Money Laundering PPT

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Legal regime for AML
(Anti Money Laundering)
Issues for Discussion

Anti Money Laundering Legislation in Pakistan

Implications of AML/CFT Measures on the
Financial Sector

International Scenario

Key Issues
What is Money Laundering?


Money laundering is the process by which the proceeds of the
crime, and the true ownership of those proceeds, are concealed
or made opaque so that the proceeds appear to come from a
legitimate source.
Generally money laundering is the process by which one
conceals the existence, illegal source, or illegal application of
income to make it appear legitimate. In other words, it is the
process used by criminals through which they make “dirty”
money appear “clean” or the profits of criminal activities are
made to appear legitimate.
3
Money Laundering

(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
Money laundering generally refers to ‘washing’ of the
proceeds or profits generated from:
Drug trafficking
People smuggling
Arms, antique, gold smuggling
Prostitution rings
Financial frauds
Corruption, or
Illegal sale of wild life products and other specified
predicate offences
4
Money Laundering



Money launderers are big time criminals who operate through
international networks without disclosing their identity.
The money laundered every year could be in the range of $600
bio to $2 trio. This gives money launderers enormous financial
power to engage or coerce or bribe people to work for them
Generally, money launderers use professionals to create legal
structure/ entities which act as ‘front’ and use them for
laundering of funds
5
Money Laundering Process

Money Laundering consists of three stages:
1. The first stage involves the Placement of proceeds derived
from illegal activities – the movement of proceeds,
frequently currency, from the scene of the crime to a place,
or into a form, less suspicious and more convenient for the
criminal.
2. The second stage is called Layering. It involves the
separation of proceeds from illegal source through the use
of complex transactions designed to obscure the audit trail
and hide the proceeds. The criminals frequently use shell
corporations, offshore banks or countries with loose
regulation and secrecy laws for this purpose.
6
Money Laundering Process
3. The third stage is called Integration. It represents the
conversion of illegal proceeds into apparently legitimate
business earnings through normal financial or commercial
operations. Integration creates the illusion of a legitimate
source for criminally derived funds and involves techniques as
numerous and creative as those used by legitimate businesses.
For e.g false invoices for goods exported, domestic loan
against a foreign deposit, purchasing of property and comingling of money in bank accounts.
7
What is Money Laundering ?
Money Laundering is the process by which illegal funds and
assets are converted into legitimate funds and assets.
Investments
Purchases
Placement: Illegal funds or assets
are first brought into the financial
system
Layering: Use of multiple
accounts, banks, intermediaries,
corporations, trusts, countries to
disguise the origin.
Integration: Laundered funds are
made available as apparently
legitimate funds.
Important: All money laundering transactions need not go through this three-stage process.
Typologies/ Techniques
employed

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Deposit structuring or smurfing
Connected Accounts
Payable Through Accounts
Loan back arrangements
Forex Money Changers
Credit/ Debit cards
Investment Banking and the Securities Sector
Insurance and Personal Investment Products
Companies Trading and Business Activity
Correspondent Banking
Lawyers, Accountants & other Intermediaries
Misuse of Non-Profit Organisations
9
Financing of terrorism


Money to fund terrorist activities moves through the global
financial system via different typologies and in and out of
personal and business accounts. It can sit in the accounts of
illegitimate charities and be laundered through buying and
selling securities and other commodities, or purchasing and
cashing out insurance policies.
Although terrorist financing is a form of money laundering, it
doesn’t work the way conventional money laundering works.
The money frequently starts out clean i.e. as a ‘charitable
donation’ before moving to terrorist accounts. It is highly time
sensitive requiring quick response.
10
Combating financing of
terrorism



(i) State Sponsored
(ii) Other Activities- legal or non-legal
Legal Sources of terrorist financing
 Collection of membership dues
 Sale of publications
 Cultural of social events
 Door to door solicitation within community
 Appeal to wealthy members of the community
 Donation of a portion of personal savings
11
Combating financing of
terrorism

Illegal Sources
 Kidnap and extortion;
 Smuggling;
 Fraud including credit card fraud;
 Misuse of non-profit organisations and charities fraud;
 Thefts and robbery; and
 Drug trafficking
12
Macroeconomic impact


Money laundering can have a range of severe macroeconomic
consequences on countries.
IMF has cited unpredictable changes in money demand,
prudential risks to the soundness of banking systems,
contamination of legal financial transactions, and increased
volatility of international capital flows and exchange rates due
to unanticipated cross-border asset transfers.
13
Macroeconomic impact


The economic and political influence of criminal
organizations can weaken the social fabric; collective
ethical standards and ultimately the democratic institutions
of the society. Organized crime can infiltrate financial
institutions, acquire control of large sectors of the economy
through investment, or other bribes to public officials and
indeed governments
Money Laundering can also have a dampening effect on
FDI if a country’s financial sectors are perceived to be
under control and influence of organized crime.
14
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
15
Penalties imposed on banks

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
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Jan. 2006
Aug. 2005
Feb. 2005
Jan. 2005
Oct. 2004
Sep. 2004
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 cancelled
Riggs Bank
US$ 25 mio
16
What KYC means?

Customer?

One who maintains an account, establishes business relationship, on
who’s 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 address

17
What KYC means?


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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 customer’s customer are?
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Core elements of KYC

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Customer Acceptance Policy
Customer Identification Procedure- Customer Profile
Risk classification of accounts- risk based approach
Risk Management
Ongoing monitoring of account activity
Reporting of cash and suspicious transactions
19
Know Your Customer (KYC) Guidelines
Customer Acceptance - Ensure that only
legitimate and bona fide customers are
accepted.
Customer Identification- Ensure that
customers are properly identified to
understand the risks they may pose.
Transactions Monitoring- Monitor
customers accounts and transactions to
prevent or detect illegal activities.
Risk Management- Implement processes
to effectively manage the risks posed by
customers trying to misuse facilities.
Guidelines issued by FATF
Advantages of KYC norms

1.
2.
Sound KYC procedures have particular relevance to the
safety and soundness of banks, in that:
They help to protect banks’ reputation and the integrity of
banking systems by reducing the likelyhood of banks
becoming a vehicle for or a victim of financial crime and
suffering consequential reputational damage;
They provide an essential part of sound risk management
system (basis for identifying, limiting and controlling risk
exposures in assets & liabilities)
21
Risk based approach

(a)
(b)
(c)
(d)
(e)
The potential risk that a customer carries depends on:
Identity of the customer including beneficial ownership
The nature of customer’s business and his product profilejewels, precious metals, arms, antiques
Location of business
Products and services offered
Customer’s customer or clientrs; their location & business
22
High risk countries

Geography
 Drug producing nations
 Drug transshipment countries
 Drug using countries
 Secrecy jurisdictions and tax havens, particularly those that
grant offshore banking licenses.
 Countries with high degree of public corruption
 Countries linked to terrorist financing
 Non Cooperative Countries and Territories
23
High risk customers
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Non-bank financial institutions ( money transmitters, cheque
cashiers, full fledged money changers, sellers of stored value
cards, security brokers & dealers etc. )
Travel agencies / Property dealers/ builders
Professional and consulting firms
Exporters or importers of goods and services
Cash intensive business e.g. retail stores, restaurants,
gambling casinos, second hand car dealerships etc.
Off-shore corporations, banks in secrecy heavens
Non-profit organisations e.g charities
24
High risk products & services
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Wire transfers
Electronic banking services which includes services offered
through internet, credit cards, stored value cards
Private banking relationships
Correspondent banking relationships
25
Cross border accounts-deposits

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All KYC procedures to be observed
Third party verification of documents through Correspondent
bank which is committed to KYC regime and is willing to
share KYC information on demand
Verification of document during visit to India
Remittance through banking channels
26
Payment gateways/ wire
transfers
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Both domestic and cross border wire transfers carry potential
risk of money laundering
Payment gateways facilitate wire transfers for customers of
banks located anywhere in the world
Whether AML/ KYC compliance level
Ascertain whether it is regulated at the place of incorporation
Insist on complete originator information with wire
Make payment to beneficiary through account or DD
Keep record of transactions
27
Salient features of IPO scam

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Modus operandi
Current account opened in the name of multiple
companies on the same date in the same branch of a bank
Sole person authorised to operate all these accounts who
was also a Director in all the companies
Identity disguised by using different spelling for the same
name in different companies
Multiple accounts opened in different banks by the same
group of joint account holders
28
Salient features of IPO scam


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Huge funds transferred from companies accounts to the
individual’s account which was invested in IPO’s
Loans/ overdrafts got sanctioned in multiple names to
bypass limit imposed by RBI
Loans sanctioned to brokers violating guidelines
Multiple DP accounts opened to facilitate investment in
IPO
Large number of cheques for the same value issued from
a single account on the same day
29
Salient features of IPO scam
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Multiple large value credits received by way of transfer
from other banks
Several accounts opened for funding the IPO on the
request of brokers, some were in fictitious names
Refunds received got credited in brokers a/cs
Margin money provided by brokers through single cheque
Nexus between merchant banker, brokers and banks
suspected
30
Operational deficiencies
Factors that facilitated the scam
 Photographs not obtained
 Proper introductions not obtained
 Signatures not taken in the presence of bank official
 Failure to independently verify the identity and address of
all joint account holders
 Directors identity/ address not verified
 Customer Due Diligence done by a subsidiary
31
Operational Deficiencies

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Objective of large number of jt. account holders opening
account not ascertained
Purpose of relationship not clearly established
Customer profiling based on risk classification not done
Poor monitoring and reporting system due to inadequate
appreciation of ML issues
Absence of investigation about use and sources of funds
32
Operational Deficiencies
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Unsatisfactory training of personnel
No system of fixing accountability of bank officials
responsible for opening of accounts and complying with
KYC procedures
Ineffective monitoring and control
33
Legislative Framework

Money Laundering Act, 2010
National Accountability Ordinance, 1999

Control of Narcotics Substance Act 1997

Anti-Terrorism Act 1997.

National Accountability Ordinance, 1999


Deals mainly with the detection, investigation,
prosecution and speedy disposal of cases involving
corruption and corrupt practices
The following offences under NAO covers the
offence of money laundering :
•
•
•
Acquisition of any property / pecuniary
advantage through corrupt, dishonest or illegal
means
Having assets beyond known sources of income
which can not be reasonably accounted for.
Pursuant to Section 20, financial institutions are
bound to report suspicious financial transactions
to NAB.
Control of Narcotics Substance Act 1997
The following offences/ provisions under CNSA covers the
AML measures:



Makes the acquisition of assets through drug money an
offence
The suspected properties / assets may be frozen and
subsequently forfeited through the Court. This measure
can be construed as an anti-money laundering measure.
Section 67: it is mandatory for financial institutions to
report STRs to ANF, suspected to be related to drug
business.
Anti-Terrorism Act 1997



Deals comprehensively with the offences of
terrorism and financing of terrorism.
Makes compulsory for the proscribed
organizations to submit all accounts for it’s
political and social welfare activities and
disclose all funding sources.
Freezing, Seizure and Forfeiture of assets
AML/CFT Measures by SBP

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Institutional Arrangements
• Setting up of dedicated AML/ CFT Units.
• Capacity Building- training
Regulatory Framework
Issuance of Prudential Regulations
Monitoring & Enforcement
On-site inspection and off-site surveillance
International Obligations
UNSC Resolutions- Freezing of accounts
Curbing of Informal Value Transfers
Formation of Exchange Companies
Documentation of Economy
Restriction on RTCs – Bearer Instruments
AML/ CFT UNITS

Primary Responsibilities of the Units
•
•
•
•
Issuance of regulations and directions to banks and
DFIs in accordance with FATF Recommendations
and international best practices
Receive STRs and process them for suitable action
Coordination and liaison with relevant Govt.
departments, LEAs, International and Multilateral
bodies
Issue directives for freezing of accounts
Regulatory Framework

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A separate section in new PRs has been dedicated
to regulations pertaining to AML and CFT.
PR Compliant with 40 + 9 recommendations
In line with Basel Core Principle No.15
Violations of regulations dealt with penal action
International scenario
International organizations engaged in AML/CFT

Mid 1980s - Growing concern of international community to deprive
criminal elements of the proceeds of their crimes.

1989 – Financial Action Taskforce (FATF) set up to ensure global action
to combat money laundering.
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1995 - Egmont Group set up to stimulate international cooperation
amongst FIUs. Best Practices for exchange of information.

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Forty Recommendations - Complete set of counter-measures against money
laundering
Nine Special Recommendations on Terrorist Financing
33 members
101 Members
1997- Asia/Pacific Group on money laundering (APG) set up to create
awareness and encourage adoption of AML measures.
International standards – FATF
40 Recommendations + 9 Special Recommendations on TF

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Legal System and Related Institutional Measures
 R 1,2,3,26,27,28,30,32
 SR II,III
Preventive Measures – Financial Institutions
 R 4,5,6,7,8,9,10,11,13,14,15,17,18,19,21,22,23,25,29,32
 SR VI, IX
Preventive Measures – Non Financial Businesses and Profession
 R 12,16,20,24
Legal Person and arrangements & Non-profit Organizations
 R 33
 SR VIII
National and International Cooperation
 R 31,32,35,36,27,38,39,40
 SR V
FATF
International standards – FATF

Extension of KYC, CDD & AML/CFT measures
to other sectors, as mentioned under 40+9
standards, in case of India, such as:

Non-Designated Financial Businesses & Professions
(NDFBPs) (R 12) : Casinos, Real estate agents, Dealers in
precious metals and precious stones, Lawyers, notaries, other
independent legal professionals and accountants, Trust and company
service providers


Exchange Houses and money remitters (R 23)
Alternative remittances, Wire transfers, Non-Profit
Organizations, Cash Couriers (SR VI to IX)
FATF
Salient Features of FATF Recommendations

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Criminalize ML to include all serious offences(R1)
Follow standards set in Vienna & Palermo UN conventions for
offence of ML(R2)
Confiscate/attach laundered assets(R3)
Secrecy laws should not prohibit sharing of information by
financial institutions (FI)-(R4)
Give special attention to business relation with countries,
which do not or insufficiently apply FATF standards(R21)
FIs should be subject to regulatory & supervisory measures
through licensing, registrations etc. for AML purposes(R23)
DNFBPs also be subject to similar regulations &
supervision(R24)
FATF
Salient Features of FATF Recommendations

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FIs to follow CDD:- no anonymous accounts, verify
identity of client & beneficial owner, CDD for politically
exposed persons (PEP)(R5,6)
CDD & Record keeping requirements for NDFBPs(R12)
CDD for cross border correspondent banking(R7)
Do not approve operations with Shell Banks(R18)
FIs should develop AML/CFT Programme(R15):


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Develop internal AML/CFT policies
Set screening standards while hiring employees
Train employees
Independent audit to test check the system
Pay special attention to non face to face customers(R8)
Apply similar standards to branches/offices abroad(R22)
FATF
Salient Features of FATF Recommendations


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
Set up FIU, empower law enforcement agencies and
competent authorities for AML/CFT(R26 to 32)
Filing of STRs(R13)
Provide legal immunities to financial institutions & their
representatives for disclosures(R14)
Maintain all necessary records(R10)
Dissuasive civil/administrative/criminal sanctions for
failing to comply with AML/CFT requirements(R17)
International cooperation, mutual legal assistance,
extradition & information exchange(R35 to 40)
FATF
Salient Features of FATF Recommendations

Special Nine Recommendations on Terrorist
Financing (TF)






Ratify & implement UN instruments-SR I
Criminalize TF as ML offence-SR II
Freeze & confiscate terrorist assets-SR III
Report STRs on TF- SR IV
International cooperation on CFT- SR V
KYC/CDD & AML/CFT measure for- SR VI to IX:



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Services involved in transmission of money/value
Wire transfers
Non-Profit organizations
Cash couriers
FATF
Key Issues
Key Issues

To what extent should Pakistan be compliant with
these 40+9 FATF recommendations?




No country fully compliant
These are ideal financial standards best suited for
developed countries where formalization of economy is
at an advanced stage
Non-membership likely to have consequences
How best can these standards be adopted in
Pakistan?
Measures to deter money
laundering





Board and management oversight of AML risks
Appointment a senior executive as principal officer with
adequate authority and resources at his command
Systems and controls to identify, assess & manage the money
laundering risks
Make a report to the Board on the operation and effectiveness
of systems and control
Appropriate documentation of risk management policies, their
application and risk profiles
51
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
But it doesn't work they way we want
Because
‘The law hath not been dead, though it hath slept’

52
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