KYC/AML 2016
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This document discusses know your customer (KYC) and anti-money laundering (AML) compliance. It provides an overview of key AML laws and regulations including the Financial Action Task Force (FATF) recommendations, European Union directives, and Luxembourg's AML laws. It also discusses money laundering and predicate offenses, the definition of a business relationship, applying a risk-based approach to KYC, and the obligations to identify customers, monitor transactions, and cooperate with authorities.
KYC/AML 2016
- 2. AML Compliance Governance Corp. soc. The context 4
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- 4. 6 4
- 6. +/- 750.000 $ per minute 6
- 7. 7
- 8. FATF (Financial Action Task Force) Founded in 1989 by the G7 40 + 9 recommendations = international norms 8
- 9. Wolfsberg Questionnaire The Wolfsberg questionnaire related to the prevention of money laundering and the financing of terrorism – level playing field (October 2000 / revised in June 2012) 9
- 10. 1. Policy, guidelines and procedures 2. Risk analysis 3. Customer knowledge, Due diligence 4. Transactions analysis 5. Transactions monitoring 6. Training re: KYC/AML Wolfsberg Questionnaire 10
- 11. Financial Action Task Force 2012 2003 2001 1989 11
- 13. The law in Luxembourg 2012 2010 2008 2004 1997 1993 13
- 14. 14 INSECURITY
- 15. 15
- 16. 16 LEGISLATION
- 17. 1. A brief reminder of the laws 2. The 2015/849 Directive 3. Cases 4. Reputational risk management The structure of the presentation 17
- 18. •1993 The professionals of the financial sector (PFS) •2012 (PFS) Notaries Casinos External auditors Lawyers Merchants of luxury goods Consultants Accountants UCITS The laws in Luxembourg 18
- 19. •1993 1.The obligation of due diligence related to the customers 2.Obligation of an adequate internal organisation 3.Obligation to cooperate with the authorities •2012 1.Risk based approach Know your customer Verification Origin of the funds Transaction analysis Coherence between transaction and customer profile Actions in case of suspicion 2.Compliance function (2004) 3.Cooperation The laws in Luxembourg 19
- 20. Image – risk of loss of reputation The reputation of a financial institution - the same goes for a country - is its most important asset. Legal Money Laundering is a criminal offence in many countries, punished by imprisonment and fines. Money Laundering is considered a severe regulatory breach in many countries Economical: Earnings shortfall Related risks
- 21. Money Laundering = The transformation of illicit money in licit money 21
- 22. • Money laundering entails a predicate offence of which revenues can lead to the offence of money laundering The offence 22
- 23. The predicate crimes: • A) Drug trade • B) Terrorism, including its financing – Criminal organisations – Trade of people and traffic of illegal migrants – Sexual exploitation (children) – Misuse of subventions, indemnities or allocation of funds – Corruption The predicate crimes 23
- 24. The predicate crimes: • B) – Trade of arms and ammunitions – Forgery, counterfeit money, disclosure of business secrets – Fraudulent bankruptcies – Breach of trust, exploitation of minor of age, – Swindle – Illicit traffic of stolen goods and properties The predicate crimes 24
- 25. • B) – Imitation and the hacking of products – Crimes and offences against the environment – Murders and infliction of grave physical wounds – Kidnapping – Smuggling – Extortion – Piracy – Insider trading and market manipulation The predicate crimes 25
- 26. • B) – Theft of substances of human origin – Trade of human beings – Malpractices on copyright – Environmental damage – Damage to buildings of historical value – Water pollution – Waste mismanagement – Non respect of customs and excises The predicate crimes 26
- 27. • B) – Any other crime or malpractice sanctioned with an imprisonment sentence of a minimum of six months or more – for example: the forgery of balance sheets, falsification of statements • C) – Misuse of corporate assets The predicate crimes 27
- 28. The material element • Money laundering entails an act or an object that provides an economic advantage, as a result of a predicate crime. The material component 28
- 29. The intentional element • The intentional and deliberate element is an essential feature of the money laundering process. The intentional component 29
- 30. The concept of the prevention of the financing of terrorism is different from the AML concept as licit money may be at the origin of the criminal activity In reality it boils down to name checking 30
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- 33. The predicate offence Numerous offences are no longer linked to serious criminal activities but are interwoven with the economic activities ! 33
- 34. The obligation to co-operate with the authorities 1. General obligation to co-operate with authorities in charge of the enforcement of the law (art. 40 law 1993) 2. Obligation to co-operate with the responsible Luxemburg authority 1. Obligation to provide information to the prosecutor on his demand 2. Obligation to inform the prosecutor on the PFS’s own initiative of any suspicion or certainty 34
- 35. • Indices & suspicion (different per profession) • A suspicion / intuition as a result of: The behaviour of an individual The evolution of the business relationship The origin of the funds The nature of the operation The ultimate goal of the operation The specificities related to an operation The unusual The obligation to co-operate with the authorities 35
- 36. The definition of a business relationship 36
- 37. • The business relationship starts before the opening of an account or the signature of a contract • Does not need to be translated into a contractual relationship, the identification of a counter party is to be assimilated to a relationship in this context • A business relationship needs to be in line with well defined objectives for both the bank and the customer. The definition of a business relationship 37
- 38. The business relationship: consequences • Requires a good understanding of the customer’s business very early on. • Providing a service already qualifies for the group’s definition The definition of a business relationship 38
- 39. In this context a customer means • The individual who opened an account or signed and account in his name or on behalf of an organisation but also all the co-signatories or individuals holding a mandate related to the account The definition of a business relationship 39
- 40. The concept 1. Identification & verification 2. The origin of the funds 3. The goals of the business relationship 4. The ultimate beneficiary 5. Documentation A risk based approach A risk based approach 40
- 41. Customer KYC Goals of the relationship A risk based approach 41 Risk assessment Sen./Non-sensitive Enhanced Due Diligence Simplified Due Diligence Standard Due Diligence
- 42. Unusual Situation Analysis Marketing Profile Real Profile Compliance FIU//CSSF A risk based approach 44 42
- 43. The obligation to know the customer Customer Identification Beneficial Owner / Economical beneficiary: 1°Is identified through a “declaration of beneficial ownership” on which the client declares whether he is acting or not on its own behalf. 2°If the Beneficial owner is different form the client, the latter will have to sign the declaration and provide its identification documentation + mandate holders. 3°In the case of a company, the main shareholders will have to be identified, even more so the “meaningful mind”. 43
- 44. « Know your customer » Client acceptance policy 44
- 46. The power of MARKETING 3060 DB in Rotterdam 46
- 47. LONG TERM SHORT TERM NET WORTH Assets – Liabilities to third parties LONG TERM LIABILITIES SHORT TERM LIABILITIES Deductive segmentation 47
- 48. • Pascale, owner of a dealership of a well known car brand. The company sells about 450 cars per year. • She would like to make an investment with a portion of the retained earnings of the company. Deductive segmentation 48
- 49. The balance sheet EURO Start period End period 01/01/N-1 31/12/N-1 01/01/N 31/12/N ASSETS Fixed (net) Stocks Debtors Cash 399 1.516 890 975 10,6 % 40,1 % 23,5 % 25,8 % 397 1.364 1.136 561 13,4 % 46,1 % 38,4 % 2,1 % TOTAL ASSETS 3.780 100 % 3.458 100 % LIABILITIES Equity & Reserves LT Debt ST Debt ST Bank Debt 592 660 2.528 0 15,7 % 17,5 % 66,9 % 0 % 673 441 2,166 178 22,8 % 14,9 % 56,3 % 6,0 % TOTAL LIABILITIES 3.780 100 % 3.458 100 % 49
- 50. EURO 01/01/N-1 31/12/N-1 01/01/N 31/12/N Turnover (1) Purchased goods - Inventory = Cost of goods sold (2) Gross margin (3)=(1)-(2) 14.104 12.639 422 12.217 1.887 13,38 % 14.690 12.573 -141 12.714 1.976 13,45 % + Other business related income = Income from operations (4) 343 2.230 2,43 % 15,81 % 521 2.497 3,55 % 17,00 % - Goods and services (5) = Added Value (6)=(4)-(5) 809 1.421 5,74 % 10,08 % 1.000 1.497 6,81 % 10,19 % - Personnel expense - Other operational expenses = Gross operating income 942 23 456 6,68 % 0,16 % 3,23 % 975 26 496 6,64 % 0,18 % 3,38 % + Financial revenues + Exceptional results = Gross total revenue 16 74 546 0,11 % 0,52 % 3,87 % 4 -10 490 0,03 % 0,07 % 3,34 % - Amort (161)., provisions, depr. = EBIT 185 361 1,31 % 2,56 % 212 278 1,44 % 1,89 % - Financial expenses - Taxes 23 156 0,16 % 1,11 % 30 111 0,20 % 0,76 % = NET PROFIT 182 1,29 % 137 0,93 % The income statement 50
- 51. 1. A brief reminder of the laws 2. The 2015/849 Directive 3. Cases 4. Reputational risk management The structure of the presentation 51
- 52. • Points of attention – Aim = Integrity, stability and reputation of the financial sector – Complete integration of the FATF recommendations – 10,000 Euro limit for cash transactions – AML law applicable to rental offices The 2015/849 Directive 52
- 53. • Points of attention – Predicate crimes include fiscal fraud subject to penal sanctions with a minimum of six months – Moral persons the 25% benchmark is only indicative – Improved access to FIU data base – 2,000 Euro for games The 2015/849 Directive 53
- 54. • Points of attention – Classification of countries , esp. non cooperative – PEP requires a special procedure, not exclusion – Responsibility in case of outsourcing The 2015/849 Directive 54
- 55. • Points of attention – Execution of transactions should be possible before mentioning – No commercial use of information – Honourability of persons in exchange bureaus, service providers, trusts – FIU.NET European platform The 2015/849 Directive 55
- 56. • Points of attention – Effective administrative sanctions – Harmonisation of deposit insurance schemes – Exchange of information on persons subject to penal sanctions – More detailed definitions – Introduction of various limits (art.11 & 12) – Insurance linked to investments – economic beneficiary – Effective beneficiary The 2015/849 Directive 56
- 57. 1. A brief reminder of the laws 2. The 2015/849 Directive 3. Cases 4. Reputational risk management The structure of the presentation 57
- 58. A CASE from the FIU – The facts (1/3) • Existing business relationship – Opening of a numbered account in order to transfer money from an account held by a company with another bank in Luxemburg. – The spouse of the account holder, pretends that her husband has disappeared. Therefore, a transfer is required to make sure money is in a safe place. 58
- 59. The facts (2/3) – A new account is opened with an offshore company as account holder. – The money is transferred from one account to the other by means of transfers and of cash withdrawals. 59
- 60. The facts (3/3) – Subsequently, the money was transferred to a third bank in Luxembourg held by an offshore company. – A few weeks later, it became clear that the husband had been arrested abroad and convicted for fraud related to subventions of a foreign state. 60
- 61. Analysis • The customer’s assets are the result of a crime, i.e. the misuse of subventions (= a predicate crime of ML), and fake invoices (= a predicate crime of ML) • Holding stolen assets: possessing goods whereby one knows the fact they were stolen 61
- 62. •The bankers’ responsibilities: – Absence of due diligence related to the customer’s activities, despite the fact he was classified by the bank as a customer with a risk profile. – Absence of verification of the origin of the funds 62
- 63. •The bankers’ responsibilities: – Cooperation in allowing the opening of accounts for the sole purpose of transfers between companies, incorporated with the sole purpose to allow for these transfers, i.e. absence of an underlying economic transaction – The unusual and secret nature of the transactions, aiming at preventing the clear identification of the origin of the funds, and this despite the clear objection of the bank’s operations 'officer. 63
- 64. •The lawyer’s responsibilities – The set up of a sophisticated structure with off- shore screen companies in the British Virgin Islands (companies created for various purposes whereas there is no underlying economic activity) – Various accounts opened with several financial institutions in Luxembourg of which the economic beneficiaries were different people. 64
- 65. •The lawyer’s responsibilities (continued) – Providing assistance, in his capacity as a business lawyer, to the author of a fraud, the assistance with the opening of various accounts and the transfer of the moneys ; – The unusual and secret nature of these operations. 65
- 66. Sanctions •The bankers (the account manager as well as his supervisor): – Cooperation to disguise the origin of the funds – Use of false documents – An administrative sanction due to the fact the transactions were mentioned to the FIU far too late after the facts, whereas it was clear, that the transactions were due for immediate reporting as suspicious. 66
- 67. WHY? WHY? WHY? An investor was introduced by a well known distributor in Austria. • The latter is subject to the same professional obligations as we are in Luxembourg. • The investor is a resident in a Baltic state. • He has a liberal profession and invests in shares of a UCIT. • The « application form » has been completed. 67
- 68. WHY? WHY? WHY? • The investors transfers 100.000 € at the occasion of the subscription via the agent, in 2012 • Subsequently, he transfers 500.000 € to be invested in shares • Requests the transfer of the securities to an institution in Liechtenstein • New subscription of 850.000 € • Follows two subscriptions, one of 89.879 € and one in the tune of 42.800 € 68
- 69. WHY? WHY? WHY? • New demand to transfer 450.000 € to Liechtenstein • Thanks to the vigilance of a compliance officer, who noticed the sequence of transfers and above all the transfers to Liechtenstein, the case was analysed. • Why these transfers? Why through Luxembourg? What might be the origin of funds be? • A request for additional information was sent to the intermediary. No reaction. A request was sent to the investor (as can be done on the ground of the legal documentation). No reaction. • Reported to the Prosecutor with a copy to the CSSF 69
- 70. Conclusion •In the field of analysis three components are essential: 1. The people 2. The documents 3. The story 70
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- 76. The unusual – beyond the standard deviation 76
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- 79. The 2013 report of the CRF mentions following points of attention: - Information contained in press releases related to penal issues or legal cases abroad, - Intra group information related to suspicious transactions - fraud, use of fake documents and counter fake money 79
- 80. The 2013 report of the CRF mention(continued) • Operations not in line with customers’ profile, without economic justification, with a lack of transparency • Fraudulent transactions by means of electronic trade • Unusual customer behaviour (for instance, lack of cooperation, lack of credibility related to presented documents, false statements 80
- 81. Cash • Remember the 10,000 European Directive on trans- border transportation of cash • The limit of cash for commercial transactions in certain countries – not yet the case in Luxembourg 81
- 82. A situation may be quite different from the one perceived at first glance! KYC/AML 82
- 83. 1. A brief reminder of the laws 2. The 2015/849 Directive 3. Cases 4. Reputational risk management The structure of the presentation 83
- 84. The major asset of a financial organisation is its REPUTATION Reputation: management & risks 84
- 85. • « The risk of loss of reputation, means the decrease or loss of confidence by the stakeholders, i.e. customers, suppliers, counterparties, shareholders, regulators or any other third party, in the organisation, putting thus into question the long term survival of the organisation…» Reputation: management & risks 85
- 86. 0 2000 4000 6000 8000 10000 1992 1994 1996 1998 2000 2002 The consequences of Arthur Andersen’s loss of reputation (auditors of ENRON) Reputation: management & risks Revenues in ‘000,000 86
- 87. What objectives need to be reached in order to be recognised as a great BRAND with a great REPUTATION? Reputation: management & risks 87
- 88. A culture of MOTIVATION Reputation: management & risks 88
- 89. A Culture of listening Reputation: management & risks 89
- 90. The PC is the result of a constant process of questions related to performance improvement and a search for excellence: BETTER PERFORMANCE FASTER CHEAPER SMALLER MORE SIMPLE A Culture of excellence Reputation: management & risks 90
- 91. A Culture of trust Reputation: management & risks 91
- 92. Reputation: management & risks A Culture of compliance 92
- 93. Companies with a strong brand have a DNA It is a way of doing things that differentiates them from the others. (Acide DésoxyriboNucléique) Reputation: management & risks 93
- 94. Organisations as well as individuals working for those organisations can be prosecuted. Reputation: management & risks 94
- 95. • Lloyds Banking Group PLC settled to pay $ 350,000,000 in 2009 • Crédit Suisse Group AG $ 536,000,000 the same year. • Barclays PLC paid $ 298,000,000 in 2010 • ABN Amro: $ 500,000,000 • JPMorgan Chase paid two years $ 88,000,000 Reputation: management & risks 95
- 96. What should I remember from this presentation?. Conclusions 96
- 97. Never transmit information directly to the authorities. It is the responsibility of compliance. KYC & a strict follow up on transactions are certainly the most appropriate tools to protect the organisation. In case of suspicion, report it immediately to compliance after a meeting with the hierarchy. Conclusions 97
- 98. • In the final analysis, prevention of money laundering is a matter of your personal reputation, the reputation of the organisation you are working for and the financial centre. • Films to see ENRON, INSIDE JOB, ROGUE TRADER,TOO BIG TO FAIL, MARGIN CALL Conclusion 98