AML presentation
- 1. Anti- Money Laundering (AML) Presented by : Abishek Jajoo
- 2. Table of Contents Sn Contents Slide 1 Introduction 4 2 Money Laundering Universe 9 3 AML history and penalties 14 4 Stages of Money Laundering 18 5 AML Stage decoded 27 6 Know Your Customer 31 7 Combating AML: Regulatory Response 38 8 AML in Exchange House Sector 43 9 Foreign Exchange and Remittance Group 45 10 Red Flags in Exchange Houses Business 50 11 KYC due diligence 56 12 Case Studies 60 13 Risk Based approach for AML 64
- 3. Key Takeaways from Session Understand Key Definitions & Classifications of AML Pillars & Stages of AML Pillars of AML including: Stages of AML Identify examples of suspicious behaviour Test Your Understanding at the end of course Understand the Risk based approach for AML Client Due Diligence & Enhanced Due Diligence AML Certificates AML responsibility Matrix Someone new to AML New Staff Refreshers Course Course Time: 1 Hour
- 5. Anti-Money Laundering “He that is of the opinion money will do everything may well be suspected of doing everything for money.” Benjamin Franklin
- 6. Money Laundering “Money laundering is the process by which financial proceeds obtained from unlawful activities/sources ("dirty" money) is integrated into the legitimate economy by putting it through a series of transactions , so as to disguise the source of Funds. Examples include Tax evasion, bribery, fraud, Illegal arms sales, smuggling and other activities of organized crime”* What is Money Laundering * Thomson Reuters & FATF Simply put, Money laundering is the processing of these unlawful proceeds to disguise their illegal origin Money laundering happens in almost every country in the world, and a single scheme typically involves transferring money through several countries in order to obscure its origins
- 7. Terrorist Financing “Terrorist financing provides funds for terrorist activity. It may involve funds raised from legitimate sources, such as personal donations and profits from businesses and charitable organizations, as well as from criminal sources, as defined above”* What is Terrorist Financing * Fintrac, Canada The objective is to disguise the source of fund or the recipient of the fund, since terrorists raise funds from legitimate sources ( in small quantity), the detection and tracking of these funds becomes more difficult
- 8. Money Laundering – By Criminal sector Estimated Value Trafficking Smuggling Piracy/Cyber Crime Drugs Other Type Value in $ Bn Trafficking 121.50 Smuggling 156.60 Piracy / Cyber Crime 251.00 Drugs 105.00 Others 9.80 Total 643.90 Source: UNODC, The Globalization of Crime: A Transnational Organized Crime Threat Assessment, June 2010
- 10. AML Universe
- 11. AML – Methods & Techniques (1/3) Money launderer can use any medium to ensure they disguise the origin of money. Although, banking remains the common channel for laundering, yet there are various modes the launderers have used in the past to launder money. The summary has been highlighted below: Banking Institutions • Banks • Investment Companies Non Bank Financial Institutions • Exchange Companies • Insurance Companies Non FI Business • Real Estate Agent • Traders of Precious Metals
- 12. AML – Methods & Techniques (2/3) We have outlined below the common methods and techniques used by money launderer: Money remittance entities Exchange companies Insurance companies Securities Broker Securities Trader Non-Banking FIs Money orders and e- transfers Corresponding banks and Concentration accounts (the internet) Private banking Structured deposits or structuring Collusion within the bank Banking Institutions
- 13. AML – Methods & Techniques (3/3) We have outlined below the common methods and techniques used by money launder (Non FIs): Casinos and other gambling related business Traders in precious holdings Trust companies and corporate service providers Notaries public, lawyers, accountants, auditors Car sales companies Investment and merchandise consultants Real estate sector Currency exchange black market
- 14. 3. AML – History & Penalties
- 15. Biggest AML Penalties Big name AML fines J.P.Morgan Chase $31.3 billion Standard Chartered $1 billion RBS $1.5 billion Goldman Sachs $2.2 billion HSBC $3.5 billion BNP PARIBAS $2.99 billion
- 16. AML Penalties year wise / category wise
- 17. Few Exchange Houses Penalties May 30, 2017. On this day the UAE Central Bank ordered the closure of an unnamed small exchange house after detecting irregularities. The exchange had 6 branches, 3 in Dubai, 2 in Abu Dhabi and 1 in Sharjah, which was owned by an Emirati and an Asian. The Asian Man absconded with money collected from customers, who complained that their remittance were not reaching destination. Central Bank on May 9, 2013 revoked license of 2 money exchange companies stating that the pair broke regulatory rules, committing major regulatory violations. The two exchange houses were Al Hilal and Asia Exchange, the latter had been at the centre of a row of non payment of workers wages and failed to transfer expatriate remittances.
- 18. 4. Stages of Money Laundering
- 19. Stages of Money Laundering
- 20. Case in point Mr.X is a dealer in selling illegal firearms and has a buyer who paid him in cash. Depositing huge cash would be difficult for him, so what can he do? He sets up a real estate company and opens a bank account to deposit small amount of money so not to raise suspicions Placement He then transfers the money to many different accounts in various jurisdictions ( with different names). Layering He then trades into option from one of these accounts and from the proceeds he buys a property , thereby integrating the money and making it legitimate Integration
- 21. What is the aim of the ML? Placement To push the dirty money into the clean system through series of small banking transactions, so to avoid suspicions Layering To disguise the origin of funds for funding the property, multiple accounts in different name set up. Objective is to hide the audit trail of the transactions Integration To use the legitimate money (proceeds from options) for conducting legitimate transactions (buying a property) Hence, the aim of money launderer was to : To disguise the origin of the funds; To create a confusing audit trail so the authorities would find it hard to trace the money ; and To use the money in an apparently legitimate transaction using apparently legitimate funds.
- 22. What you should do? Do not tip off Ensure that you do not tip off suspicions transactions to the customer, who can be a potential money launderer. Report Suspicions You should always raise flags and report suspicions to your AML officer if you feel the transaction is unusual or the customer is not entertaining your request for documents etc. Do not assist Do not assist the money launderer if he/she decline to provide necessary documents for building relationships and update the documents every 2 years
- 23. Case Study 1 Receptionist Instruction from Relationship Manager to deposit money into a clients account Does not feel right. What should I do?
- 24. Case Study 1 The receptionist is asked by a relationship manager to deposit money into a clients account. The receptionist does not feel this is right. What should she do? A – Do as instructed and keep quite B – Inform her line manager that she has been instructed to do so. Her line manager is absent that day. What should she do? A – Do as instructed and keep quite B – Talk to the MLRO and appraise him that she has been instructed to do so.
- 25. Case Study 2 Relationship ManagerProspect I will be unable to provide you any details of the source of funds since my tax consultant has advised against disclosing any details. You should be happy that the money is coming from a reputed bank. What should I do. I feel he is hiding something. But the amount is coming from a reputed bank.
- 26. Case Study 2 What Should the Relationship Manager do? A) Work with the prospect and somehow on board the client B) Inform the prospect that without the source of wealth information being provided, he cannot be on boarded as a client. C) Inform the prospect that without the source of wealth information being provided, he cannot be on boarded as a client and also report the issue to the MLRO as a suspicious transaction. Relationship manager has collected the prospects passport and other details during past meetings but finds this non disclosure to be suspicious. Relationship Manager meets a prospect and in the course of discussion the prospect informs him about the inability to provide details regarding the source of funds in accordance with advice provided by his tax consultant.
- 27. 5. AML Stage Decoded
- 28. Stage I : Placement Objective : Getting rid of holding the proceeds of illegitimate operations Depositing smaller cash amounts in one or several accounts; Purchasing cheques and then depositing the same into the bank; Purchasing single-premium insurance policy without paying attention to details and conditions for cancellation and commissions; Money smuggling over borders; Buying precious/ valuable metals;
- 29. Stage II : Layering Objective : to separate the illicit money from its original source Buying shares and then reselling the same; Issuing several complex bank transfers; Issuing transfers against goods (letters of credit); Debt repayment (financing/ credit cards);
- 30. Stage III : Integration Objective : to legitimatize the money generated from illegitimate activities through integrating the money into the financial system Repurchasing precious valuable assets, properties, lands; Entering into or financing business projects; Buying goods; Buying Bonds, equity etc.;
- 31. 6. Know Your Customer
- 32. KYC What should banks/Exchange Houses do? Checking if customer has necessary KYC documents would be the first and most critical step
- 33. KYC - CBUAE KYC Policy is the preemptive anti- money laundering measure to halt any misuse of the exchange channel for money laundering. The policy framework is intended to regulate the operations so as to ensure the flow of only legal money through remittance channels. The main aim is to: 1. Identify customers with true documentation that are seeking to conduct transactions. 2. Be alert to any unusual transaction activity 3. To prevent the creation of fictitious accounts with standardized procedures.
- 34. Customer Identity format •Name of the Customer and DOB •Nationality •Permanent Address •Telephone No.(Res & Off.) •Purpose of transaction •Passport No. •NTN •Nature of Business •Bank Account
- 35. 12. Details of Assets Owned: a) Cash Value: b) Stocks & Bonds Value: c) Real Estate Value: d) Other Value: 13. Details of Liabilities: a) Loans / debts b) Debit accounts 14. Source of Funds to be invested: _____________________________________________________________ 15. Names of banks he deals with: ______________________________________________________________ 16. Details should be mentioned if there is more than one account: Applicant’s Name: _________________________ Capacity: ___________________ Signature: ________________________________ Date: ______________________ Approval of Production & Sales Manager Name: ________________________ Signature: _____________________ Date: _________________________ Customer Identity format (continued)
- 36. KYC Remediation Program Sl No CIP Documents List Yes No 1 Complete Name of the Client Yes 2 Client's MaidenName No 3 Address of the client Yes 4 Contactdetails Yes 5 DOB Yes 6 Various accounts maintained by the client No 7 Creditscore No 8 IdentificationNumber Yes 9 PassportDetails Yes -Prepare a list of all clients. -Categorize according to the industry sector. - Develop a CIP Checklist for individual clients and entities. -Collecting the documents as per the list. -Prepare a list of missing and expired documents. CUSTOMER IDENTIFICATION PROGRAM (CIP) Develop CIP Checklist
- 37. Risk Based Approach – KYC remediation RISK ASSESSMENT OF CLIENTS Risk AssessmentFrequency HighRisk Documentswill be reviewed once in ayear MediumRisk LowRisk Documentswill be reviewed once in three years. Documentswill be reviewed once in two years. After the CIP and document collection, we need to risk access the clients as high, medium and low on the basis of the following categories: • Country ofbusiness • Industrysector • Ownership • Products • Negative Alerts • PEP and RCA connections. KYC Risk Assessment Criteria Accumulated Score Risk Grading Due Diligence 1 to4 Low CDD 5 to8 Medium CDD 9 to12 High EDD Indicator High Medium Low Country of Business 3 2 1 IndustrySector 3 2 1 Ownership 3 2 1 Products 3 2 1 Negative Alerts 3 2 1 PEP & RCA Connections 3 2 1
- 38. 7. Combating AML: Regulatory Response
- 39. What is being done? International Efforts UN Security Council Resolution No. 1373 and subsequent resolutions FATF 40+9 recommendations International Monetary Fund (assessments, technical support, visits) EU Directive & Basel Committee on Banking Supervision Wolfsburg Principles (corresponding banks, private banking, trade finance) Local Efforts The UAE maintains a strong Anti Money Laundering (AML) system. Federal Law No. 4 of 2002 Federal Law No. 1 of 2004 and Federal Law No. 9 of 2014
- 40. Financial Action Task Force (FATF) The FATF is an intergovernmental organization established in 1989 by G7. Originally it was referred as G-7 Financial Action Task Force. G7 is an international forum for the member countries governments. FATF is headquartered in Paris, France. The mandate of the FATF is to set standards and to promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and the financing of proliferation, and other related threats to the integrity of the international financial system. In collaboration with other international stakeholders, the FATF also works to identify national-level vulnerabilities with the aim of protecting the international financial system from misuse.
- 41. Financial Action Task Force (FATF) The new document is called the FATF Recommendations 2012. This revision was made in order to combine each set of principles intended to serve as counter measures against money laundering and terrorist financing. This document is meant to provide a set of international standard that will help to strengthen the integrity of the financial system on a global level. In 2012, the FATF combined two documents, the Forty Recommendations on Money Laundering and the IX Special Recommendations. The Forty Recommendations on Money Laundering was initially released in 2000, and was a document that provides international countermeasures against money laundering. The IX Special Recommendations was meant to provide a comprehensive set of guidelines for the prevention, detection and combating of terrorism.
- 42. What the Recommendation requires • Criminalize money laundering. • Seize property to prevent further money laundering. • Undertake customer due diligence (CDD) measures. • Use enhanced due diligence in relationship with Politically Exposed persons (PEPs). • Gather information about offshore institutions when conducting cross-border transactions. • Create a Financial Intelligence Unit (FIU) for reporting suspicious transactions and to investigate suspected cases of money laundering. • Monitor operations to ensure compliance with AML legislation. • Provide the authorities combating money laundering and terrorist financing with appropriate financing, human and technical support.
- 43. 8. AML in Exchange Houses
- 44. • In recent years global efforts to prevent the abuse of financial systems to launder money or finance terrorist activities have become extremely important. • Exchange Houses must follow certain set standards that must be followed at all times in order to protect themselves from being abused by money launderers and/or terrorist financiers and to ensure Anti Money Laundering and Combating Financing of Terrorism (AML/CFT) Compliance across its business in line with UAE AML/CFT Laws and Regulations.
- 45. 9. FOREIGN EXCHANCE AND REMITTANCE GROUP
- 46. • Exchange companies in the UAE came together and formed the Foreign Exchange and Remittance Group. • The main objective is to work for the betterment of the exchange industry and create a conducive environment for their business growth and facilitate a healthy competitive market for all. • The group is licensed by the Dubai Chamber of Commerce & Industry(DCCI) and works under the aegis of the Central Bank of the UAE (CBUAE). • The idea behind FERG has been to advocate for reform and progress in our industry. The aim is to completely weed out non-compliant financial transactions and unethical business practices. FERG
- 47. Money Laundering & Exchange Houses Industry Recently in these last few years many cases have been there not just worldwide but also UAE of Money laundering in the Currency Exchange houses. With the most recent one being in May 2017. The owner of an exchange house took the remittance deposited to be transferred to another country and left the country.
- 48. 1.Beneficial Owners 2.On going Due Diligence 3.Wire Transfers 4.Enhanced CDD on: A)FPEP’S B)Correspondent Banks C)Businesses/ Individuals 5.Shell Banks and Companies 6.Reporting of suspicious transactions 7.Attempted Transactions 8.Unusual Transactions 9.Tipping off 10.Compliance Officers 11.Penalty Annexure to Circular No. 24/2000(Regulation concerning Procedures for AML by CB to Money changers
- 49. Reputational loss Financial loss/FinesLicense cancellation Imprisonment Risk of non-adherence •As per Article 15 of the UAE Federal Law No. 4 of 2002, failure to report an STR to the AMLSCU by those who are aware of the suspicious activity or transaction may be a criminal offence, punishable by a fine or imprisonment or both. •Under Article 16 of the UAE Federal Law No. 4 of 2002, tipping off is an offense and is punishable for a fine or imprisonment or both.
- 50. 10. Red Flags for Money Laundering
- 51. Overview of Exchange House Sector Money Exchange is a thriving business in the UAE owing to a demographic structure which contains large number of expatriates regularly transferring remittances to their families and relatives in their home countries. CB has issued Resolution No. 123/7/1992 dated 29.11.1992 for regulating money changers. One of the most important provisions of the resolution confines licensing for carrying on money changing houses to institutions and companies established per provisions of the commercial companies law.
- 52. Source: Mubasher Exchange House Outward Remittance (CBUAE 2017) Sector Q1 12.98 3.48 2.7 2 1.81 0 2 4 6 8 10 12 14 Amount(Billion) Indian Pakistan Philippines US Egypt
- 53. Exchange Houses - Key Challenges •Currency exchange houses engaged in money transfer and foreign exchange business in UAE do face certain challenges. The main challenge being that exchange houses need to follow strict AML compliance standards, else they are faced with potential fines and in extreme cases a shutdown of the exchanges. •Currency exchange houses in UAE is a very competitive market as there are large number of players. This can benefit the customers as the cost of remitting money is very low compared to other countries but this can be a bit of a problem for the exchange houses.
- 54. 54 Red flags that indicates Money Laundering Red flag is a signal that a transaction is unusual and suspicious. In general a few red flags are: •The client is known to have convictions for acquisitive crime. • The client attempts to disguise the real owner of the business or the parties to the transaction. • The client asks for short-cuts and/or unexplained or unusual speed • The finance is being provided by a lender, other than a financial institution, with no logical explanation or economic justification • A significant amount of private funding from an individual running a cash-intensive business • Business transactions involve countries where there is a high risk of money laundering and/or the funding of terrorism. • False or suspicious documents are used to back up transactions
- 55. Red Flags in Exchange Business Customers altering transactions upon learning they must show ID Customers reluctant to show ID Customers trying to change large quantities of small value currency into large value currency Customers concealing the beneficial owner of funds Company accounts whose transactions are mainly conducted in cash rather than in negotiable instruments without an apparent reasons. Repeated requests for travelers cheques or drafts in Foreign currency Two customers coming together but sending money transfer separately to the same beneficiary or coming together for receiving money transfer from the same remitter *Above list is not exhaustive
- 56. 11. KYC Due Diligence
- 57. Customer Due Diligence Identify customer and verify data, documents and information Determine if customer is acting on behalf of another person Identify UBO and verify identity of UBO Obtain info on intended nature of business and relationship On-going due diligence
- 58. Factors – Risk Profiling 1. Type and background of customer or UBO. 2. Geographical base. 3. Areas of operation. 4. Nature of activities 5. Means of payments. 6. Source of fund. 7. Source of Wealth. 8. Type & complexity of business relation. 9. Any payments from third parties. 10. Is business relation dormant. 11. Bearer arrangements. 12. Suspicion of ML, FT or any crime. *Above list is not exhaustive.
- 59. Unusual or Suspicious Exchange Houses Transactions All transactions with reasonable grounds for doubt – equal to or in excess of prescribed limit – relating to ML, TF or unlawful organization should be reported. Disclosure to customer, beneficiary or any other party is prohibited, other than authorities concerned with criminalization of ML and combating TF. All employees should be conscious and aware of issues related to any disclosure. Competent employee must freeze transaction and notify AMLSC Unit through electronics system or other reasonable means in case of doubt of transactions being related to terrorism financing or unlawful organizations.
- 60. 12. Case Studies
- 61. A customer who wants to send money to his native place to his brother, goes to an exchange house and pays a sum of AED 10,000. The customer then asks his brother 2 days later whether the money reached. The brother says he hasn’t received The customer then enquires at the exchange house. The exchange house is also confused On investigation it is revealed that the owner took the money or an employee stole the money. Case Study 1
- 62. • A customer comes to an Exchange house X to send money abroad. • The exchange house asks him for his ID proof. Upon asking the customer realizes that he does not have the necessary ID with him now. • He tells the Exchange house that he is a regular customer and that it is his first time he forgot. The exchange house agrees to allow him to send money saying that this is the last time • In such a situation the Exchange house is not following their basic checklist and is prone to AML fine and AML penalties. Case Study 2
- 63. • Exchange House X, does not follow proper AML guidelines. • They do not do their annual internal AML audit and manipulate the remittance fees so as to earn profit at customers expense • During the CB UAE AML audit, they are caught and fined a huge amount. • In fact the CB UAE warns them if they do not improve and follow guidelines then by next year, their license would be revoked. Case Study 3
- 64. 13. Risk Based approach for AML
- 65. Risk Based Approach Key elements: • Identify any possible risk relating to ML / TF Identification • Countries, competent authorities and organizations have to determine how the ML/TF threats identified will affect Assessment • Implies to take enhanced measures to manage and mitigate situations Mitigating risks
- 66. Key success Factors • Strong senior management leadership and oversight of the development and implementation.Governance • Adequate internal controls are a prerequisite for the effective implementation of policies and processes to mitigate ML/TF risk. Internal controls • Staff should have integrity, should be adequately skilled and possess the knowledge and necessary expertise. Recruitment • It is important that staff receive proper AML/CFT trainingTraining • Internal control environment should be conducive in assuring the integrity, competence and compliance of staff with relevant policies and procedures. Ensuring and monitoring compliance
- 67. Comprehensive Program Core Services Risk Assessment & Monitoring Risk Cateogorisation of the Client into high, medium and low Monitor the Clients on Risk Level Basis - high, medium and low. Develop monitoring/trend reports along with threshold for escalation Escalate/Report ot the Country Regulator if reqd SAR analysis and Implementation Based on gap analysis: Development of checklist for collection of missing/about to expire documents; Development of Controls checklist Perform CIP and than customer due diligence on the clients. Implement IT Restructuring solutions. Implementation & Training Conducting workshops/trainings for key stakeholders in the process, including: Compliance Officer AML Manager. Risk Management Vertical. Front Office / Business IT Teams Provide continous support Carrying out On Going Reviews. Quality Assurance and Audit Current State ”As Is” Analysis Collecting client’s information from the relation manager & intranet. Diagnostic review of exisiting practices in Compliance ,KYC and CIP practice. Review of the exisiting reporting and monitoring structure. Review of the Exceptions and Variances
- 68. Overview
- 69. Risk Based Approach RBA Product/Services Trading Account OTC Deals Derivatives Geography High Risk Country Sanction Country Medium or Low Risk Customer Individual Citizen or Resident Expat International Investor Local Corporate Listed Partnership Sole Proprietorship International Entity Listed Unlisted Trustee
- 70. Risk Based approach for AML When a Corporate Relationship has been established, following process needs to be followed The Relationship officer shall ensure the KYC form has duly filled by the counterparty/customer. Based on the gathered information, it shall categorize the customer into various risk categories Know Your Customer High Risk Categorization of Risk Medium Risk Low Risk Enhance Due Diligence at transaction level Due Diligence Simplified Customer Due Diligence Simplified Customer Due Diligence Trend Reports, Risk Variables for HRC Monitoring Tools Trend Reports, Risk Variables for MRC Trend Reports, Risk Variables for LRC Every 2 yearsFrequency of Updating Customer Information Every 3 years Every 5 years Enhance Due DiligenceDue Diligence, Incase of Suspicious Transaction Enhance Due Diligence Enhance Due Diligence Define Thresholds , trend reports etc. Define criteria based on Customer Profiling Define thresholds, trend reports etc. Define thresholds, trend reports etc.
- 71. Suspicious Activity Financial transactions that are inconsistent with the type of customer or business they carry on. Examples of suspected transactions include: Usage of ATMs; Small/ structured cash deposits; Multiple remittances; Creating speculations/ deposits and then breaking the same regardless of the fees; Sudden increase in volume of deposits; Opening deposits or investments using drafts with huge values; Insurance and funds; Unexpected repayment of debts; or Single customer has several accounts with no valid reasons.
- 72. OFAC/ Black List/PEPs – High Risk Customers Current or former senior official in the executive, legislative, administrative, military, or judicial branch of a foreign government (elected or not) A senior official of a major foreign political party A senior executive of a foreign government owned commercial enterprise, and/or being a corporation, business or other entity formed by or for the benefit of any such individual An immediate family member of such individual; meaning spouse, parents, siblings, children, and spouse's parents or siblings Any individual publicly known (or actually known by the relevant financial institution) to be a close personal or professional associate
- 73. AML Compliance Certificates AML compliance is not a point in time exercise and ongoing monitoring should be done to establish a robust AML process. In this regards, divisions should provide their assurance to AML division.
- 74. AML Responsibility Matrix Major O/S AML issues should be addressed through a clear responsibility matrix so as to drive the right risk behavior in the your company. Accountability & Transparency promotes effective corporate governance Primary Responsibility Primary Responsibility for managing the AML remains with the relationship officer of a business divisions. He/ She should report suspicious transaction to MLRO Secondary Responsibility A firm should promote four eye principle i.e. maker/checker concept to avoid negligence, fraud etc. Immediate Manager shall also be responsible to ensure suspicious transactions are being reported Oversight Authority Anti-Money Laundering/ Compliance Unit should act as an oversight authority and should independently also review/audit the transactions to ensure all suspicious are being reported.
- 75. Thank You !!!