Issues in AML and Financial Crimes Presented by: Dr. Muhammad Baasiri MENAFATF President SIC Secretary Seminar for Senior Bank Supervisors from Emerging Economies Washington DC October 17-28, 2005
FATF 40 Rec. Set out the framework for antimoney laundering efforts and are designed for universal application. Have been recognized, endorsed, or adopted by more than 130 countries.
FATF Global Crackdown against terror The era after September 11, 2001. The FATF expanded its mission beyond money laundering to terrorist financing. Implementing the Special Recommendation aims to deny access for terrorists to the international financial system.
Major changes to the 40 Recommendations Widening the range of predicate offences that qualify for ML sanctions Enhanced due diligence for high-risk customers Imposing AML obligations on nonfinancial businesses and professions
Major changes to the 40 Recommendations Requiring measures to address risks associated with developing technologies Improving the transparency of legal persons and trust arrangements Setting key institutional measures necessary for combating ML/TF
Excerpts from the FATF Rec. addressing current issues
Current issues and concerns PEPs (Rec. 6) Correspondent Banking (Rec.7) Developing Technologies (Rec.8) Non-financial Businesses and Professions (Rec. 12)
Current issues and concerns Shell Banks (Rec. 18) Cash Courier (Rec. 19 & SR 9) Legal persons and arrangements (Rec. 33-34) Hawala (SR 6)
Definition of PEPs Individuals entrusted with prominent public functions, including their family members and close associates.
PEP (Rec. 6) FI should: Determine whether the customer is a PEP Obtain senior mgt approval for establishing relationship. Establish source of wealth and funds Conduct ongoing monitoring of the relationship.
PEP Issues Lack of information about PEPs round the world Political influence thus making banks reluctant to ask questions No unique identifier about PEPs hinder the implementation of prevention policies
Definition of Correspondent Banking Provision of banking services from one bank The Correspondent Bank to another Bank The Respondent Bank.
Correspondent banking (Rec. 7) FI should: Determine whether the institution has been subject to ML/TF investigation or regulatory action Assess the institution AML/TF controls Obtain senior mgt approval before establishing relationship
Correspondent banking (Rec. 7) FI should: Document the responsibilities of each institution Ensure that the institution has verified the ID of its customers with respect to PTAs.
Risks Associated with Correspondent Banking Indirect relationship Astronomical amounts of money move from various directions Payment through Accounts (PTA) Nesting or downstream correspondent clearer Respondent banks may apply less stringent AML controls
Developing Technologies Involves the range of products and services available in the market place to transfer money electronically
Developing Technologies (Rec.8) Requires FI to pay special attention to any ML threats that may arise from developing technologies, especially those favoring anonymity.
Risks Associated with New Technologies Elimination of face to face contact (on-line banking) Speed of execution Possibility to transfer funds worldwide (wire transfers)
Risks Associated with New Technologies Stored value cards offer anonymity E-cash remove audit trail from transactions Identification can be made by password which can be stolen (Credit card etc )
Non-Financial Businesses and Professions Cover lawyers and legal professionals that are licensed and admitted to practice and work in law firms or are self-employed; it does not cover lawyers who have the status of employees in legal undertaking that does not provide legal advice to 3 rd parties.
Non-Financial Businesses & Professions (Rec( 12 & 16) The requirements set out in rec. 5,6,8,11,13,15,13,15 and 21 apply to non-financial businesses and professions.
Independent Legal Professionals Offer Services for Launderers Creation of corporate vehicles or complex arrangements Buy and sell property Perform financial transactions Financial and tax advice Gain introduction to financial institutions.
Shell Bank Exists only on papers Has no physical presence. Does not employ one or more individuals on a permanent basis Does not maintain operating records at a fixed address Is not subject to supervision by the banking authority
Shell Bank (Rec. 18) FI should: Refuse to enter into correspondent relationship with shell banks. Guard against establishing relationship with respondent banks that permit their accounts to be used by shell banks
Risks Associated with Shell Banks Possibility to open account at real bank to launder crime proceeds Difficulty for law enforcement to access banks records. Management who run the bank act anonymously.
Cash Courier Refers to the physical transportation of currency or bearer negotiable instruments from one country to another. It also includes the following modes of transportation: Physical transportation by a natural person, or any accompanying luggage or vehicle. Shipment of currency through containerized cargo Mailing of currency or bearer negotiable instruments by a natural or legal person.
Cash Courier (Rec. 19) Countries should implement measures to detect or monitor the physical cross-border transportation of currency and bearer instruments without impeding capital movements.
Usefulness of Cash Couriers For the purpose of concealing proceeds derived from illicit activities, launderers carry large quantities of cash across borders into countries with: No exchange control Strict banking secrecy Lax ML legislation.
Definition of Legal persons and arrangements Refers to foundations, partnerships, or associations, or any similar bodies that can establish a permanent customer relationship with a financial institution or otherwise own property.
Legal persons and arrangements (Rec. 33-34) Countries should take measures to: Prevent the unlawful use of legal persons and trust arrangements by ML. Ensure that Accurate and timely info on BO and express trusts can be obtained and accessed by authorities.
Risks Associated with Legal persons and Trusts They conceal the ID of BO of funds. Can be used at the placement and integration stage of ML. Hide assets from legitimate creditors Protect property from seizure under judicial action
Definition of Hawala Involves the transfer of values between countries,outside of the legitimate banking system.
Alternative Remitance System (SR VI) Requires countries to take measures to ensure that persons or legal entities that provide a service for the transmission of money through an informal value transfer system are licensed and subject to all the FATF Recommendations that apply to banks and non-bank financial institutions.
Issues related to Hawala Offers a high degree of anonymity Leaves little paper trail Absence of records prevent any effective inquiry by law enforcement authorities Not subject to regulation and supervision Could be used to finance terrorist activities
MENAFATF Ad-hoc Committee on Hawala MENA countries have taken significant strides in controlling the associated risks MENAFATF second plenary of Sep 27, issued a best practices paper on Hawala MENA countries continue to address regional issues like Hawala, Cash Couriers, and Charities
Other ML risks Structuring Reverse flip Refining Loan Back Scheme Manipulation of import and export prices Bank Complicity Enemy Within Etc
Illustrative Scenario (Under invoicing through L/C)
X runs an import export company in a country, while Y runs a computer assembly company in another country. X & Y are closely associated in the heroin business X needs another shipment of heroin to be smuggled into the country where he is living
X & Y signed a written agreement specifying that payment to Y for the heroin shipment valued at $1,200,000, will be in the form of undervalued merchandise.
Deal Specifications The actual value of the merchandise is higher than the invoice price of these items, with an estimated value of $1,500,000. The value of the heroin shipment is $1,200,000. The difference is made up through an irrevocable Letter of Credit
X 1 2 3 Y 1. Y opens a letter of credit in favor of X for USD 300,000, representing 20% of the actual value of the merchandise. 2. X in return dispatches the merchandise to Y. 3. The difference is made up to X in the form of heroin.
THANK YOU