tracfin unit for intelligence processing and action against illicit financial networks

Transcription

1 2014 MONEY LAUNDERING AND TERRORIST FINANCING RISK TRENDS AND ANALYSIS tracfin unit for intelligence processing and action against illicit financial networks

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3 TABLE OF CONTENTS THE ANALYSIS OF THE REPORTING FLOW AND THE DETECTION OF VULNERABILITIES 9 THE QUALITY OF THE REPORTING FLOW AS THE CORNERSTONE OF AN EFFECTIVE AML/CTF SYSTEM 10 THE INCREASE IN SUSPICIOUS TRANSACTION REPORTS DEALING WITH TAX FRAUD 12 Case study 1: Presumption of money laundering through the purchase of life insurance policies within an opaque financial circuit 13 THE OBLIGATION TO IMMEDIATELY REPORT ANY TRANSACTIONS THAT MAY BE CONNECTED TO MONEY LAUNDERING OR TERRORIST FINANCING 14 Case study 2: Case of late submission of a STR 15 THE DETECTION OF THREATS TO PREVENT THE RISKS OF CRIMINAL INTERFERENCE IN THE ECONOMIC AND FINANCIAL SYSTEM 17 THE IMPORTANCE OF KNOWING THE BENEFICIAL OWNER 18 Case study 3: Doubts about the identity of the ultimate beneficial owner in a transnational holding chain 19 THE DETECTION OF ATTEMPTS BY ORGANISED CRIME NETWORKS TO INFILTRATE THE LEGAL ECONOMY 20 3 Case study 4: Control of a network of building companies by individuals linked to an organised crime group 21 Case study 5: Scheme for laundering financial flows through scams using bogus binary option trading platforms and implying the juxtaposition of an electronic money institution and a payment institution 22 RISK ASSESSMENT AS THE BASIS FOR AN EFFECTIVE AML/CTF SYSTEM 25 THE CAREFUL MONITORING OF KNOWN RISKS 26 Case study 6: Lack of due diligence in a correspondent banking relationship 27 Case study 7: Suspected laundering of funds from the misuse of company assets and tax fraud as part of a scheme based on the use of bearer bonds as a way of obscuring the funds origin 29 THE MITIGATION OF EMERGING RISKS 30 Case study 8: Financial fraud on the internet based on the use of virtual currencies 33 CONCLUSION 34 Publication director : Jean-Baptiste Carpentier Editor : Laurence Pico

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5 THE IMPORTANCE OF ASSESSING MONEY LAUNDERING AND TERRORIST FINANCING RISKS Tracfin conducts a money laundering and terrorist financing risk assessment every year. Through this process the Unit implements the requirements introduced by recommendation 1 of the FATF (Financial Action Task Force) standards, which specifies that countries should identify, assess, and understand the money laundering and terrorist financing risks for the country [ ] 1. Recommendation 1 also states that countries should require financial institutions and designated non-financial businesses and professions (DNFBPs) to identify, assess and take effective action to mitigate their money laundering and terrorist financing risks 2. The demand for a national risk assessment is repeated in Article 7 of Directive 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing. Article 8 of this directive also stipulates in this regard that Member States must ensure that reporting entities take appropriate steps to assess risks, taking into account risk factors including those relating to their clients, geographic criteria, products, services, transactions and distribution channels. In order to provide information to guide reporting entities in this process, Tracfin publishes case studies on its website, organises awareness-raising initiatives and regularly conducts a risk assessment whose main conclusions are presented in the annual analysis report. The assessment approach used by Tracfin is based on the money laundering and terrorist financing risk assessment method set out by the Financial Action Task Force (FATF) in its guidelines published in FATF, 2012: International standards on combating money laundering and the financing of terrorism and proliferation, The FATF Recommendations, February. 2 Ibid. 3 FATF, 2013: FATF guidance: National Money Laundering and Terrorist Financing Risk Assessment, February.

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7 THREATS, VULNERABILITIES AND CONSEQUENCES: THE THREE CONCEPTS THAT UNDERPIN RISK ASSESSMENT Recommendation 1 of the international standards on combating money laundering, the financing of terrorism and proliferation laid down by FATF states that countries should identify, assess, and understand the money laundering and terrorist financing risks for the country, and should take action, including designating an authority or mechanism to coordinate actions to assess risks, and apply resources, aimed at ensuring the risks are mitigated effectively. On that assessment, countries should apply a risk-based approach (RBA) to ensure that measures to prevent or mitigate money laundering and terrorist financing are commensurate with the risks identified. [...]. The concepts and method for the national money laundering and terrorist financing risks assessment are presented in guidelines published in February 2013 by FATF. A risk assessment is not a fixed result; it is above all a process aimed at identifying, analysing, and understanding money laundering and terrorist financing risks to more effectively prevent them. A risk arises from a combination of three factors: a threat, a vulnerability and the potential consequences. A potential threat is defined as any person, group of people or activity that may harm society or the economic and financial system. Knowledge of the environment within which the offences underlying money laundering are committed is vital. A vulnerability is any element (such as a system, product, transaction or practice) or situation that may be misused for the purposes of money laundering or terrorist financing. Taking a national approach also makes it possible to identify vulnerabilities related to differences between different countries regulations that may have a negative impact nationally. Scenarios are devised linking threats to the exploitation of vulnerabilities. The consequences of these scenarios are assessed to check that the prevention and mitigation measures taken are effective and proportional and adapt them if necessary. Tracfin s risk assessment is based both on the information that it receives from persons authorised by the Monetary and Financial Code and on outsourced financial intelligence. Comparing the information received and processed by the Unit against the information gleaned by monitoring open and closed external sources provides additional clarification that further informs the process. By the volume, diversity and quality of the information received by the Unit are also vital. The quality of a suspicious transaction report (STR) depends on factors including the presence of a substantiated presentation of the facts that makes the suspicions expressed by the reporting entity understandable, the quantification of the financial movements, broken down into credit and debit transactions and according to the medium used, and the quality and comprehensiveness of the information attached to the report (when 38,419 STRs were submitted) was unique in the unprecedented increase in the reporting flow, with a third more reports received compared with 2013 (when 28,938 STRs were submitted). The rise in reports relating to tax fraud and reporting entities greater awareness of the different types of fraud may partly explain this growth 1. However, the quality of the information received and the participation of all the entities subject to reporting obligations cannot always be counted on. The Unit is therefore particularly insistent that it must immediately be informed of any transactions that have a suspected link to money laundering or terrorist financing. All reporting professionals must play their part in the prevention of misuse of the economic and financial system. 7 The AML/CTF Advisory Board (COLB) is the national coordination forum that acts as the umbrella for all of the relevant State departments and supervisory authorities, and whose duties includes overseeing the production and updating of a document summarising the money laundering and terrorist financing threat in France. 1 Tracfin s 2014 Annual report available at

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9 THE ANALYSIS OF THE REPORTING FLOW AND THE DETECTION OF VULNERABILITIES 9

10 10 As well as Systematic Information Disclosures (COSIs), Tracfin receives and analyses suspicious transaction reports from entities subject to reporting obligations, along with information shared by State departments, persons with a public service mission, supervisory authorities, professional associations, and Financial Intelligence Units (FIUs). It is crucial that the reports received by Tracfin meet quality requirements for it to detect vulnerabilities, whether these relate to a sector, product, transaction, underlying offence, or reporting behaviour, and monitor the effectiveness of the remediation measures taken. Generally speaking, the sharp increase in the number of reports submitted by both financial and nonfinancial reporting entities should not result in a decrease in the quality of their presentation of the facts, bearing in mind that Article L of the Monetary and Financial Code stipulates that they only have to report to Tracfin amounts or transactions relating to amounts that [the reporting entities] know, suspect, or have good reason to suspect, are the product of an offence punishable by more than one year s imprisonment or contribute to terrorist financing. THE QUALITY OF THE REPORTING FLOW AS THE CORNERSTONE OF AN EFFECTIVE AML/CTF SYSTEM The reporting flow grew by nearly 33% in Within the financial professions there was a steep increase in the reporting flow from banks and payment institutions. However, money changers are still not reporting enough, as over the last three years less than half of this profession s reporting entities that are registered with Tracfin have submitted a suspicious transaction report. The reporting flow of non-financial entities subject to reporting obligations has doubled in two years thanks to the Unit s awareness-raising initiatives and the contributions of court-appointed receivers and trustees in bankruptcy. The number of STRs submitted in 2014 by some reporting entities in the gambling sector must be maintained and increased across the rest of the sector, and, above all, the quality of the reports received must be significantly improved. The many reporting channels used and the focus on gambling by all of the reporting entities also meant that the Unit received twice the volume of suspicious transaction reports relating to alleged money laundering through gambling than the number received from gambling sector reporting entities alone. This made it easier to compare information and detect failures by some entities to meet their reporting obligations. Of the sectors of activity considered to be high risk by the reporting entities, labour intensive sectors with a high business turnover rate continue to account for a large share of STRs. The increase in reports regarding the logistics and transport, and medical and paramedical sectors, already noted in previous years, continued this year. The Unit also noted a rise in reports relating to the industrial sector, in areas such as trafficking in metals and waste recycling and management. While the number of legal entities reported compared with the number of natural persons reported was around one fifth, a ratio which is down slightly versus 2014, the ratio of legal entities to subject to disclosures was around one third. This observation is proof of the effectiveness of the Unit s investigations, which led to the identification of 30% more legal entities, some of which should have been reported to Tracfin, a fact that it would like to draw reporting entities attention to. The average amounts per STR, which may cover several transactions over highly varied time periods, were under 500,000 in 85% of cases. The anti-money laundering system monitoring indicators, which show that the distribution of STRs by range of amounts has been relatively stable in recent years, indicate that in 2014 suspicious transaction reports concerning amounts under 100,000 grew more than the flow as a whole. However, these reported amounts should not be taken at face value, as the reporting entity is rarely aware of the entire scope of the financial transaction.

11 SOME POINTS FOR CONSIDERATION RELA- TING TO THE REPORTING FLOW, WHICH WERE RAISED IN THE REPORT ON THE MUTUAL EVALUATION OF FRANCE (2011) 1 The report on the third mutual evaluation of France by FATF, published in 2011, stressed the significant contribution by banks and credit institutions to the suspicious transaction reports received by Tracfin. Their already predominant share of the reporting flow is in fact still growing (from 71% in 2012 to 76% in 2014). The report also noted that a significant number of reports [came] from money changers [and that] insurance companies [appeared to be] well behind these first two sectors, although some progress [seemed] to have been made [...]. The flow of STRs from money changers has fallen since The flow from insurance companies, mutual insurance companies and benefits institutions, on the other hand, is increasing, although there is room for improvement in these reporting entities reporting practices, especially given the economic and financial importance of this sector. Although, four years later, the observation made in that other categories of financial professionals subject to the STR obligation appear to have made a very limited contribution is no longer as true, banks and credit institutions nevertheless account for 86% of the total volume of reports from the financial sector. Lastly, this mutual evaluation report also noted that certain non-financial professions [were not making] a sufficient contribution to AML/CFT efforts, either because of a lack of awareness of their AML/ CTF obligations or because they [did not] understand their vulnerability to money laundering and terrorist financing. To address this issue, in recent years Tracfin has led numerous initiatives to raise the awareness of these reporting entities, which are starting to produce results in terms of increasing the reporting flow. These reporting entities reporting practices are still very uneven, however, and they are encouraged to significantly step up their reporting flow 2. Experience also shows that some activities, such as terrorist financing and drug trafficking, may be detected from low, but repeated amounts. Out of all of the transactions reported, while cash transactions, transfers and cheques remain the most commonly reported payment methods, the first two methods experienced the most growth in Conversely, in 2014 STRs relating to financial flows using digital currencies did not maintain their growth of previous years. The anonymity that surrounds some digital currency instruments creates a particular risk, which is increased by the fact that there is nothing guaranteeing that a prepaid card s buyer will be its final user, as the payment instrument is linked to the holder. In practice, these payment methods may be used in money laundering or terrorist financing operations. Article 12 of Directive 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing sets out the conditions that must be met and that enable a Member State, based on an appropriate risk assessment, to authorise entities subject to reporting obligations not to apply certain due diligence measures to clients in connection with digital currency transactions. These conditions include, but are not limited to, the requirement that the payment instrument must be used solely to buy goods or services; it cannot be credited using an anonymous digital currency; and a maximum monthly limit of 250 must be imposed for payment transactions, a ceiling that may be lowered by Member States Financial Action Task Force, 2011: Report on the third mutual evaluation of France, 25 February 2 Tracfin s 2014 Annual report available at

12 THE INCREASE IN SUSPICIOUS TRANSACTION REPORTS DEALING WITH TAX FRAUD STRs relating to attempts to reduce wealth tax or repatriate undeclared foreign assets rose in Around a fifth of Tracfin s referrals to the tax authorities in 2014 concerned accounts held abroad and attempts to repatriate undeclared foreign assets. Reports regarding the operating of an undeclared, or under-declared, professional activity, remain significant. The rise in the intermediate VAT rate applicable to renovation works has probably also helped to keep the reporting level high. 12 CASH AS A CHANNEL FOR MONEY LAUNDERING, FRAUD AND TAX EVASION Since 2009, Tracfin has noted an increase in the use of cash in the shadow economy, which is showing no sign of decrease; between a quarter and a third of the STRs received by the Unit involved cash withdrawals and/or deposits. Like the reporting flow as a whole, reports relating to cash deposits and withdrawals rose by more than a third between 2013 and Suspicious transaction reports on gambling involving cash transactions grew particularly strongly over the same period. These STRs refer, for example, to cash withdrawals from bank accounts in which gambling winnings are deposited, and which are held by individuals linked to companies operating in labour intensive sectors. Article 11 of Directive 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing states, among other stipulations, that Member States must ensure that gambling and game of chance service providers subject to reporting obligations apply customer due diligence measures when customers collect winnings, place a bet or, in both cases, when they conclude a transaction of an amount equal to or greater than 2,000, whether this is completed in one or several operations. The ratio of the amount won to the amount bet can be more effectively quantified and any fraudulent behaviour identified by requesting proof of identity when customers place a bet, under the same conditions as when winnings are collected. More generally speaking, transactions may be conducted in cash so that companies or individuals can avoid paying various forms of tax, or criminals can inject this cash into the financial system. The STRs received by Tracfin show, when analysed, the role played by cash as a channel for tax fraud, for example by reducing a company s revenue, through withdrawals for a lower wealth tax base or undeclared donations. They also reveal how cash is used in social security fraud, in practices such as the payment of wages to undeclared workers. Cash, and especially small denomination notes, are the main form in which funds of illegal origin are generated. These funds can be manipulated and transported more easily following conversion into large denomination notes, confirming the use of the 500 note in illicit financial flows. Notes with a high face value are used by organised criminal groups both as stores of value and as a means of paying for assets. Large denomination notes make it easier to move cash around in large-scale money laundering schemes. Such notes may also be requested in connection with financial activities that are legal but are fraudulent in tax terms, as 500 notes can be easily transported to offshore financial centres, for example, to be integrated into the financial system through tax evasion schemes. As part of the action plan for the combating of terrorist financing presented by the Minister of Finance and the Public Accounts on 18 March 2015, a decision was made to lower the ceilings for cash payments from 3,000 to 1,000 for individuals or legal entities resident in France, and from 15,000 to 10,000 for non-residents, as of 1 September 2015.

13 Case study 1 Presumption of money laundering through the purchase of life insurance policies within an opaque financial circuit The following case illustrates a presumed case of money laundering through the purchase of life insurance policies. The opaque financial network used could be an alternative to the repatriation of undeclared funds held abroad whose origin may be fraudulent. Profile of the participants Individual: Mr X, who holds accounts in tax havens Alpha and Beta Flows leading to the suspicion of wrongdoing Against a backdrop of increased efforts to combat fraud and tax evasion, and at the same time the processing of corrective tax returns from taxpayers holding assets abroad under the conditions set by the ministerial instruction of 21 June 2013, reporting entities noted an increase in attempts to repatriate undeclared funds held abroad. In the case in question, international cooperation with foreign financial intelligence units, combined with the vigilance of reporting entities, uncovered atypical financial transactions by Mr X, who opened several accounts with different foreign banks, in tax havens Alpha and Beta. The origin of the funds, and particularly the many cash deposits made into account 1 held by Mr X (country Alpha) was unknown. These funds were invested in a life insurance policy taken out with an insurance company in country Beta, which was unable to conclusively establish the origin of the sums paid. The life insurance policy was subsequently pledged and used as a guarantee to secure bank loans in different banks in country Beta, loans whose purpose was to make payments, through bank cheques, into life insurance policies taken out in France. Taking out a loan, especially with a foreign bank, so as to pay the money into a life insurance policy, was an atypical transaction with no apparent economic justification, taking place within a structure whose architecture revealed a wish to obscure the financial network Life insurance policy 3 held by Mr X Bank loans paid into life insurance policies 750, 000 Account 2 held by Mr X 3 Country Beta Tax haven Pledging of the life insurance policy in order to secure bank loans Life insurance policy 1 held by Mr X Life insurance policy 2 held by Mr X 1.25 M Account 3 held by Mr X 2 Funds used to purchase a life insurance policy Country Alpha Tax haven Account 1 held by Mr X 1 Funds of unknown origin paid into the account Key Financial flows

14 14 With assets under management of 1,515 billion 1 at the end of 2014, life insurance policies are the investment of choice in France. Article 10 of Amending Finance Law No of 29 December 2013 for 2013 introduced measures to combat tax fraud, including reinforcing the reporting obligations for endowment contracts and life insurance policies, and the creation of the central registry for life insurance policies and endowment contracts (FICOVI). Article 1649b of the General Tax Code resulting from it therefore stipulates that the insurance companies, benefits institutions and unions referred to in Book I of Article L of the Insurance Code, and the mutual insurance companies and unions referred to in Article L of the Code governing mutual societies and similar organisations established in France, must report the purchasing and termination of endowment contracts or investments of the same kind, and particularly life insurance policies. The premiums paid and the redemption value or the amount of the guaranteed capital must also be reported each year, if this amount or this value is greater than or equal to 7,500. If these policies were taken out with organisations that are established outside France, these obligations, which have been reinforced, are the responsibility of policyholders. These obligations will be effective as of 1 January 2016, or 15 June 2016 at the latest. In an economic and financial environment where strategies are employed to repatriate undeclared foreign assets, the property sector s exposure to the risk of the laundering of the proceeds of tax fraud should be indirectly increased. The flow of STRs from the property sector entities referred to in point 8 of Article L of the Monetary and Financial Code is still too dependent on the reporting practices of a limited panel of reporting entities. Any changes in the reporting practices of a reporting entity from this panel have a major impact on the number of STRs for the sector. In 2014, this resulted in a fall of nearly 50% in the flow of suspicious transaction reports, after it had increased for two years running. Given the limited volume of the reporting flow, this observation cannot be mitigated by the sluggishness of the property market in Property sector entities subject to reporting obligations, which now include persons performing the functions of pro- 1 Source: French Federatio n of Insurance Companies (FFSA) perty manager 2 in accordance with law No of 10 July 1965 establishing the status of property managers, should note the need to introduce a system of risk analysis resulting in due diligence appropriate to the client s profile and the business relationship. The activities of the National Supervisory Committee (CNS), which was created in 2009 to impose penalties for failures noted by the supervisory authorities of so-called orphan reporting entities, such as estate agents, are set to be stepped up, increasing the effectiveness and efficiency of the anti-money laundering and counterterrorist financing system. After examining the cases referred by supervisory authorities, this committee decides what administrative penalties should be applied, such as a warning, reprimand, temporary withdrawal of a licence or professional card, or a fine of up to 5 million. THE OBLIGATION TO IMMEDIATELY REPORT ANY TRANSACTIONS THAT MAY BE CONNECTED TO MONEY LAUNDERING OR TERRORIST FINANCING Tracfin received a lot of suspicious transaction reports about old financial flows in The Unit would therefore like to remind reporting entities that they must inform Tracfin without delay of any transactions that have a suspected link to money laundering or terrorist financing. Tracfin has sometimes noted very long delays between the occurrence of the facts at issue reported and the sending of STRs. STRs submitted following receipt of court referrals, in cases where there were clear warning signs that the reporting entity should have quickly detected, are also not uncommon. Although reports relating to old flows have contributed to the increase in the flow, the increase cannot be attributable to this phenomenon alone, as it is a long-term trend. 2 Law No of 24 March 2014 to facilitate access to housing and overhaul town planning

15 Case study 2: Case of late submission of a STR The following case is an example of the late submission of a STR. The Unit would like to draw the attention of reporting entities to the provisions of Article L of the Monetary and Financial Code and the need to immediately report any transactions that may be connected with money laundering or terrorist financing to Tracfin. Profile of the participants Individuals: Mr X, a businessman well-known for his links to a local criminal organisation Mr Y, a member of Mr X s family Legal entities: Public limited companies A and B in the hotel and restaurant sectors Holding company D, registered in an EU Member State Flows leading to the suspicion of wrongdoing Hotel- and restaurant-sector companies A and B were owned by a foreign company registered in a Member State of the European Union, of which Mr X, a businessman well-known for his links to a local criminal organisation, was the majority shareholder. These two companies accounts were certified by the same auditor. Following the death of Mr X in 2014, which was widely reported by the local press, the Unit received several suspicious transaction reports concerning companies A and B. However, these two companies had displayed unusual characteristics for a number of years, because of the large cash payments made into their bank accounts and successive contributions to the shareholders current accounts of abnormally high amounts in view of the companies financing needs, and bearing a high rate of interest. Although the repeated misuse of the shareholders current accounts and the atypical bank account transactions continued for many years, reports were only submitted to Tracfin in 2014, after Mr X s death. According to Article L of the Monetary and Financial Code, reporting entities must abstain from carrying out any transactions that they suspect may be linked to money laundering or terrorist financing until they have submitted the suspicious transaction reports provided for by Article L of the Monetary and Financial Code, and can only complete transactions if the conditions stipulated in the fourth paragraph of Article L of the Monetary and Financial Code have been met. If a transaction that should have been reported in an STR has already been completed, either because it was impossible to stop it or because the need to report it became apparent after its completion, reporting entities must inform Tracfin without delay. In the case in question, as the transactions completed were sometimes carried out several years before they were reported, and there was no recent information liable to shine a new light on these transactions, the STRs were effectively submitted late. In such cases, Tracfin informs the relevant supervisory authority. 15 Mr Y Company D Registered in an EU Member State Majority shareholder 2 Mr X Death in 2014 Well-known for his links to a local criminal organisation Reporting by the local press Company A Company B Account 1held by company A Account 1held by company B 1 Numerous contributions to the shareholders current account Numerous contributions to the shareholders current account Atypical account transactions for several years: numerous cash deposits and contributions to the shareholders current accounts of amounts equal to several hundreds of thousands of euros Key Financial flows

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17 THE DETECTION OF THREATS TO PREVENT THE RISKS OF CRIMINAL INTERFERENCE IN THE ECONOMIC AND FINANCIAL SYSTEM 17

18 THE IMPORTANCE OF KNOWING THE BENEFICIAL OWNER FATF recommendations 24 and 25 stress the need for countries to take measures to prevent the use of legal entities and structures for money laundering or terrorist financing purposes. Directive 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing stipulates, in order to improve transparency and so combat the misuse of legal entities, that Member States should ensure that information about the beneficial owners of legal entities and trusts is kept in a central register and that this information is accessible to reporting entities so that they can meet their antimoney laundering and counter-terrorist financing due diligence obligations. CLOSE-UP Note that Article 8 of law No of 6 December 2013 created Article of the Criminal Code, which provides that for the application of Article 324-1, property or revenue is presumed to be the direct or indirect result of a crime or an offence if the material, legal or financial conditions of the investment, concealment or conversion operation cannot have any other justification than to conceal the origin or the beneficial owners of this property or revenue. This article allows the judge to identify legal and financial structures devoid of any economic logic, whose complexity is clearly only a way to prevent flows from being traced and to conceal their origin. 18 In guidelines published in October , FATF highlights the need to identify the individual who ultimately owns the property or controls a legal entity, even if this ownership and this control are exercised through intermediate structures that obscure the chain of control of a legal entity. In France, as the regulatory provisions stand, reporting entities must meet obligations to identify beneficial owners, as defined by Article R561-1 of the Monetary and Financial Code, which states that if the client of one of the persons referred to in Article L is a company, the beneficial owners of the transaction is defined as the individual(s) that either directly or indirectly own(s) more than 25% of the shares or voting rights of the company, or exercise(s) control, by any other means, over the company s management or governance bodies or the general meeting of its shareholders. 1 FATF, 2014: Guidance on transparency and beneficial ownership, October

19 Case study 3: Doubts about the identity of the ultimate beneficial owner in a transnational holding chain Articles L and L of the Monetary and Financial Code underscore the obligations of reporting entities to determine the beneficial owners of business relationships and keep this information up to date. If the ultimate beneficial owner of a business relationship is unknown, a suspicious transaction report should therefore immediately be submitted. Profile of the participants Legal entities: Company X, the holding company of group X, registered in country Alpha, which is a member of the European Union Companies Y and Z, which are affiliates of company X registered in country Alpha, which is a member of the European Union Foundation W, registered with a financial intermediary in country Beta, which is a tax haven and not a member of the European Union Asset management bank A, a French subsidiary of a major banking group Flows leading to the suspicion of wrongdoing In 2013, bank A became a client of company X as an investment advice service provider, which resulted in the investing of several millions of euros in the subfund of a SICAV (openended fund) distributed by bank A. Company X, the financial holding company of group X, which had offices in twenty or so countries, was registered in country Alpha, which is a member of the European Union, whose third mutual evaluation report by FATF stressed its vulnerability to the risk of investment by non-residents of funds acquired from offences committed abroad. When the business relationship was initiated, bank A had several discussions with representatives of company X in order to gather the information required to identify the beneficial owners. Company X was in fact controlled by two companies, Y and Z, which were also registered in country Alpha, and were the first links in a chain of ownership whose ultimate beneficial owner or owners was, or were, unknown. The information produced by company X was incomplete, not systematically accompanied by supporting documents, and sometimes contradictory, which should have prompted bank A to submit a suspicious transaction report. In 2014, there was a change in the chain of control of company X with the takeover of company Z by a foundation established in country Beta, whose third cycle mutual evaluation report by Moneyval noted the country s vulnerability to the layering phase of money laundering and said that, given the resulting risk inherent in numerous financial transactions, careful attention must be paid to identifying beneficial owners correctly and precisely. In the case in question, as bank A again failed to identify the complete chain of ownership of company X, it should have immediately submitted an STR or a supplementary STR. Bank A s decision to submit a suspicious transaction report was made late, several months after the fact, when company X decided to redeem all of its units. Tracfin informed the relevant supervisory authority Asset management bank A Initiation of the business relationship Investment in a SICAV distributed by bank A Possibility of submitting an STR Bank A submits a suspicious transaction report End of Complete redemption of units Company X Limited liability company Country Alpha 60 % 40 % Key Financial flows Company Y Limited liability company Country Alpha Complex chain of ownership Possibility of supplementary STR 2 Acquisition at the start of 2014 No public information about the beneficial owners Company Z Limited liability company Country Alpha 100 % Foundation W Registered with a financial intermediary Country Beta?

20 THE DETECTION OF ATTEMPTS BY ORGANISED CRIME NETWORKS TO INFILTRATE THE LEGAL ECONOMY 20 The identification and monitoring of the methods employed by organised crime groups to infiltrate the legal economy and launder funds of illegal origin are vital tasks that go hand-in-hand with risk assessment. Two of the most common ways in which organised crime groups operate is by infiltrating the legal economy by means of companies specifically created for criminal purposes, or taking control of legitimate companies experiencing financial difficulties. Mid-sized establishments are prime targets in such cases, along with small- and medium-sized enterprises, and takeover methods are used that are designed to conceal the identity of the true beneficial owner through the interposing of foreign legal structures. A criminal group may also create and invest in one or more companies managed by one of its members. There are two options in this case: either the company or companies is, or are, created in order to legally generate profits, or they use illegal practices to fraudulently generate profits that can then be transferred abroad to members of the criminal group. Some schemes reported by reporting entities are based on the use of short-lived companies and several tiers of subcontracting, so as to avoid controls and organise large-scale tax and social security fraud, the illegal revenue from which is a possible means of financing organised crime. Note that Article 8 of law No of 10 July 2014, intended to combat unfair competition between companies, provides particularly for the creation of a black list of companies found guilty of illicit employment. As decided by the courts, companies ordered to pay a fine for certain illicit employment offences may therefore be added to this black list, published by the Ministry of Employment s Departments and available on the internet EB0C3200F337FBADA398A5488D.tpdjo15v 3?cidTexte=JORFTE XT USE OF COMMERCIAL STRUCTURES TO LAUNDER CASH FUNDS MISAPPROPRIATED FROM A COMPANY According to the European Central Bank 1, the hotel, restaurant, retail and wholesale sectors of activity handle the most cash. These sectors continue to appear frequently in the tax-related suspicious transaction reports received by Tracfin, but the reporting level is lower than for contracting, or trading and distribution. The cases of tax fraud, when analysed by Tracfin, revealed, among other things, cases of cash deposits made by tradesmen-merchants and company directors into their personal accounts so as to reduce their official revenue. This misappropriation of cash funds by company directors, who might be suspected, as a result, of the misuse of company property, is a common reason for the submission of STRs. The investigations conducted by Tracfin after it received a report of this type uncovered a misappropriated fund laundering network based on the use of a large number of commercial structures. In a case handled by the Unit, for instance, the bank account of a contracting company received numerous cash deposits from three restaurantsector companies whose directors belonged to the same family. The very nature of the duties performed by accounting professionals gives them an excellent vantage point from which to detect fraud. The number of STRs from these reporting entities has grown considerably. These three companies appeared in the contracting company s accounts in a single customer account that grouped the three companies together. According to the information held by Tracfin, the accounting documents did not reflect the financial movements observed; some invoices were also apparently produced using word processing software and were not recognised in the accounts. Finally, cash from these three restaurant-sector companies was regularly collected by the contracting company. The bank accounts of these three companies, when analysed, also showed that part of the receipts were collected in the directors personal accounts and part in each company s various accounts, although the debits and credits between entities had no economic justification. Analysis of the financial flows suggested the existence of a financial network involving several companies used to launder cash misappropriated from restaurant-sector companies. 1 European Central Bank, 2011: The use of euro banknotes - results of two surveys among households and firms, Monthly Bulletin, April

21 Case study 4 Control of a network of building companies by individuals linked to an organised crime group The following case concerns a network of building companies controlled by people with links to an organised crime group operating in an east European country (country Beta). Profile of the participants Individuals: Mr X, director of company Z, who has links to a criminal group in country Beta (Eastern Europe) Mr U, who has an account in country Alpha Legal entities: Contracting company Z, which has multiple bank accounts Numerous contracting companies, whose directors have links to country Beta Flows leading to the suspicion of wrongdoing Company Z, which was recently created and operated in the contracting sector, was fully owned by Mr X. This company had filed more than fifty pre-employment declarations (DPAE) since it was created. On the other hand, the amount of the social security contributions that it had paid seemed extremely low considering the turnover of nearly 3 million recorded by the company in its bank accounts in less than one year of operation. The company did not appear to be meeting its tax and social security obligations and, in view of the turnover recorded in its accounts, it might be assumed that it was using undeclared labour and committing tax and social security fraud. Company Z signed several subcontracting agreements with other contracting companies. The bank accounts of company Z operated like transit accounts, as the funds collected were either immediately transferred to Mr U s bank account opened in country Alpha, or redistributed to individuals living in country Beta. According to Tracfin s investigations, Mr X, Mr U and certain contracting company directors and beneficiaries of company Z s funds, might have belonged to an organised crime group operating from country Beta that had dealings with people located throughout Europe. Mr U s account, opened in country Alpha, collected nearly 20% of the flows from company Z s accounts. The funds received by Mr U were also transferred to individuals living in country Beta. A large proportion of the debit flows from company Z s accounts did not appear to be economically justified, while the links between company Z and some of the funds beneficiaries might have arisen from organised criminal activity. Company Z s operations might therefore be qualified as possible undeclared work or tax and social security offences, or any crimes or offences connected to organised crime activity. 21 Mr X Director Country Beta 1 2,5 M Country Alpha Cheques and transfers Company Z Account 1 500,000 Transfers Mr U Transfers Account 2 2 Account 3 Transfers Key Financial flows

22 Although the vulnerability of certain traditional sectors of activity (such as the restaurant sector and contracting) to the risk of criminal interference has long been known, organised crime groups are constantly looking for new economic sectors that might be useful for money laundering and/or investment purposes. Payment sector companies, which are attractive to investors given the buoyancy of the market due to changes in consumers payment habits, particularly as a result of the development of e-commerce, also appeal to criminal organisations. This interest shown by organised crime groups may be greater than might otherwise have been the case, as some companies in this sector are not or will not be regulated 1, and they can sometimes be run by a limited number of staff, making them easier to control. Lastly, the search for channels through which to launder the proceeds of cybercrime can only increase the sector s overall exposure to the risks of criminal interference. Case study 5: Scheme for laundering financial flows through scams using bogus binary option trading platforms and implying the juxtaposition of an electronic money institution and a payment institution Some payment sector companies may be appealing to criminal organisations as they allow the layering of financial flows and the mixing of funds from legal sources with sums of illegal origin, as well as expanding the scope of the collection account technique, as the following case illustrates. When it comes to these fund collection schemes that may bring in various individuals or legal entities resident abroad, information exchanges with financial intelligence units make a big contribution to the detection and investigation process. Profile of the participants Individuals: 22 Victims, located in France and abroad, of bogus binary option website scams Legal entities: Companies linked to trading scam websites, registered in countries lacking an effective anti-money laundering system Company A, an electronic money establishment that is accredited in country A, which is a member of the European Union Company B, a payment institution that is accredited in country B, which is a member of the European Union, and is operating in France under the freedom to provide services Flows leading to the suspicion of wrongdoing 1 Note that on 24 July 2013 the European Commission adopted a package of regulations relating to the European payment framework, which includes the revising of the European Parliament and Council directive on payment services in the internal market, notably enabling the legal supervision of new operators in the online payment market. The victims of the scam were canvassed by telephone and invited by a call centre agent to place a first, often small, bet on websites offering binary option trading 1, for which no authorised investment service provider could be clearly identified. The legal information on these websites referred to registered companies in countries lacking an effective anti-money laundering system. The professional appearance of the websites and the fact that bets could be placed by bank transfer to a bank account opened in France inspired confidence in the victims, however, who gradually increased their bets. The deception continued until they requested the collection of their winnings. 1 Binary options are financial instruments in the form of options that generate profits or losses depending on whether or not a condition has been met when the option expires.

23 Company B, a payment institution accredited in country B, which is a member of the European Union, used as its main selling point on its website its ability to collect bank transfers from banks in many countries on behalf of its e-merchant clients. The amounts collected were then transferred to their final beneficial owner (the e-merchant) in exchange for a fee. Company B had opened bank accounts in various countries in order to provide this service. The bank account opened in France by company B therefore received numerous transfers from individuals. When the account was opened, company B s representative explained that this account would receive payments for purchases, with an average shopping basket of around 300, from various merchants using company B for their payments initiated by French customers. This explanation did not match the actual flows received, as the bank account was soon credited with transfers ranging from a few hundred euros to several tens of thousands of euros, whose instructing parties were individuals located in France and in other European countries. The funds collected in company B s French bank account, amounting to nearly 2 million in the space of two years, were then transferred to two accounts abroad. Nearly 1,800,000 were in this way paid into the account opened in country D by company A, an electronic money establishment accredited in country A, which is a member of the European Union. These funds were subsequently transferred to the foreign accounts of the companies linked to the trading scam websites. The remaining 200,000 were transferred to the foreign account of company B. The juxtaposing of an electronic money establishment (company A), as the sole, long-standing client of the payment institution (company B), therefore represents a double layering of financial flows that might reasonably be thought to come from internet trading scams and was therefore intended to obscure the financial network in order to limit its traceability. 23 Payment institution accredited in country B, which is a member of the European Union, and operating in France under the freedom to provide servicess Electronic money establishment accredited in country A, which is a member of the EU Sole client Company A Company B Numerous transfers Company B s bank account in France 1,800,000 Company A s account opened in country D, which is a member of the EU 200,000 Transfers to the bank accounts of the companies managing the trading scam websites. Victims of trading scam websites Company B s bank account opened in country C which is a member of the EU Key Financial flows

24 24

25 RISK ASSESSMENT AS THE BASIS FOR AN EFFECTIVE AML/CTF SYSTEM 25

26 Based on the vulnerabilities detected and the threats identified, Tracfin establishes new types of risks while monitoring the development of risks that it has long been aware of. THE CAREFUL MONITORING OF KNOWN RISKS 26 Although the anti-money laundering and counter-terrorist financing system is constantly adapted to take into account the emerging threats and vulnerabilities identified, the attention paid to these new risks should not, however, lower the level of vigilance with regard to schemes, operations and activities already known to pose a risk. Correspondent banking has long been recognised by FATF as an intrinsically high risk activity that systematically requires strong due diligence measures. Recommendation 13 of the FATF standards is for instance dedicated to presenting the measures that financial institutions should take in this specific case, in addition to the normal due diligence measures. In 2003, the Prudential Supervision and Resolution Authority (ACPR), which at the time was named the Prudential Supervision Authority (ACP), published an explanatory document entitled sector-based implementing principles for correspondent banking to define its antimoney laundering/counter-terrorist financing due diligence requirements for correspondent banking, for the financial organisations under its supervision. SYSTEMATIC INFORMATION DISCLOSURES (COSIS) RELATING TO CASH PAYMENTS OR WITHDRAWALS MADE TO OR FROM DEPO- SIT OR PAYMENT ACCOUNTS Article L of the Monetary and Financial Code sets out the cases in which Systematic Information Disclosures (COSI) are required. This Article stipulates that the persons referred to in points 1 to 7 of Article L shall send [to Tracfin] information relating to financial transactions that pose a money laundering or terrorist financing risk because of the funds country or territory of origin or destination, the type of transaction, or the legal structures involved. COSIs do not exempt reporting entities from submitting STRs and do not exempt them from responsibility. Decree No of 23 March 2015 introduced the obligation to disclose to Tracfin information about cash payments or withdrawals to or from deposit or payment accounts whose total amounts over one calendar month exceed 10,000 1, given that the money laundering and terrorist financing risks are high and varied for cash transactions. The provisions of this decree will become effective on 1 January The flow of STRs dealing with cash deposits and withdrawals is continuing to grow and to show that the money laundering and terrorist financing risks attached to this type of transaction are high. Between 2013 and 2014, for example, the number of STRs relating to cash deposits and withdrawals leapt by more than 40%. These transactions may be evidence either of companies or individuals trying to avoid paying various forms of tax, or of criminals seeking to inject this cash into the financial system. The recurring types of case identified in connection with cash transactions include the payment of undeclared workers, cash-in-hand payments in property transactions, and attempts to transfer financial assets while avoiding transfer duties, and to reduce the amount of assets subject to wealth tax. 1 See Article R of the Monetary and Financial Code

27 Case study 6: Lack of due diligence in a correspondent banking relationship The following case is an example of a bank that doesn t seem to have been vigilant enough in its risk-based approach for its correspondent banking activity, which is considered to be high risk and therefore to require special due diligence measures 1. Profile of the participants Individual: Mr X, who is known to the police and has a gambling addiction Legal entities: Bank A, which is located outside the EU Bank B, the correspondent bank of Bank A, which is located in an EU member state Flows leading to the suspicion of wrongdoing A few years ago, Mr X was sentenced to several months in prison for stealing cheques, which he then falsified for gambling purposes. In 2014, Mr X was once again the beneficiary of more than 500,000 of gambling winnings, collected in various bank accounts. These funds were then paid into his account opened with Bank A, in a country outside the EU. Part of the funds credited to the account opened by Mr X with bank A were paid in by depositing cheques. As bank A did not have an establishment in France, it worked with a correspondent bank to complete the transaction. Bank A s correspondent bank was bank B, located in a member country of the EU, which had a branch in France (bank B-FR). Through this branch, bank B therefore presented these cheques payable in France for clearing. The French branch of bank B does not seem to have been vigilant enough in its risk-based approach for its correspondent banking activity, which is considered to be high risk and therefore to require special due diligence measures 2. These transactions were in fact carried out as part of a correspondent banking chain, as the cheques had been endorsed many times (CRBF (Banking and Financial Regulation Committee) Regulation Art. 10 b). Once the cheques had been cleared, the French branch of bank B credited its parent company s account. The parent company then transferred the funds to bank A on behalf of the cheques beneficiary, namely Mr X. In this way, Mr X had many gambling wins, but it was impossible to trace his game ticket purchases. The investigations conducted by Tracfin led to a suspicion that Mr X was stealing and/or falsifying cheques so as to satisfy his excessive appetite for gambling. If such was the case, the transferring of part of the funds received to a foreign account, which, moreover, was not declared to the tax authorities, could point to a case of money laundering Mr X plays games of chance, paid for by cheque, buying tickets from several merchants Stealing and/or falsifying of cheques Mr X Mr X deposits his winnings cheques in his account opened with bank A 3 Mr X s account opened with bank A Banck A Located outside the EU 7 Winning cheques Transferring of funds to bank A on behalf of Mr X Branch of bank B France 4 Sending of winnings cheques endorsed many times Bank B Bank A s correspondent bank, which is located in a member country of the EU 5 Clearing of the cheques in France Once the cheques have been cleared, the French branch of bank B credits its parent company s account 1 Refer to the sector-based implementing principles for correspondent banking, ACP, March Ibid. 6 Key Financial flows

28 Financial investment products and transactions that favour anonymity, such as anonymous bearer bonds, and, to a lesser degree, savings bonds, require additional due diligence measures (Art. L of the Monetary and Financial Code). Bearer bonds are governed by strict rules and their anonymity is tax related. Indeed, when anonymous bearer bonds issued after 1 January 1998 are subscribed for, the tax anonymity option must be chosen on subscription. In any case, the subscriber s identity is recorded in an anti-money laundering register. Article L of the Monetary and Financial Code also explicitly confirms that all of the obligations to identify and check the identity of clients apply to these products. The report published on 25 February 2011 on the third mutual evaluation of France by FATF stated that the French authorities should [...] consider repealing the provisions which authorise and organise the issuance of such anonymous bonds 1. However, the implementation of additional due diligence measures by the chain of reporting entities allows the detection of money laundering attempts using this product, identified as high risk by its very nature, demonstrating the effectiveness of a risk-based approach. 1 FATF, 2011: Report on the third mutual evaluation of France, p

29 Case study 7: Suspected laundering of funds from the misuse of company assets and tax fraud as part of a scheme based on the use of bearer bonds as a way of obscuring the funds origin The following case shows an example of a complete money laundering scheme. The funds were invested through the subscription of bearer bonds subject to tax anonymity. The bonds were then transferred, by unknown means, to a third party, who requested that payments from the redemption of these bonds be made to various bank accounts. The funds from the redemption of the bearer bonds were subsequently reused to top up a life insurance policy. Profile of the participants Individual: Mr X, a hotel-restaurant director Mr Z, a friend of Mr X Mr Y, an insurance broker, who has been retained by insurance company Z Legal entities: Hotel-restaurant managed by Mr X Insurance company Z Insurance company W Flows leading to the suspicion of wrongdoing Mr X manages a hotel-restaurant whose profits are underdeclared, which gives him access to cash not held in a bank account. On several occasions, a friend of Mr X, Mr Z, in whose accounts numerous cash deposits were made, bought bearer bonds issued by insurance company Z, and subject to tax anonymity, from Mr Y, an insurance broker. The total funds saved by Mr Z, which amounted to 200,000, seem to be excessive in view of his declared income, which makes Mr Y wonder about the origin of the funds used to build up these savings. Mr X regularly requests the redemption of bearer bonds that he did not subscribe for from insurance company Z. The payments from redemptions are made to the accounts opened by Mr X with various banks. Mr X then takes out a life insurance policy with insurance company W, through which the funds from the redemption of the bearer bonds are recycled, funds that may ultimately originated from the concealment of revenue from the hotelrestaurant that he manages. 29 Hotel - restaurant Director 1 Misappropriation of revenue? Mr Z, who is a friend of Mr X Bank account held by Mr Z 2 Investment Subscribing of bearer bonds subject to tax anonymity Insurance broker Integration 3 Mr Y Account 1 held by Mr X Bank A Insurance company W Request for the redemption of anonymous bearer bonds Layering Insurance company Z 4 Payments through transfers to Mr X s accounts Account 2 held by Mr X Bank B 5 Mr X reinvests the funds in a life insurance policy Key Financial flows

30 THE MITIGATION OF EMERGING RISKS 30 Through its monitoring Tracfin is able to identify new practices or activities, and new instruments or products, which may be misused for money laundering and/or terrorist financing purposes. Tracfin s 2013 annual report, for instance, described the money laundering and terrorist financing risks that may arise from crowdfunding. Tracfin was therefore involved in discussions led by the French authorities in 2013 that resulted in the introduction of a legal framework applicable to crowdfunding. Crowdfunding is a method of participative funding used to collect funds from the public through an internet platform in order to finance a project. A crowdfunding platform can modernise the operating principle of accumulating savings and credit association schemes, by using the internet, and allows the consolidation of sums from different sources, therefore digitising and increasing the scope of traditional fraud and money laundering channels. TERRORIST FINANCING: THE RISKS SASSOCIATED WITH FUND RAISING THROUGH THE INTERNET When it comes to the combating of terrorist financing, experience shows that the vigilance of reporting entities is required starting from very low amounts. The wide variety of transactions (including bank transfers, transfers of cash, cash withdrawals and currency and credit transactions), along with their commonplace nature, make detection difficult. If a client is questioned by a reporting entity about his financial transactions, his answers must therefore be interpreted in the light of information about the context, which may send out weak signals that, when linked together, prompt the submission of a suspicious transaction report. The events in France in January 2015 are proof enough that consumer credit institutions must be particularly vigilant in this respect. In general terms, the reporting entity s knowledge of a client plays a vital role in linking the client s financial behaviour to their non-financial environment. When it comes to microfinance (for example if an individual wishes to travel to a combat zone abroad), mesofinance (such as schemes involving charity organisations) and macrofinance (intended for terrorist organisations), social networks, used among other things to make calls for donations, increase fund raising possibilities. The findings of the FATF report on the financing of ISIS, published in February 2015, include the growing misuse of crowdfunding platforms and of any type of fund raising website. When terrorist financing is involved, the flows analysed are often fragmented, the transactions are infrequent, the sums exchanged are small, there are multiple instructing parties and the transactions are spread out geographically. There is a risk of these websites being used to consolidate and transfer funds through the internet, so as to create an alternative to international fund transfer systems. To prevent such a risk, crowdfunding platforms must make sure that they have enough information to guarantee adequate knowledge of their contributors and project sponsors and to implement due diligence processes appropriate to such scenarios. Reporting entities must also continue to pay close attention to financial flows connected with the pooling of funds on the internet.

31 Law No of 2 January 2014 authorising the government to simplify and secure the operation of companies enabled the creation, in accordance with order No of 30 May 2014, of a legal framework appropriate to this new financing method, firstly in order to ensure its development in secure legal conditions, and secondly to offer protection to investors and lenders. Since 30 May 2014, the crowdfunding intermediaries referred to in Article L of the Monetary and Financial Code have been subject to point 7a of Article L of this code. They are therefore subject to antimoney laundering and counter-terrorist financing obligations, which notably implies that they are obliged to submit suspicious transaction reports to Tracfin under the conditions stipulated in Article L and to respond to any information requests sent to them by the Unit. The close monitoring of new payment methods by Tracfin resulted in the discovery of potential risks linked to the development of virtual currencies. The growth of new activities related to virtual currencies raised the issue of how to adapt and change the legal and regulatory framework to meet these new challenges, particularly with regard to the combating of money laundering and terrorist financing. The Unit therefore led a working group on digital currencies, whose contributors were various public sector participants1 and private sector experts2. This working group s report3, which was officially submitted to the Minister of Finance and Public Accounts on 11 July 2014, presented an overview of the risks and threats posed by 1 General Directorate of the Treasury (DGT), General Directorate of Customs and Excise (DGDDI), Public Finances General Directorate (DGFiP), General Directorate of Competition, Consumption and the Prevention of Fraud (DGCCRF), Directorate of Criminal Affairs and Pardons (DACG), Central Directorate of the Judicial Police (DCPJ), General Directorate of the Gendarmerie (DGGN), Financial Market Authority (AMF), Prudential Supervision and Resolution Authority (ACPR), Banque de France and departments representing the Ministry of Defence and the Ministry of the Interior 2 The French Banking Federation (FBF) was asked to organise a working meeting of banking sector specialists on digital currencies. The Chairman of the association Bitcoin France (Philippe Rodriguez), the Chairman and CEO of Paymium (Gonzague Grandval), the Associate Director of the firm Altéir Consulting and Chairman of the Digital Economy Association s payment method committee (Acsel) (Laurent Nizri) and the Scientific Director of the Next Generation Internet Foundation (Fing) (Jean-Michel Cornu) were interviewed by members of the working group. 3 THE COSIS RELATING TO FUND TRANSFER TRANSACTIONS INVOLVING CASH PAY- MENTS OR DIGITAL CURRENCIES: AN AID TO FINANCIAL FLOW ANALYSIS Tracfin s understanding of international cash transfer flows is aided by a cross-analysis of the data taken from STRs and the data from systematic information disclosures. Bearing this in mind, not enough information about fund transfer transactions using digital currencies (such as a payment made by means of a prepaid card) is sent to Tracfin. These transactions, like fund transfer transactions involving cash payments, are, however, subject to the obligations of Article L of the Monetary and Financial Code. Tracfin is monitoring the change in the amounts of the fund transfer transactions (transactions upwards of 1,000 or upwards of a total of 2,000 per client over one calendar month) reported to it through COSIs. The information learned from this quantitative analysis of COSIs relating to fund transfer transactions includes the magnitude of the global amounts transferred to China. COSIs dealing with fund transfers to China report amounts 50% higher than the average amounts of the COSIs relating to fund transfer transactions. Out of a sample of the COSIs received in the course of a calendar month, the disclosures regarding transfers to China account for a numerical average of 3.5% of COSIs, but for more than 5% of the total financial flows. Also note that the global amount, calculated for the same sample, of the COSIs linked to Hong Kong, is around 60% higher than the global amount of the COSIs connected with the neighbouring city of Shenzhen. The suspicious transaction reports from international fund transfer systems, when analysed, allow the identification of recurring types of case, such as reports relating to cases of the laundering of the proceeds of various forms of trafficking (e.g. narcotics) and customs fraud (counterfeiting). When analysed, the reports received also suggest the existence of organised prostitution networks in many cases. The comparison of data from the analysis of COSIs with the data from STRs also allows the identification of payment service provider agents whose actions point to active participation in money laundering schemes facilitated by their status as fund transfer company agents. 31

32 32 virtual currencies. This report also recommended risk mitigation measures, which are being gradually rolled out over time, as the need for their implementation arises. These recommendations are intended particularly to limit the anonymity of virtual currency users, the possibilities for using virtual currencies as an anonymous payment method and cash/virtual currency flows. The importance of harmonising the legal and regulatory framework at the European and international level, and particularly the framework within which virtual money changers operate, is also highlighted. Note that, in France, the Prudential Supervision and Resolution Authority (ACPR) stated in January that when Bitcoins are bought/sold for a currency with legal tender status, the intermediation activity consisting of receiving funds from the Bitcoin buyer to then transfer them to the Bitcoin seller is classed as the providing of payment services and regularly carrying out this activity in France entails accreditation as a payment service provider (credit institution, virtual currency establishment or payment institution) by the ACPR. The work carried out nationally is coordinated with the work in this area undertaken at supranational level and is consistent, for example, with the recommendation by the European Banking Authority, which, in an opinion published on 4 July , recommended that virtual money changers be made subject to the antimoney laundering and counter-terrorist financing system. Discussions about how to adapt the anti-money laundering and counter-terrorist financing system to the development of virtual currencies are currently underway within FATF s various bodies. A first report was published in June 2014 aiming at defining the terminology and minimising the risks related to virtual currencies. FATF s work on this theme, to which France actively contributes by expressing its support for balanced regulation of the virtual currency sector, and more particularly virtual money changers, is continuing in Tracfin s various communications about virtual currencies, along with intensive news coverage of the issue in 2014, have raised reporting entities awareness of these new risks therefore saw a sharp rise in STRs on financial flows connected with virtual currency buy/ sell transactions. Reporting entities must be highly vigilant in view of the continued growth in virtual currency-related risks. The submission of an STR to Tracfin is strongly advised if the origin or destination of funds and the reason for a transaction are uncertain. 1 See: Prudential Supervision and Resolution Authority, Position 2014-P-01, 29 January p pinion+on+Virtual+Currencies.pdf

33 Case study 8 Financial fraud on the internet based on the use of virtual currencies The following case illustrates a presumed case of financial fraud on the internet based on the use of virtual currencies. Clients were offered the chance to invest in products linked to virtual currencies, although there was no proof of the actual existence of these investments. Profile of the participants Individual: Mr X, the sole director/shareholder of company Z, who has a bank account in country A, which is a member of the European Union Mr Y, a client recruited by company Z as a broker Legal entity: Company Z, registered abroad and specialised in fund management Flows leading to the suspicion of wrongdoing Company Z was registered abroad as a fund management company specialised in products linked to virtual currencies, which are by nature highly speculative. No information was given about the investments offered by company Z, which was recently created and managed by Mr X. There was also no proof of the investments actual existence. The so-called investment products offered by company Z were advertised on a website and dedicated pages on social networks, however. The funds invested by clients, some of whom may have been victims of an abuse of weakness, were paid not into company Z s accounts, but directly into Mr X s foreign account. Some clients were invited to become brokers for company Z in order to receive commissions in their turn on the funds collected and referrals of new brokers. The contracts offered by company Z were poorly drafted, with clauses that were extremely unfavourable to company Z s clients. The circumstances in which Mr X offered his fund manager services to his clients, some of whom were invited to become brokers, and the fact that he collected funds in his personal account, suggested that he was possibly guilty of abuse of trust, and abuse of weakness in the case of some clients, conspiracy to defraud and laundering of the subsequent proceeds. This type of financial fraud on the internet, using the speculative nature of virtual currencies to attract investors, is comparable to the Ponzi schemes set up by con men who use the pull of new technologies to draw in investors Mr X Registered in France Mr X s bank account opened in country A whis is a member of the EU Funds paid into Mr X s personal account abroad 150,000 in 6 months Director Mr Y Recruited as a broker for company Z 2 Investors Company Z Registered in country B, which is a member of the EU 1 Company Z s website offering investments in digital currencies Investors Key Financial flows

34 CONCLUSION 34 There was a very sharp rise in the reporting flow in However, there is still room for improvement in the quality of the information received. The participation in this reporting process of all of the entities subject to reporting obligations is also not always assured. A reporting entity cannot be exempted from its due diligence and reporting obligations on the grounds that another reporting entity holds the same information. Tracfin therefore systematically informs the relevant supervisory authority if its investigations show that a reporting entity has failed to meet its reporting obligations. Despite the profound changes that the payment systems industry has experienced in recent years and the development of new forms of payment, cash movements still hold their place among the transactions that are the most commonly reported to Tracfin. Cash is both a channel for tax and social security fraud and is at the heart of almost all terrorist micro-financing operations. This is why, as part of the action plan for the combating of terrorist financing presented by the Minister of Finance and the Public Accounts on 18 March 2015, a decision was made to lower the ceilings for cash payments from 3,000 to 1,000 for individuals or legal entities residing in France, and from 15,000 to 10,000 for non-residents, as of 1 September The anonymity that surrounds certain digital currency instruments also poses a particular risk, and their use should therefore be restricted and capped, as provided for by Directive 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing. Two major objectives of the combating of money laundering and terrorist financing are to combat anonymity and increase the transparency of financial networks. The assessment of risks, both by the relevant authorities and by entities subject to reporting obligations, helps to identify the measures necessary to achieve such objectives and, more generally, to protect the integrity of the economic and financial system.

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36 Unit for intelligence processing and action against illicit financial networks 10 rue Auguste Blanqui MONTREUIL - tel: (33) Graphic design : Studio graphique SIRCOM - august crf.france@finances.gouv.fr