fundamentals of anti money laundering

Use the contents and materials below to develop a full book/material of at least 100 Pages. It should be in your own word and easy to understand. The Plagiarism must not be more than 3% and properly referenced. There must be table of content and proper heading of all write up. It must be suitable for publication and of international standard

· Introduction

· Money Laundering- How big is the threat?

· Economic Implications of Money Laundering

· Impact of Money Laundering on Financial Institution

· Why is AML/KYC important?

· Legislations on Money Laundering

· Terrorism and Terrorist Financing

· Elements of AML/CFT framework in Banks

· Key events in the Compliance/Regulatory Landscape

· The role of Financial institution in Money Laundering / Terrorist Financing

· Challenges faced by reporting institutions

· The battle against Money Laundering (ML) and Terrorist Financing (TF) is an on-going and continuous process.

· Financial and Non-Financial Institutions have a duty to check the background, credibility and ethical status of potential business partners before commitment or commencement of business relationship thereby reducing risk, guarding reputation and preventing financial loss.

· The process makes certain that “All precautionary steps are taken to ensure that thorough scrutiny, attentiveness and carefulness have been observed before the project, transaction, scheme, contract, agreement etc. is executed or business relationship established”.

· Customer due diligence (CDD) is one of the best defenses any institution can maintain to guard against the dangers of money laundering, terrorist financing and other economic and financial crimes.

· As collectors of financial information, banks are in a unique position in the payments system as collectors of financial information to be able to identify questionable or suspicious payments or activities.

· Compliance with the regulations is critical to ensure effective use of reported information in combating financial crimes, including money laundering and financing of terrorists and other illicit undertakings.

· Financial institutions are expected to have a sound AML compliance program.

· Business goals and effective compliance with laws and regulations can both be achieved.

· Managing an effective compliance program can provide many benefits to improve overall performance and to facilitate the achievement of business goals.

What is Money Laundering?

· Palermo Convention also known as the United Nations 2000 Convention Against Transnational Organized Crime and Other Protocols of November, 2001 defines Money Laundering as:

· The conversion or transfer of property, knowing it is derived from a criminal offense, for the purpose of concealing or disguising its illicit origin or of assisting any person who is involved in the commission of the crime to evade the legal consequences of his actions.

· Key Points of the definition:

· Conversion or Transfer: this means movement from one state to another (i.e. illegal to legal)

· Knowing it is derived: This is “willful blindness”

· Criminal Offences: the property acquired ordinarily is from criminal operations, which is against the state.

· Concealing or disguising the illicit origin

· Assisting any person i.e. collaborating with persons (willful blindness)

· To evade legal consequences of the criminal activities

WHY AML/CFT COMPLIANCE?

· Statutory and Mandatory

· International Best Practices

· Risk Management Purposes

· Reputational Risk

· Fraud Prevention

· KYC and Market Intelligence

· Penalties, Fines and Jail Terms

· Depositors/Shareholders Best Interests

· Self Preservation

·

The Need for an Effective AML Controls

· No bank is immuned from AML risks

· An effective AML programme:

· − Reduces risk to your business

· − Is good risk management practice

· − Is a legal requirement

· − Is expected of your bank by international correspondent banks

· − Is expected of your bank by discerning foreign investors

· − Shows the bank is not negligent or an accomplice, in the event of AML investigations

− Affects your bank.s AML risk rating

Why is AML / KYC Important?

· Economic Issues

· Regulatory Requirement

· Reputational Risk

· Operational Risk

· This is not just a matter of satisfying our regulators. This is about having ethical standards and protecting the Bank's reputation in turbulent times.

Why is AML / KYC Important? THE CHALLENGE:

· Fundamentally, the core principles critical to any AML/CFT programme are:

· Compliance with the relevant AML/CFT laws

· Communicating the organization's AML/CFT programme to all Stakeholders

· CDD/EDD: Knowing all your customers & all about your customers (KYC)

· Continuous money laundering risk-assessment

· Appointment of Chief Compliance Officer at the top

· Approval of policies and Procedures by the Board

· Transaction Monitoring & Reporting - CTR and STR

· Training & Awareness

· Independent Audit of the AML/CFT programme

Why Do Financial Institutions Care?

· Banks today face a growing list of regulatory rules and requirements that could have a major impact on the industry. Regulators are ramping up their compliance, oversight, and enforcement activities, forcing banks to adapt to heightened market and regulatory expectations.

· Financial regulators  are shifting focus to examine more closely the processes and cultures surrounding the risk management and compliance processes put in place by banking institutions.

· In response, banks continue to invest significant time, resources, and effort to comply with the full range of regulatory requirements, even as they seek clarity on specific regulatory issues.

Money Laundry Stages & its consequences on Financial System.

· The money laundering cycle can be broken down into three distinct stages; however, it is important to remember that money laundering is a single process. The stages of money laundering include the:

· Placement Stage

· Layering Stage

· Integration Stage

· As financial institutions and regulators, we should know and realize that, the first two stages of Money Laundry (Placement and Layering) are the critical points for us to combat money laundry. If a launderer should escape us during these two stages, we have lost the “war”.

· The last stage of the process is just for the criminal to operate smoothly and enjoy the “fruit of his labour”, leaving us to leak our wounds.

· The placement stage represents the initial entry of the "dirty" cash or proceeds of crime into the financial system

· Generally, this stage serves two purposes:

· (a) it relieves the criminal of holding and guarding large amounts of bulky of cash; and

· (b) it places the money into the legitimate financial system.

· It is during the placement stage that money launderers are the most vulnerable to being caught.

· This is due to the fact that placing large amounts of money (cash) into the legitimate financial system may raise suspicions of officials.

The placement of the proceeds of crime can be done in a number of ways. For example, cash could be packed into a suitcase and smuggled to a country, or the launderer could use smurfs to defeat reporting threshold laws and avoid suspicion. Some other common methods include

· Loan Repayment

· Repayment of loans or credit cards with illegal proceeds

· Gambling

· Purchase of gambling chips or placing bets on sporting events

· Currency Smuggling

· The physical movement of illegal currency or monetary instruments over the border

· Currency Exchanges

· Purchasing foreign money with illegal funds through foreign currency exchanges

· Blending Funds

· Using a legitimate cash focused business to co-mingle dirty funds with the day's legitimate sales receipts

· Round Tripping

· Here, money is deposited in a controlled foreign corporation offshore, preferably in a tax haven where minimal records are kept, and then shipped back as a foreign direct investment , exempt from taxation.

· Bank Capture

· In this case, money launderers or criminals buy a controlling interest in a bank, preferably in a jurisdiction with weak money laundering controls, and then move money through the bank without scrutiny.

· Real Estate

· Someone purchases real estate with illegal proceeds and then sells the property. To outsiders, the proceeds from the sale look like legitimate income. Alternatively, the price of the property is manipulated: the seller agrees to a contract that underrepresents the value of the property, and receives criminal proceeds to make up the difference.

· Shell Companies and Trusts:

· Trusts and shell companies disguise the true owner of money. Trusts and corporate vehicles, depending on the jurisdiction, need not disclose their true, beneficial, owner. Sometimes referred to by the slang term rathole though that term usually refers to a person acting as the fictitious owner rather a business entity

Money Laundry Stages & its consequences on Financial System

· The Layering Stage

· After placement comes the layering stage (sometimes referred to as structuring).

· The layering stage is the most complex and often entails the international movement of the funds.

· The primary purpose of this stage is to separate the illicit money from its source.

· This is done by the sophisticated layering of financial transactions that obscure the audit trail and sever the link with the original crime.

· During this stage, for example, the money launderers may begin by moving funds electronically from one country to another.

· Then divide them into investments placed in advanced financial options or overseas markets.

· constantly moving them to elude detection; each time, exploiting loopholes or discrepancies in legislation and taking advantage of delays in judicial or police cooperation.

· The Integration Stage

· The final stage of the money laundering process is termed the integration stage.

· It is at the integration stage where the money is returned to the criminal from what seem to be legitimate sources.

· Having been placed initially as cash and layered through a number of financial transactions, the criminal proceeds are now fully integrated into the financial system and can be used for any purpose.

· There are many different ways in which the laundered money can be integrated back with the criminal

· The major objective at this stage is to reunite the money with the criminal in a manner that does not draw attention and appears to result from a legitimate source. 

· For example, the purchases of property, art work, jewellery, or high-end automobiles are common ways for the launderer to enjoy their illegal profits without necessarily drawing attention to themselves.

· No financial institution is immune from Money Laundry Risks

· An effective AML program expects both the Financial Institutions and Regulators to:

· Reduces risk to their businesses

· Good Risk Management practice

· Legal Recommendation and Regulatory Enforcement by Regulators

· High standard compliance in the selection and relations with international correspondent banks

· Ability of the financial system to discern foreign investors

· Due Diligence in the event of AML investigations

· Good rating criteria for Financial Institutions in terms of AML risk rating

· Terrorist organizations derive income from a variety of sources, often combining both lawful and unlawful funding, and where the agents involved do not always know the illegitimate end of that income. The forms of financing can be grouped in two types: 

· Financial support – In the form of donations, community solicitation and other fundraising initiatives. Financial support may come from states and large organizations, or from individuals.

· Revenue generating activities - Income is often derived from criminal activities such as kidnapping, extortion, smuggling or fraud. Income may also be derived from legitimate economic activities such as diamond trading or real estate investment.

The Role of Financial institution In Combating ML & TF - 7 Key Mandates

· 1. Money Laundering & Terrorist Financing Detection

· 2.KYC, Customer Identification and Due Diligence Enforcement

· 3. Staff Training, sensitization and education

· 4. Adequate Record Keeping

· 5. Suspicious Transaction Reporting

· 6. Currency Transaction Reporting

· 7.Designation of an Independent high level authority to oversee the Compliance function - Chief Compliance Officer.

· Money Laundering and Terrorism Financing threatens financial institutions at multiple points of vulnerability. Focusing on a single channel or line of business can hinder management visibility and allow fraud and money laundering to go undetected.

· Adopting a single, holistic management framework that integrates disparate detection systems with alert and case management can automate crime prevention, helping to protect financial institutions from the financial and reputational loss associated with financial crimes.

· Leveraging detection systems for both fraud prevention and detection and anti-money laundering (AML) processes will help reduce risk and improve efficiency.

KYC, Customer Identification and Due Diligence Enforcement

· Central to an effective anti-money laundering and anti-terrorist financing programme is the formulation and implementation of comprehensive, rigorous and thorough customer due diligence or “Know-Your-Customer” polices and procedures.

· Financial institutions should develop graduated “know your customer” policies and procedures for higher-risk customers that go beyond the basic information-gathering requirements for average/low risk clients.

· Financial Institutions should undertake regular reviews of all existing client identification records to ensure that they remain up-to-date and relevant and remain subject to customer due diligence processes.

· KYC policies and procedures must contain a clear statement of management's overall expectations and establish specific lines of responsibilities not only at the point of the institution’s first contact with the customer, but throughout the business relationship.

Staff Training, sensitization and education

· Financial institutions must introduce programmes to ensure that all members of staff, at all levels of the organization, are informed of their responsibilities, and encouraged to provide prompt notification of suspicious as well as threshold transactions.

· Training/education programmes must be designed to clarify responsibilities and to provide sufficient guidance for staff to identify and provide prompt notification of suspicious as well as threshold transactions.

· Training/education programmes must be designed and implemented on an ongoing basis to reflect current trends and pattern of money laundering activities.

Adequate Record Keeping

· Once a business relationship has been formed, the financial institution should maintain records of client identification and transactions performed. Clear standards must be outlined within the policy manual pertaining to record keeping including the minimum five-year retention period from the termination of the business relationship.

· Client identification files should contain account numbers and full customer identification information, account opening forms, copies of identification documents, business correspondence and other relevant details.

· Transaction records must be maintained in such a form that would allow for reconstruction of individual transactions, to provide audit trails and if necessary, evidence for prosecution of criminal activity.

Appointment of Compliance Officers

· A financial institution must designate an officer of the institution who performs management functions as its "Compliance Officer”, to be responsible for ensuring the effective implementation of the established policies, programmes, procedures and controls to prevent and detect money laundering and terrorist financing activities in accordance with the relevant statutes, the CBN’s Guidance Notes and the licensee’s own policies and procedures.

· In this regard, the institution should appoint a Chief Compliance Officer who must be senior management level staff to oversee the compliance function. This individual should have direct reporting line to the Board of Directors. This will allow for independence and effective compliance monitoring process

ML Reporting

· A suspicious transaction will often be inconsistent with a customer's known legitimate business or personal activities or with the normal business for that type of account.

· There are several red flags which triggers suspicion and bank officers must be keen in watching out for these signs for proper identification and reporting of suspicious customers/transactions

· Hence, general knowledge of the nature of the industry/sector in which the customer operates and the nature and pattern of the customer's own business is the first element in recognizing an unusual transaction, or series of transactions.

· Financial institutions should establish systems that can adequately capture such activities and also put in place a coordinated process that require all suspicious and threshold transactions to be brought to the attention of supervisory management.

Questions Operators’ Employees Must Ask

· When dealing with your customers, ask yourself these questions:

· How well do I know this customer?

· Does the transaction make sense considering the customer's profile?

· Do I fully understand the transaction the customer wishes to complete?

· Am I comfortable with this transaction?

· Is this the usual method for conducting this type of business transaction?

· If in doubt, there may be a possibility that your customer is using your institution to launder money

Financial Cost of CDD Failure to Banks

· Through the withdrawal of funds by depositors,

· The termination of inter-bank facilities,

· Claims against the bank,

· Investigation costs,

· Asset seizures and freezes,

· Loan losses

· The need to divert considerable management time and energy to resolving

· problems that arise

· Suffer fines, criminal liabilities and special penalties imposed by supervisors.

· Cost implications for its business

· Legal costs.

Recommendations To Avoid Sanctions

· No transactions should be made without any form of documentation especially new customers and high profile customers.

· Full involvement of the Information Technology and operations staff with the Compliance Unit in the implementation of the reporting.

· The implementation of AML training by HR and making the AML test compulsory for all staff for purposes of confirmation of employment

· KYC to form 20% of account officers’ KPI so as to encourage continuous customer due diligence checks an as part of your customer delight strategy.

· Approval of a sanctions regime for AML/CFT/KYC infractions in the bank

· Updating of customer information on legacy accounts on a risk based basis.

· Continue to maintain a proactive good working relationship with the regulators and law enforcement agencies

Tests Of Effectiveness Of AML Programme

· Compliance tick-box vs. compliance culture

· Level of commitment by Board and senior management – active vs. mere rubber stamp

· Robustness of AML audit – focus on KYC procedures vs. entire AML programme

· Nature of follow-up action regarding identified deficiencies

· Robustness of AML awareness programme

· Enforcement of sanction for breach

· Appropriateness of sanctions

References and Further Reading

· Mariano-Florentine Cuéllar, “The Tenuous Relationship between the Fight against Money Laundering and the Disruption of Criminal Finance”, 93 Journal of Criminal Law and Criminology 311 (Winter/Spring 2003).

· Financial Action Task Force - The Misuse of Corporate Vehicles, Including Trust and Company Service Providers – October, 2006

· Christopher Slobogin, “Transaction Surveillance by the Government” 75 Mississippi Law Journal 139 (Fall, 2005).

· Heba Shams, Legal Globalization: Money Laundering Law and Other Cases, Sir Joseph Gold Memorial Series Vol. 5 (BIICL: London, 2004), Chapters 2 & 3.

· “Breaking the Methamphetamine Supply Chain: Law Enforcement Challenges” a testimony by J Rannazzisi, Deputy Assistant Administrator before-Office of Diversion Control before the Senate Committee on Finance

· Seminar on Current Developments in Monetary and Financial Law Washington, D.C., October 23-27, 2006 Elements of an Effective AML/CFT Framework: Legal, Regulatory, and Best Institutional Practices to Prevent Threats to Financial Stability and Integrity Ian Carrington* and Heba Shams**

· Sarah Jane Hughes, “Policing Money Laundering through Funds Transfers: A Critique of Regulation under the Bank Secrecy Act”, 67 Indiana Law Journal 283 (Winter, 1992).

· Senator John Kerry and Senator Hank Brown, The BCCI Affair: A Report to the Committee on Foreign Relations, United States Senate (December 1992, 102d Congress 2d Session Senate Print 102-140), Chapter 9.

· Richard T. Preiss, “Privacy of Financial Information and Civil Rights Issues: The Implications for Investigating and Prosecuting International Economic Crime”, 14 Dickinson Journal of International Law 525 ( Spring, 1996), at 530 et seq.

· http://www.fdic.gov/news/news/financial/2005/fil2405a.html

· 15 http://www.occ.treas.gov/ftp/eas/ea2005-101

· 16 http://www.fincen.gov/foster

· 17 http://www.fsa.gov.uk/Pages/Library/Communication/PR/2005/117.shtml

· 18 http://www.fincen.gov/abnamro.html

· The World Bank : Capacity Enhancement Program on ” Anti-Money Laundering and Combating Financing of Terrorism”

· Linus Osita Okeke Senior Manager, Forensic Services KPMG Professional Services 22A Gerrard Road, Ikoyi, Lagos Tel: 01-4610173 Mob: 0803-402-1042 [email protected] www.ng.kpmg.com