process, in which illegal funds or assets are first brought into the financial system. Layering: The second stage of the money laundering process, in which illegal funds or assets are moved, dispersed and disguised to conceal their origin. Funds can be hidden in the financial system through a web of complicated transactions. Integration: The third stage of the money laundering process, in which the illegal funds or assets are successfully cleansed and appear legitimate in the financial system, making them available for investment, saving or expenditure.

14 Terrorism Financing Objectives: What is terrorism and terrorism financing? What is the role of money? What are the principle uses and sources of money by terrorist organizations? Terrorism is a global problem. Terrorism is the unlawful use, or threatened use, of force or violence against individuals or property to intimidate or coerce governments or societies, often to achieve political, religious or ideological objectives. Terrorism financing can be raised by legitimate sources such as fund-raising activities and business profits, as well as illegitimate sources such as the drug trade and fraud. The fight against terrorism financing requires an understanding of the way terrorist organisations obtain their money and its use.

15 What is the Role of Money? Terrorist organisations need money to: Recruit and sustain: money is needed to recruit, support, train, transport, house, compensate and equip terrorist agents Acquire influence: money is needed to sustain media campaigns and win political support. Build the support base: money is needed for educational and social programs to win members and create a support base Carry out terrorist activity. Their success in accessing and deploying this money has disastrous results! Terrorist organisations do not require a lot of money to achieve disastrous results.

16 Sources of Money Even though terrorist groups have similar qualities their sources of money may differ. Terrorist organizations obtain money from a number of legitimate and illegitimate sources, such as the following: Illegal activities: Terrorists obtain funds from illegal activities such as drug trafficking, smuggling, kidnapping and extortion. Drug trafficking is particularly lucrative. In Latin America, 'Norco-terrorist' obtains much of their money from the drugs trade. Wealthy Sponsors: Terrorists may receive funds from wealthy individual or sponsors which can support their terrorist activities.

17 Sources of Money Charitable and religious institutions: Legitimate charitable and religious institutions can be a source of funding for terrorists. They are ideal conduits because they are very lightly regulated and do not need to provide a commercial justification for their activities. Commercial enterprises: Terrorist organisations may run or own otherwise legitimate commercial enterprises to generate profits and commingle illegal funds. These include jewelery businesses, trading companies, convenience stores, real estate ventures and investment management firms.

18 Sources of Money State sponsors: A number of rogue nations have been known to provide assistance, financial support and safe harbor to terrorist organizations. A prime example of this was Afghanistan under the Taliban regime.

19 Sources of Money Because a large amount of funding for terrorism activities comes from legitimate sources, terrorism financing is sometimes depicted as the reverse of traditional money laundering. Instead of illegal money being 'washed' to make it legal, terrorist financing often involves the task of filtering legitimate funds into terrorist hands.

20 Terrorism Financing - SUMMARY Terrorism financing can be raised by legitimate sources such as fund-raising activities and business profits as well as illegitimate sources such as the drug trade and fraud. Terrorist organizations need money to support their activities.

21 KYC Requirements & Suspicious Transactions Regulatory Obligations What is a 'know your customer' (KYC) policy? What are the risks faced by financial institutions of not implementing a KYC policy? What are the principal elements and requirements of a KYC policy? What is ongoing customer due diligence (OCDD)?

22 What is KYC? It is critical for financial institutions, professionals working within the financial sector, as well as other regulated entities to know their customers very well. Financial institutions should have a proper understanding of their customers to satisfy their respective KYC obligations. It is equally important that employees of these organizations are properly trained regarding the importance of KYC and the specific KYC policies or procedures of their organization. KYC is important for a number of other reasons. For example, if a business knows its customers well, it may be able to prevent damage to its reputation and avoid fraud or excessive risk in financial transactions involving customers.

23 What is KYC? KYC has two stages: IDENTIFICATION VERIFICATION Do not hesitate to ask questions: What is the purpose of the transaction? What is your customer s business? What is the Source of funds and what will this be used for? ** Remember KYC doesn t mean to INVESTIGATE the customer; however it ensures to check if the information provided by the customer is correct.

24 Principle Objectives of the KYC Policy: Ensuring that only legitimate and bona fide customers are accepted. Ensuring that customers are properly identified and that they understand the risks they may pose. Verifying the identity of customers using reliable and independent documentation. Monitoring customer accounts and transactions to prevent or detect illegal activities. Implementing processes to effectively manage the risks posed by customers trying to misuse facilities.

25 What Are the RISKS faced by Financial Institutions for not Implementing KYC Policy? There are five types of risks that an effective KYC policy can help to mitigate: Reputational Operational Legal Financial Concentration

26 What are the RISKS faced by financial institutions for not implementing KYC policy? Reputational Risks: The reputation of a business is usually at the core of its success. The ability to attract good employees, customers, funding and business is dependant on reputation. Even if a business is otherwise doing all the right things, if customers are permitted to undertake illegal transactions through that business, its reputation could be irreparably damaged. A strong KYC policy helps to prevent a business from being used as a vehicle for illegal activities. Operational risk: This is the risk of direct or indirect loss from faulty or failed internal processes, management and systems. In today's competitive environment, operational excellence is critical for competitive advantage. If a KYC policy is faulty or poorly implemented, then operational resources are wasted, there is an increased chance of being used by criminals for illegal purposes, time and money is then spent on legal and investigative actions and the business will be viewed as operationally unsound. (OR) We may suffer losses as a result of loss of business, seizures of accounts in any way connected to money laundering and fines. Future business expansion and success may be affected. Operating licenses may be withdrawn or denied.

27 Legal risk: What are the RISKS faced by Financial Institutions for not implementing KYC policy? If a business is used as a vehicle for illegal activity by customers, it faces the risk of fines, penalties, injunctions and even forced discontinuance of operations. Apart from regulatory risk, involvement in illegal activities could lead to third-party judgments and unenforceable contracts. In addition, professionals working within many financial and other professional sectors may also personally be subject to legal action or prosecution. Due to the nature of business, these risks can never entirely be eliminated. However, if a business does not have an effective KYC policy, it will be inviting legal risk. By strictly implementing and following a KYC policy, a business can mitigate legal risk to itself and its staff.

28 What Are the RISKS Faced by Financial Institutions for not Implementing KYC Policy? Financial risk: If a business does not adequately identify and verify customers, it may run the risk of unwittingly allowing a customer to pose as someone they are not. The consequences of this may be far reaching. If a business does not know the true identity of its customers, it will also be difficult to retrieve any money that the customer owes. Concentration risk: This type of risk occurs on the assets side of a business if there is too much exposure to one customer or a group of related customers. It also occurs on the liabilities side if the business holds large concentrations of funds from one customer or group (in which case it faces liquidity risk if these funds are suddenly withdrawn). By implementing an effective KYC policy, a business can identify the entire scope of the asset and liability risk faced in relation to each customer and group of customers.

29 RISKS Institutional & Individual

30 Key Elements of KYC Policy: KYC Policy has five major key elements: Customer acceptance: The point at which a new customer is accepted or rejected is the easiest point at which the risk of dealing with illegal money can be avoided. By following good customer acceptance policies, dealing with entities and individuals who might engage in illegal transactions can be avoided. Customer identification: Establishing the identity of customers is central to the KYC policy both for the customer acceptance or rejection decision and for the ongoing monitoring of customer accounts and transactions. By identifying customers effectively, the business is able to deal with them in the appropriate manner. Customer verification: Verifying that customers are who they say they are is vital to any customer identification procedure. Merely collecting customer information is not enough for an effective KYC policy. Reliable and independent documentation should be used to support and confirm the identification details a customer provides. For example, citing an original primary photographic identification document such as a passport or driver s license.

31 Key Elements of KYC Policy: Accounts and transactions monitoring: In an effective KYC policy, customer accounts and transactions are properly classified in terms of risk and are regularly monitored. Through checks and thresholds, unusual activities, activities by high-risk customers, or suspicious behavior can be detected and reviewed. Risk management: To ensure that the risks posed by money laundering and other criminal activities are identified, mitigated and managed good risk management practices are essential. Another objective of the KYC policy is to look past the appearance of the customer and obtain visibility into the sources of the customer's money. The basic objective is: to obtain an understanding of the risk the Customer poses to business. Could the customer use the business to facilitate money laundering or terrorism financing?

32 What is Customer Due Diligence? Due Diligence Requires: Knowing your customer through proper identification verification. Regularly reviewing your customer base to ensure you understand the nature of the accounts you offer and the risk they pose. Routinely monitoring account activity including wire transfers to ensure the activity matches with the customer's profile. This is also called as enhanced due diligence (EDD).

33 Fundamentals of Due Diligence: Carry out customer due diligence: To be reasonably satisfied that customers are who they say they are. To know whether they are acting on behalf of another There is no legal barrier (e.g. government sanctions) to provide the product or service requested To be able to assist law enforcement, by providing available information on customers or activities being investigated.

34 KYC Identification (Mandatory Information) Customer Identification Documents: Currently Valid Government Issued Contains Customer s Name Contains Customer s Photograph Contains Customer s Address (Preferred)

35 Acceptable ID s and Limits: The Acceptable ID s for KYC purposes in Canada are as per below. Driver s License Passport Permanent resident card Citizenship card Valid record issued by Provincial/Federal/Territorial governments. (The health card is not acceptable as an ID in three provinces namely, Ontario, Manitoba & Prince Edward island) Most Importantly: The employee is to confirm that the details provided on the Send/Receive form match with the details mentioned on the ID document. ID details are mandatory for every transaction The maximum threshold for a cash transaction is CAD$5,000 i.e. both for Send & Receive in Canada.

36 Cash Limit Threshold The maximum threshold for a transaction (either cash or POS) is CAD$5,000 for Send & Receive in Canada. However, please respect the receiving country s policies because they have different daily thresholds amounts. (Please refer to XM agent list) For example, in India per day, The Maximum Payout is INR 125, on a daily basis. This amount is equal to approximately CAD $1,812. Maximum cash payout: INR 50,000. Transactions with payout amount greater than INR 50,000 will be paid by an Account Payee Check. The ID is required for all transactions.

37 Record Keeping Requirements: All agents need to maintain the record of all the transactions for at least 6 years. The objective of record keeping is to ensure that we are able to provide the basic information about customer and to reconstruct the individual transactions undertaken at the request of the relevant authorities at any given time. The following are the essential details that the agent branch has to file and preserve: Full contact address and phone, mobile number of the sender/receiver Customer Identification Details of the transactions During the term of the agency or upon its termination, XM will upon reasonable notice to the Agent, inspect, audit and review the Agent s books and records relating to compliance with XM s written policies and procedures and the international and local laws and regulations.

38 Third Party Requirements: Where Xpress Money determines that one of its clients or a person giving cash is acting on behalf of a third party, Xpress Money must keep a record that sets out: For an individual, the third party s name, address and date of birth and the nature of the principal business or occupation of the third party; For an entity, the third party s name and address and the nature of the principal business of the third party; For corporations, the entity s incorporation number and its place of issuance; The relationship between the third party and the client or the person who gives the cash A proxy document from the customer authorizing the third party for purposes of the transaction

39 What is Black List? When a business provides different products or services to a new or existing customer it should be aware of the 'blacklist'. Regulators and government departments in different countries, such as Special Economic Measures Act ) SEMA in Canada, the Australian Department of Foreign Affairs and Trade and the US Department of the Treasury, publish blacklists of various entities. Blacklisted entities: Blacklists may cover: countries and government institutions individuals companies charitable organizations and non-profit associations Known terrorist groups and their affiliates. Blacklist purposes: The purpose of blacklists varies, but includes prevention or curtailment of the following: money laundering terrorism weapons of mass destruction drug production or smuggling Corruption.

40 What is Black List? Blacklist sanctions: Sanctions imposed on blacklisted entities can include: Arrest and extradition Freezing of assets Prohibition on dealing with third parties. Blacklist laws: The laws under which blacklists are issued prohibit businesses (particularly in the financial sector) and individuals from dealing with blacklisted entities. However, to avoid legal problems and reputation risk, many businesses comply with the major blacklists even if such businesses are not expressly subject to regulation.

41 What are Suspicious Transactions? Any transaction that Has no business or apparent lawful purpose. Is not the kind in which a customer would normally be expected to engage Examples of Suspicious transactions/red flags: Most common indicators according to FAFT: Customers sending or receiving frequent amounts that are much greater than what would be expected for the customer. Customers avoiding thresholds. Customers trying to structure their transactions. Customers conducting suspicious transactions may appear nervous, rushed or defensive to questioning about his remittance. Customers who may be reluctant to show ID. Customers who may offer gifts to avoid certain record keeping requirements or if you handle the transaction in a certain way as he desires. Customers concealing the beneficial owner of funds. Two customers coming together but sending money transfer separately to the same beneficiary.

42 What to do in Case of a Suspicious Transactions/RED flag? It is our duty and responsibility to report suspicious and unusual transactions to our Supervisor/Branch Compliance Officer. DO NOT warn or inform the customer when you intent to file a Suspicious Transaction Report (STR/SAR).any unauthorized disclosure is a criminal offence. Only disclose to your Supervisor/Branch Compliance Officer to file a STR/SAR.

43 Failure to Report: Failure to report unusual and suspicious transactions shall be penalized and shall attract legal and disciplinary action in accordance with the prevailing laws and regulations. Civil and criminal penalties can be imposed for violations of anti-money laundering laws and regulations. Penalties can result in substantial fines and in prison terms. Any MSB that fails to comply with reporting and recording keeping requirements faces possible civil penalties for negligent violations. Under certain circumstances, businesses can also be held criminally liable for the acts of their employees.

44 Penalties: Failure to comply with Canadian AML/ATF legislative requirements can lead to criminal charges. The following are some of the penalties: Failure to report a suspicious transaction or failure to make a terrorist property report conviction of this could lead up to five years imprisonment, to a fine of $2,000,000, or both. Failure to report a large cash transaction or an electronic funds transfer conviction of this could lead up to a fine of $500,000 for a first offence and $1,000,000 for each subsequent offence. Failure to retain records or implement a compliance regime conviction of this could lead up to five years imprisonment, to a fine of $500,000, or both.

45 Penalties: In addition, failure to comply with the legislative requirements can lead to the following administrative monetary penalties: Failure to implement any of the five elements of the compliance regime could lead to an administrative monetary penalty of up to $100,000 for each one. Failure by an entity to report the required information to senior management within 30 days after the review of its compliance program could lead to an administrative monetary penalty of up to $100,000.

46 So Our Obligations are Clear: We must: Verify the identity of Client (Customer Due Diligence measures). Keep accurate and complete records. (Enhanced customer due diligence and ongoing monitoring). Maintain adequate control systems. (Policies and procedures to prevent money laundering and terrorist financing) Continually bear in mind the possibility of money laundering i.e., identifying suspicious transactions. Report suspicious transactions to the Supervisor/compliance officer. Training of employees.

47 Questions?? THANK YOU! If you have any questions or concerns, please contact Inderpal Singh Bharaj Chief Compliance Officer(Canada) 7025 Tomken Road, Suite 237, Mississauga, Ontario. Tel: Fax: