Non Face-to-Face
Transactions:
Risks and Challenges
Richard Parlour
Financial Markets Law International
© FMLI 2006
OARRs
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© FMLI 2006
Outcome
Agenda
Roles
Rules
Outcome
• Risks of non face-toface (NF2F)
transactions
• Regulation of NF2F
transactions
• Psychology of NF2F
transactions
• Developing solutions
for challenges of
NF2F transactions
Agenda
• Key Issues
• International
Experience
• Role of Psychology
• Developing Solutions
Roles
Richard
Active
participants
HANDOUT!!
Handout Survey
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Ten statements
Select which response closest to you
No right or wrong answers
Be as honest as possible
Self marking
Rules
Background for NF2F
• Desire to be Offshore
Financial Centre
• Growing industrial,
financial, tourism, IT
sectors
• 5-6% annual growth since
1968
• >10,000 offshore entities
• Banking sector
investment > $1 billion
• India, South Africa
• Internet banking
Local Background Risk
• Minor consumer and trans-shipment point for
South Asian heroin
• Small amounts cannabis produced and
consumed locally
• Low terrorism risk and experience
• Significant offshore financial industry creates ML
potential
• Corruption levels low (TI level 4.1)
• Government committed to regulation, moderate
country risk
Related Offshore Risk
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India
Major ML centre
Major drug transit,
precursors
Largest number terrorist
incidents
Terrorist risk severe
Hawala
TI level 2.8
Medium country risk
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South Africa
ML centre of concern
Not major drug centre
Organised crime
Terrorism risk elevated
TI level 4.6
Medium country risk
Non Face-to-Face Transactions
Medium
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Post
Telegraph
Telephone
Fax
Email
Internet
SMS
Instant messaging
Dealing system
Electronic banking
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Risks
“Physicalities loss”
Privacy
Hacking
Cracking
Spyware
Data loss
Ease of access
Depersonalisation of
contact
Transaction speed
NF2F Loss/Gain
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Losses
Gender check
Age check
Body language
Dress signals
Signature
Likeness
Forensics
Gains
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Speed
Reach
Reduced costs
E tracing
E matching
Better psychographic
profiling?
International Experience on
NF2F
• FATF recommendation 8 – policies and
procedures to address any specific risks with
NF2F business relationships or transactions
• BIS BCBS CDD paper 2001 2.2.6:
– Apply equally effective ID procedures
– Specific and adequate measures to mitigate higher
risk
• EU MLD 3 Art 13.2
• Wolfsberg 1.2.5 - specifically address measures
to establish ID of NF2F customers satisfactorily
BCBS NF2F Risk Mitigation
• Certification of documents presented
• Requisition of additional documents over
F2F clients
• Independent contact with client by bank
• Third party introduction (subject to
conditions)
• Requiring first payment through account in
client’s name subject to same CDD
standards
EU Third Money Laundering
Directive Art 13.2
Where customer not physically present for ID, take
specific and adequate measures for higher risk:
• ensuring customer ID established by additional
documents, data or information;
• extra measures to verify/certify documents
supplied, or confirmatory certification by MLD 3
financial institution;
• ensuring first payment through account in
customer’s name with a credit institution.
FATF Suggestions
• Reinforce no
anonymous accounts
• KYC over life of
relationship
• Uniform standards
worldwide
• Develop IT to detect
suspicions
• Limit online services
or amounts
• On line accounts only
if opened off line
• Online services only
where licensed
• Home and host state
oversight
UK on F2F
• Nothing in primary legislation
• MLRs – ID procedures to take into account
greater potential for ML when applicant for
business not physically present when
being identified
• FSA removal of ML sourcebook, emphasis
on senior management principles, JMLSG
• JMLSG
JMLSG on F2F
• Risk based approach
• Risk increasing factors:
– Ease of access despite time, location
– Ease of multiple fictitious applications
– Absence of physical documents
– Speed of transactions
• Verify electronically or by documents
• Care over impersonation fraud
Psychology and the fraudster
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Average fraud 3½ years before detection
51% uncovered by accident
19% uncovered by audit
10% uncovered by management controls
20% disclosed by disgruntled mistress
Police no better at detection than public
20: 60: 20 rule
The Financial Psychopath –
Common Myths and Traits
• Don’t look shifty
• Do maintain eye
contact
• Don’t gesture a lot
• Speak more slowly
• Motivation not so
much greed, as fear
of failure
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Work hard
Easily bored
Take risks
Creative
Charming
No remorse
Impulsive
Self confident
Competitive
Uncovering the Financial
Psychopath – Key Difficulties
• High flyers/gurus
most prone
• Not in your interest to
uncover
• They move faster on
loopholes
• Junior staff
understand system
better than senior
staff
• Would have to display
own ignorance to
uncover
• Would have to own
up to being not a
good supervisor
• Cost of checks
• Couldn’t happen here
• Outcome oriented
• Lose objectivity
Internet psychology
• Informal language as more isolated from
consequences of behaviour
• Productivity/addiction
• Lose inhibitions – increased emotional
intensity
• Increased social isolation
• Different impression formation/creation
• NJ teenager manipulated stock market
through chat rooms – fined $273k by SEC
Scoring
• Add up total As and Bs
• The more Bs, the more likely you are to be
a financial psychopath or more prone to
fraud
• If more than 7 Bs, likely you have already
committed fraud
• Also means you are likely to be a high flier
Equivalence
• SDD for equivalent
jurisdictions
• EDD for non-equivalents
• Highly political
• FATF members?
• Others deemed
equivalent by non-FATF
members?
• GCC members?
• ESAAMLG members?
• Other FATF style
members – EAG, APG,
MENAFATF?
• Egmont members?
• Risk based?
• Effectiveness?
NF2F Tools
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Specific
VISIT THE RISK
VTC/webcam?
EDD/lifestyle report
Limit service/level
Only if F2F a/c opening
Official documents
Information security
Encryption, comms choice, e
monitoring
Backup
Privacy policy
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General
Risk assessment
Added documentation
Database/ Internet searches
Document certification
References/3rd parties
Credit checks
Sanctions checks
Regular KYC
Transaction monitoring IT
First payment through client
account at third bank
Disaster recovery plan
Conclusion
• Key Issues
• International
Experience
• Role of Psychology
• Developing Solutions
Still Curious?
Richard Parlour
Financial Markets Law
International
www.fmli.co.uk
© FMLI 2006