Chapter 9 Money Laundering

MR RAYMOND LIEW

2008 Prentice Hall

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What is Money Laundering?

The process by which criminals attempt to conceal, use or process the true origin and ownership of their criminal wealth and activities AMLA 2001
- illegal arm sales - smuggling - drug trafficking - human trafficking - prostitution
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- embezzlement - bribery - computer fraud - corrupt practices

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Telemarketing Frauds Consumer Scams & Schemes Business Opportunities Kinds of Frauds & Scams Criminal Operations Investment Frauds Business Scams Money Laundering
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What is Money Laundering?

Appears to Illegally Conversion originate from obtained money legitimate source Criminal Activity Drugs / Arms Trafficking Terrorism Extortion
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Who are Money Launderers?

Billions of dollars flow through offshore banks. - Russian mafia - Colombian drug lords - terrorist groups - corrupt government officials - tax evaders

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December 2007 Dead 156 Injured 448

Dec 1 Three ETA gunmen kill one Spanish civil guard and mortally wounded another (who died 4 days later) in Capbreton, France Dec 6 A parcel bomb explodes in Paris, France and kills one, seriously injures another, and injures several other people Dec 11 Bombings in Algiers kill 37 or more and injure 17 Dec 12 A car bomb kills Brigadier General Francois al-Hajj (a top candidate to head Lebanon's military) and his driver, and injures dozens more. The bombing occurs in front of the municipal building in Baabda, a Christian suburb of Beirut Dec 12 Three car bombs detonate in rapid succession, killing at least 40 and wounding 125 in the Shi'ite city of Amarah. Iraqi State television reports that many of the casualties involve women and children. Dec 21 A mosque suicide bombing kills at least 50 in Sherpao, targeting Aftab Khan Sherpao, the Interior Minister of Pakistan Dec 24 Police stop a would-be bomber with 3.5 kg of plastic explosives in Istanbul, outside a subway station. Dec 24 Four French tourists are gunned down in Aleg, Mauritania; the family's father survives, but with serious injuries. Mauritanian police say two of the three suspects are affiliated with a salafist group close to Al-Qaeda. Dec 27 Pakistani opposition leader Benazir Bhutto is assassinated by an attacker who shoots her after a campaign rally in Rawalpindi and then blows himself up; at least 20 are known dead. A Baitullah Mehsud Islamic Terrorism leader or elements within the Pervez Musharraf government are suspected.

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ORGANISATION AT RISK OF MONEY LAUDERING

Financial institutions-banks, credit unions Insurance companies Professionals Accountants. Lawyers Real estate Gaming-casino Commerce-some of the lending manufacturers in the world have been unwilling victims to money laudering Non-profit organisations-charities
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HOW MUCH?
Funds laundered in the world range between 2 and 5 percent of the worlds gross domestic product. 1996 statistic these percentages would estimate between USD590 bil and USD1.5 tril.

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Techniques in Money Laundering

Getting Currency into the financial system so as to convert illicit funds from cash straight into a financial instrument or bank account

Placement

Layering
The movement of funds from institution to institution to hide the source and ownership of the funds, obscure the audit trail and sever the link with the original crime

Integration
The reinvestment of those funds in an ostensibly legitimate business so that no suspicion of its origins remains and to give the appearance of legitimizing the proceeds
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Placement
Immersion or Soaking The physical disposal of bulk cash proceeds derived from illegal activity

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LAYERING
Soaping / Scrubbing The separation of illicit proceeds from their source by creating complex layers of financial transactions These disguise the audit trail & provide anonymity

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Integration
Repatriation / Spin Dry Reinjecting laundered proceeds into economy so that they reenter financial system as normal business funds Provides an apparently legitimate explanation to criminally derived wealth

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Techniques in Money Laundering

Placement
Smurfing Shipping Money Abroad Placement through Banks Use of Pass Through or Payable Through Accounts Electronic Wire Transfers Insurance Products Investment Related Transactions
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Layering
Tax Havens & Offshore Banks Bank Secrecy Law as a layering tool Corporations & Shell Companies as a layering tool Use of trusts Use of walking accounts Establishing self owned bank Use of intermediaries

Use of haven bank credit cards Receiving as consulting or directors fee Arrangement of corporate loans

Integration

Proceeds of gambling Real estate transactions Stock Purchase Use of business International importing and exporting Use of free trade zones

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International Initiatives
USA Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act 2001 (PATRIOT) United Nations Convention against Illicit trafficking in Narcotic Drugs and Psychotropic Substances 1988 Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime 1990
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International Initiatives
EC Directive 1991 Financial Action Task Force on Money Laundering (FATF) Asia/Pacific Group on Money Laundering Caribbean Financial Action Task Force Gulf Cooperation Council

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The FATF Forty Recommendations

Drafted by FATF 1990 Revised in 1996 and 2003 Adopted by most countries

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The FATF issued the Forty Recommendations in 1990 and completely revised them in 1996 and 2003. The current (2003) Forty Recommendations require states, among other things, to:

implement relevant international conventions criminalise money laundering and enable authorities to confiscate the proceeds of money laundering implement customer due diligence (e.g. identity verification), record keeping and suspicious transaction reporting requirements for financial institutions and designated non-financial businesses and professions establish a financial intelligence unit to receive and disseminate suspicious transaction reports, and cooperate internationally in investigating and prosecuting money laundering.

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EXAMPLES OF SUSPICIOUS ACTIVITIES/TRANSACTIONS Crmininal arranged for money held in an offshore account ot be lent as loans to their on-shore entities Domestic corporation which bills an offshore company for bogus goods or services provided Transactions involving an offshore shell bank whose name may be very similar to the name of a major ligitimate institutions Pass-through banks accounts accounts used for frequent inward remittances that are swiftly followed by outward payments Transactions involving huge amount of funds Unidentified source of funds
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Malaysian Initiatives
Anti-money Laundering Act andTerrorism Financing Act 2001 BNM and LOFSA Securities Industry Act 1983 Futures Industry Act 1990 Securities Industry (Central Depositories act 1991) Securities Commission Anti-Corruption Agency Inland Revenue Board Royal Malaysian Police Ministry of Internal Securities
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Under s 4 of the AMLA there is a RM5.0 million fine or imprisonment of five years or both on conviction for an offence of money laundering.
Almost 100 money laundering cases being prosecuted July 19, 2010 Ninety-four money laundering cases are in various stages of prosecution with more than 3,000 charges involving proceeds amounting to RM1.2 billion, said Bank Negara Malaysia Deputy Governor Datuk Zamani Abdul Ghani. The modus operandi of such methods involved the smuggling of dirty monies into Malaysia by the agents of a criminal ring, where the agents would subsequently deposit cash into the accounts of various entities and individuals in several bank branches operating in border towns. The deposits will remain in the accounts only for a limited period of time, where the runners or the agents will withdraw the cash to be further wire-transferred and or smuggled to another neighbouring country, as instructed by the syndicate.
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MANAGING MONEY LAUDERING RISK

Establishment of internal policies Implementation of customer due diligence Know-your-customer policy Record keeping and centralisation of information Establishment of reporting of suspicious procedures Oversight and compliance programme On-going training Independent audit function Designation of compliance officer at management level Enhancement of MIS Development of the Risk-based Approach Best Practice generally accepted industry standard
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THE WAY FORWARD IN ELIMINATING MONEY LAUNDERING Strengthening compliance, supervisory and enforcement frameworks Extension of regulatory net Management of forfeited assets International-cooperation Develop clear strategies endorsed at the top

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Money Laundering Risks

What are the risks to banks? (i) Reputational risk (ii) Legal risk (iii) Operational risk (failed internal processes, people and systems & technology) (iv) Concentration risk (either side of balance sheet) All risks are inter-related and together have the potential of causing serious threat to the survival of the bank
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Factors which severely hamper law enforcement efforts

             Acceptance of flight capital by western countries Laws and limitations of other countries Jurisdictional conflicts and lack of international coordination Bankings role in facilitation of the activity Bank Secrecy Volume and complexity of international transfers of funds Internet based banking Tax heavens as sanctuaries Offshore corporations Having to prove fraudulent transfer Shortfall of reporting requirements Criminals influencing Government and Bank support The widespread use and acceptance of trade mis-pricing

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Reputational Risk:
The potential that adverse publicity regarding a banks business practices, whether accurate or not, will cause a loss of confidence in the integrity of the institution Reputational Risk : a major threat to banks as confidence of depositors, creditors and general market place to be maintained Banks vulnerable to Reputational Risk as they can easily become a vehicle for or a victim of customers illegal activities
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Operational Risk
The risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events Weaknesses in implementation of banks programmes, ineffective control procedures and failure to practise due diligence
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Concentration Risk
Mostly applies on the assets side of the balance sheet: Information systems to identify credit concentrations; setting prudential limits to restrict banks exposures to single borrowers or groups of related borrowers On liabilities side: Risk of early and sudden withdrawal of funds by large depositorsdamages to liquidity

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Penalties imposed on banks

Jan. 2006 Aug. 2005 Feb. 2005 Jan. 2005 Oct. 2004 Sep. 2004 cancelled May. 2004 ABM AMRO US$ 80 mio Arab Bank US$ 24 mio City National Bank US$750,000 Riggs Bank US$ 41 mio AmSouth Bank US$ 50 mio City Bank Japan Licence Riggs Bank US$ 25 mio

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Early indicators of Fraud (Red Flags)

Unreasonable returns compared to market rate of returns Promise for free money Magical solutions / products Show off / Affinity Clandestine Meetings / Maintenance of Secrecy Anonymity / One man / small team officiating Oral Representations documentation / No formal approvals or

Claims of Authority / Registered in a different country Urgency in collecting finances Flouting of Laws Short cut formulae
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SUSPICIOUS TRANACTION
Suspicious transaction means a transaction whether or not made in cash which, to a person acting in good faith
gives rise to a reasonable ground of suspicion that it may involve the proceeds of crime; or appears to be made in circumstances of unusual or unjustified complexity; or appears to have no economic rationale or bonafide purpose;
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Suspicious Transactions
Providing misleading information / information not easily verifiable while opening an Account Large cash withdrawals from: a dormant or inactive account or account with unexpected large credit from abroad Sudden increase in cash deposits of an individual with no justification Employees leading lavish lifestyles that do not match their known income sources
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What KYC means?

Customer? One who maintains an account, establishes business relationship, on whos behalf account is maintained, beneficiary of accounts maintained by intermediaries, and one who carries potential risk through one off transaction Your? Who should know? Branch manager, audit officer, monitoring officials, PO Know? What you should know? True identity and beneficial ownership of the accounts Permanent address, registered & administrative 2008 Prentice Hall address

What KYC means?

Making reasonable efforts to determine the true identity and beneficial ownership of accounts; Sources of funds Nature of customers business What constitutes reasonable account activity? Who your customers customer are?

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KYC DOES NOT MEAN

Denial of Service to the Common Person Intrusive Behaviour Use of information for cross selling Harassment of customers- threatening to close down the accounts arbitrarily

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Core elements of KYC

Customer Acceptance Policy Customer Identification ProcedureCustomer Profile Risk classification of accounts- risk based approach Risk Management Ongoing monitoring of account activity Reporting of cash and suspicious transactions
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Measures to deter money laundering

Appropriate measures to ensure that ML risks are taken into account in daily operations, development of new financial products, establishing new business relationships and changes in the customer profile Screening of employees before hiring and of those who have access to sensitive information Appropriate quality training to staff Quick and timely reporting of suspicious transactions
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Summary: Prevention of Money Laundering

Observing Rules for Bankers

Compliance with Laws

Money Laundering Prevention

Customer due Diligence

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Identifying Irregular / Suspicious Transactions

Investment Frauds Ponzi Schemes

o
A Ponzi Scheme is basically an investment fraud where investors are enticed with the promise of extremely high returns or dividends over a very short period of time.

Named after Carl Ponzi, who collected $9.8 million from 10550 people (including

three fourth

of the Boston Police Force) and then paid out $7.8 million in just 8 months in the year 1920 at Boston by offering profits of 50% every 45 days

Ponzi schemes are a simple fraud whereby initial investors are paid exceptional dividends as interest payouts from the deposits of a growing number of new investors. Profits to investors are not created by success of the underlying business ventures but instead are derived from capital contribution of other investors. A few people invest in the scheme, then as news of the offer spreads, more investors are drawn in.

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