COMBATING MONEY LAUNDERING:Legal Perspective on the Role of Central and

Commercial Banks

Adv. Justine Sipho Chitengi DAAD Scholar & Advocate of the High Court for Zambia

LLM(UWC/HU); LLB Merit(UNZA); BSc Forestry(CBU); PGC Public Policy, Governance & Leadership(AU//OSISA) CETP Contracting & Entrepreneurship (Northlink); PGC LPQE(ZIALE-Zambia); CPD Conveyancing(LAZ); AHCZ

Staff TrainingCentral Bank Of Nigeria

Reiz Continental Hotel, Abuja Nigeria, 25- 30 August 2012.By the Institute for Finance & Economic- Zambia.

“The views herein expressed are solely attributable to the author”

©2012 Chitengi S.J. 1

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i. IntroductionML being a process of disguising illicit proceeds

(ill-gotten funds), the role of financial institutions in the process both as possible intermediary and an effective point of curbing the vice cannot be overemphasized.

On the one hand, launderers are ever trying to establish rapport with financial institutions as medium of perpetration because they know that ill-gotten monies that enter into the financial system can be “legitimized” if appropriate and effective measures are not taken by financial institutions.

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On the other hand, governments (through enforcement agencies) are equally counting on financial institutions in an effort to combat the vice because the intervention of financial institutions is essential hereto in that they are the ones with direct or substantive connection with the launderers.

Overview and General Understanding of Money Laundering. (Participants’ Input)

Definition, Principles, History, Process, Dimension, Predicate Offences, Mischief, Players and Roles.

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Definitions of Money LaunderingLiteral DefinitionMoney Laundering is the attempt(s) or act(s) of a process to conceal or disguise the true nature and source of money (value) in a bid to mislead the public from knowing that the same are proceeds of crime.

United Nations Dual Definitions1988 UN Vienna Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances:First, The conversion or transfer of property, knowing that such property is derived from any [drug trafficking] offence or offences, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in the commission of such an offence or offences to evade the legal consequences of his actions; or

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The concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from an offence or offences or from an act of participation in such an offence or offences.- Article 3(b).Second, The acquisition, possession or use of property, knowing at the time of receipt that such property was derived from an offence or offences, or from an act of participation in such an offence or offences.- Article 3(c)(i).

All the above are legal definitions and countries can devise their own additional to the above but usually not subtracting therefrom.

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Elements by Definition

(a) Actus Reus•Process;•Concealment/Disguising/Transformation/Conversion/Usage/Acquisition/Possession;•Money/Property/Value;•True Source/nature/origin/use/ownership;•Proceeds of crime;•Derivative; and

(b) Mens Rea•Knowledge- actual/implied.

Participants By DefinitionActual Perpetrators;

Abettors- suppliers of instrumentalities;

Accomplices- both and after the facts; and

Other modus operandi participants.

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Techniques of ML By DefinitionFirst Stage- Placement: Introduction of proceeds of crime into the economy thus moving them from direct association with the crime;

Second Stage- Layering: Tactical maneuvering of the introduced proceeds within the economy so as to impede and outwit possible pursuits by law enforcers by creating a sham of legitimacy. For instance, repeated and spontaneous money transfers or spurious transactions aimed at confusing audit trails; and

Third stage- Integration: Reintegration or getting the ‘laundered’ resources back to the instigator with a smokescreen making the proceeds seemingly legitimate when in fact not.04/11/23 9

Critique of the Definitional Stages/Techniques of ML

Kenneth Mwenda avers that the three-stage interpretation of money laundering is superficial and has its roots in a time when money laundering was a crime that was often committed only in relation to proceeds of drug trafficking, which by virtue of the fact that all drugs are sold on the streets for cash, generated large volumes of cash.

This approach postulates that the process of money laundering is a simple one and it occurs in three successive stages, namely, placement, layering and integration.

Such postulations are somewhat misplaced as the perpetration of ML in modern times much more complicated defying all logic hold the three stages stricto sensu aspects.

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Historical DevelopmentsML as an a formal and official expression of economic legal mischiefs (white collar crimes) was first used by an American Judge in the case of US v $4,255,625.39 (1982) 551 F Supp.314 in 1982.Prior to that, it was originally coined by a journalist for newspaper tabloid to casually spur public resentment against the instigators of the 1973 Watergate scandal.- Abhishek Dadoo, Money Laundering (2008) As a notion, though, the roots of ML date as far back as the early 1930s to the Al Capone epoch of bootlegging underworld black marketeering where Laundromats were bogusly used by the Mafia and gangsters as cash business frontages or facades to disguise ill-gotten proceeds of prostitution, gambling and extortion from the unsuspecting populace. Ultimately, the practice of modern ML proper started with ‘the Mob’s Accountant’, Meyer Lansky, who got so apprehensive after the October 1931 trial and conviction of Al Capone that he skimmed a way of depositing/stashing his illegal loot in identified Swiss Banks. Thereafter, he employed the ML tactic known as ‘loan-back’ concept whereby illegal money could now be disguised by ‘loans’ provided by compliant foreign banks with ‘all rigours and niceties’ of the law followed- even taxes deducted on disguised dirty monies.- Billy Steel, Money Laundering - A Brief History. 04/11/23 11

Criminalisation of ML Money laundering as a crime only attracted

interest in the 1980s, essentially within a drug trafficking context. It was from an increasing awareness of the huge profits generated from this heinous activity and a concern at the massive drug abuse problem in western society which created the impetus for governments to act against the drug dealers by creating legislation that would deprive them of their illicit gains and criminalise their conduct.- Ibid.

Following therefrom, a number of international, regional and domestic legal instruments in almost all well-meaning jurisdictions have since been enacted.

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Criminal liability is often spelt out in a country’s legislation, and it may include a term of imprisonment and/or a fine for engaging in or abetting and facilitating an offence of money laundering or obstructing an investigation into suspicions of money laundering activities.

In some countries, such as the United Kingdom, failure to report a ‘suspicious transaction’ to the AML authorities could constitute a criminal offence just as would be the case where someone ‘tips-off’ a suspected money launderers of possible investigations that are expected.

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In almost all jurisdictions the aspect of criminalising ML has proved very controversial in checking the same against- (i) constitutional guarantees/liberties of persons; and (ii) traditional criminal law doctrines.- See Chitengi , Pertinent Legal Issues and Impediments Fettering the Successful Prosecution of the Crime of Money Laundering and its Predicate Offences: Proposed Reforms in Zambia (2009).

On a plethora of authorities and indeed as enunciated by Mwenda, op cit, the following are some of the controversies surrounding criminalisation of ML and the possible cushioning aspects thereof namely; civil liability option:

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Burden of Proof- Which party should shoulder the burden of proof in money laundering cases?In many common law jurisdictions, the burden of proof in criminal law cases, including offences of money laundering, lies on the prosecution. See Woolmington v. DPP [1935] AC 462; Cf. Rex v. Oliver Smith (1910) 6 Cr. App. R. 19, where it was stated that, as an exception to the rule that the burden of proof lies on the prosecution, where insanity is relied upon, the defendant must establish that defense. See also M’Naughton’s case (1843) 4 St. Tr. (N. S.) 847) a case hereto applicable by implication and analogy.

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Standard of Proof- The standard of proof normally is such that the prosecution must prove beyond reasonable doubt that you committed the offence!

This can make it very difficult for the prosecution to succeed, especially in developing countries where there are very few good lawyers working for the State, say, within the Directorate of Public Prosecution. The majority are in private practice.

So, what’s the way forward?

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A possible way out of this conundrum, would be to introduce legislative changes that shift the burden of proof from the prosecution to the accused so that the accused should now prove beyond all reasonable doubt how, where and when he acquired his seemingly dubious wealth.

Indeed, the accused should show that he amassed his or her wealth in a lawful and legal manner.

This proposal has in it a deterrent element. The idea is that the law offender and all would-be-offenders should be discouraged from ever committing money laundering offences.

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Once the burden of proof has been shifted to the defence, it would no longer be a question for the prosecution to prove beyond reasonable doubt that the accused committed the offence of ML.

Rather, the accused would have to show, beyond reasonable doubt, that he or she legally and lawfully acquired the wealth and did not engage in any offence of ML.

Admittedly, if implemented, the above proposal would attract strong criticism. But, we are awake to this fact. In any case, both UNCAC and the Vienna Convention seem to okay this approach.

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A notable criticism here could be that implementing such a proposal would have disastrous effects on the rule of law and the constitutionally guaranteed presumption of innocence.

But, then, is it not a precept of the law that to every general rule there can be an exception?

Indeed, what wrong would there be in enshrining in the Republican Constitution an exception to the general rule, stating therein, unequivocally and explicitly, that notwithstanding whatever is contained in the Bill of Rights, the exception applies only to offences of ML, corruption, and drug trafficking?

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Civil liability for ML offences, as a cushioning aspect of the criminal controversies often involves seizure and forfeiture of proceeds of crime to the State, and this is usually regulated by legislation.

Also, in common law jurisdictions, doctrines of Trusts Law play an important role through the institution of a Constructive Trust.

Restitution, too, is another aspect of the common law that facilitates the recovery of proceeds of crime through civil procedure.

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ML as a National and Global Manifestation

ML is multi-dimensional, constituting of both a national as well as an international dimension; thus the typologies of ML are best observed at both levels.- Dadoo, op cit.

Tritely, ML a truly global phenomenon largely exacerbated by the International financial community- offshore banking, safe havens and alternative remittance systems such as ‘hawala’ among others.

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Indeed as per the 1993 UN Report, [T]he basic characteristics of the laundering of the proceeds of crime, which to a large extent also mark the operations of organised and transnational crime, are its global nature, the flexibility and adaptability of its operations, the use of the latest technological means and professional assistance, the ingenuity of its operators and the vast resources at their disposal and connections/networks at the international scene.

The international dimension of ML was well depicted in a study of Canadian ML police files where it was revealed that over 80% of all laundering schemes had an international dimension.

Also the 1992 Operation Green Ice aptly expatiated the essentially transnational nature of modern ML.

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ML on an international level necessitates it having a national dimension as well. ML may, however, be practiced exclusively on a national level just as much there could be an overlap between the national and international dimension of laundering money.- Dadoo, op cit.

The international dimension of ML is far more effective as compared to the national dimension; it also becomes extremely difficult, if not impossible, to unravel the complex web transactions in order to expose the origin of the money that is the proceeds of the crime if concealed at international level.- Ibid.

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ML in its Present Context Today, ML is a transnational legal mischief dealt with from both a criminal and/or civil perspective with the aim to take away financial gains from perpetrators.- Crime does not pay approach of messaging.

As such AML actions could lie in personum or in rem.Considering the magnitude of ML negative effect on

the world economy (economic distortion), both international and regional enforcement mechanisms/efforts are implicitly permitted to reinforce domestic efforts/mechanisms.

Consequently, imperious defensive arguments such as dual criminality, extraterritorial jurisdiction, state sovereignty and non crimen sine lege are readily sacrificed for the good of world humanity in this case.

UN backs good enunciations such as MLA & IC hereon

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II. The Policy Definition and Regulatory Frameworks

Leading jurisdictions have combined efforts with either the international or regional communities to combat the ML menace and its predicate offences to ameliorate its devastating negative impact on their economies.

These efforts include enhancing the regulatory frameworks through legislative and policy interventions premised on evidenced-based AML programming and institutional capacity building- mostly a concern of policy activism coupled with political will.

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Policy Objectives: The Rationale Combating ML/CTF- Mwenda, op cit(a) ML tends to undermine legitimate private sector

initiatives by extending finance and credit to front companies that are used by launderers, thereby making it difficult for other companies to compete with these front companies on a fair and level playing field;

(b) ML may lead to a government’s loss of control over economic policy when proceeds of crime continue to dwarf the government’s budget;

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(c) ML also affects currencies and interest rates since launderers tend to reinvest their funds where their schemes are less likely to be detected rather than where rates of return are higher;

(d) ML leads to economic distortion and instability since launderers are often not interested in profit generation from their investment but rather in concealing their identity and protecting the proceeds of crime (money launderers usually invest their laundered funds in activities that are not necessarily economically beneficial to the country, but which promise them concealment of the source of funds and the identity of the launderers);

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(e) ML can lead to loss of government revenue where tax evasion, as a predicate offence, is rampant in the country;

(f) ML can lead to risks to privatization programs since money launderers often have the financial power to out-bid legitimate investors;

(g) ML can expose a recipient country to reputation risk, resulting in the erosion of investor confidence in that country’s financial market;

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(h) ML can lead to a legal risk to banks in cases where banks are subjected to all sorts of lawsuits resulting from a bank’s failure to observe the ‘know your customer’ standards or from failure to practice ‘due diligence’ in customer evaluation and acceptance;

(i) ML can compromise the corporate governance structure of a bank, especially in the case of small banks and their approach to deposit mobilization and customer selection; and

(j) ML sometimes provides fuel for terrorists, while draining its ‘milk’ from such predicate offences as drug dealing, animal poaching, tax evasion, the running of illegal brothels, illegal arms dealing, illegal trafficking in children and women, and corrupt practices by public officials.

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AML Law and Regulation: A Case of NigeriaNigeria, for its part, has undertaken several initiatives

aimed at combating ML though some of these have arguably been in response to international pressure.

The first significant regulatory effort in form of legislation was probably the 1989 National Drug Law Enforcement Agency (NDLEA) Act, which bought Nigeria in tandem with the 1988 Vienna Convention.

Subsequent such measures kept coming through, much to the commendation of all successive Governments for demonstrating political will and good leadership as well as the citizenry as demonstrated hereinafter:

1991 Banks and Other Financial Institutions Act (BOFIA)- amended in 2002;

1993 Advanced Fee Fraud and Other Related Offences Decree;

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1994 Failed Banks (Recovery of Debt and Financial Malpractice in Banks) Act;

1995 Money Laundering Act- amended 2002;1995 Advance Fee Fraud and Other Related

Offences Decree- creating “419” offences;2000 Corrupt Practices and Other Related

Offences Act- establishing the Independent Corrupt Practices Commission;

2002 Electoral Act- replaced the 2001 Electoral Act;

2002 Economic and Financial Crimes Act- establishing the Economic and Financial Crimes Commission;

2004 Money Laundering (Prohibition) Act04/11/23 31

As per Robert Hull et al, op cit, one of the most significant of these efforts was the 2002 Economic and Financial Crimes Act, which, along with two important amendments to existing ML legislation, was passed partly in response to international pressure.

The Act was signed on 14 December, just one day before an FATF deadline to recommend sanctions for non-compliance with the Forty Recommendations.

The Act created the Economic and Financial Crimes Commission (EFCC), given a mandate to investigate all financial crimes, including ML, in addition to enforcing the aforesaid ML legislation of 1995 (as amended in 2002).

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On the basis of the Implementation Plan prepared by an inter-agency technical committee, set up by the EFCC in 2003, the Nigerian Financial Intelligence Unit (NFIU) was also established. It became operational in the last quarter of 2004. The NFIU draws its power from the EFCC Establishment Act 2004 and the Money Laundering (Prohibition) Act 2004.- Ibid

In shaping the creation and operation of the said NFIU, guidance was drawn from the FATF 40 Recommendations [Recommendation 26], United Nation Convention Against Transnational Organized Crime(Palermo Convention) [Article 7 (1)(b)], Egmont Group of Financial Intelligence Units [Statement of Purpose] and the UN Convention Against Corruption(UNCAC) [Articles 14 & 58].

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All these provisions point to the need for every jurisdiction to create a national central body responsible for the collection and analysis of data for the purpose of referring financial information on suspected money laundering activities to the appropriate law enforcement agency and regulatory/supervisory institution.- Ibid

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Another important Nigerian body in the fight against ML is the Independent Corrupt Practices Commission (ICPC), established in 2000.

Its main tasks are to investigate reports of corrupt practices, to eradicate corruption in public bodies and to educate the public against corruption.

The ICPC also lists amongst its duties the prevention of corruption through studies of systems, practices and procedure.

Whilst the EFCC is an investigation and prosecution body focused on financial crime, the ICPC has a broader mandate to tackle corruption as a predicate offence of ML in all forms both by investigation and education.

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The Central Bank of Nigeria (CBN) has since been assigned greater responsibility in dealing with ML following the 2002 legislative amendments.

In particular, the Governor has been given discretionary powers to intervene in the banking sector in order to safeguard confidence in the financial system as a whole.

The CBN has also been given a greater role in financial sector surveillance, identifying trends and patterns of corruption in banks and other monetary institutions.

The CBN has directed all commercial banks in Nigeria to report any transaction of a sum over half a million naira (US $5,000 equivalent).

The CBN then transmits all such reports to the National Economic Intelligence Committee (NEIC).

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This system is set up to monitor money sources and uses, track spending patterns and generally forestall terrorist activity. Anyone who cannot satisfactorily explain a transaction over a half million naira may be charged under the Exchange Control (Anti-Sabotage) Act, which carries a minimum penalty of five years in prison for individuals, and a fine of N100,000 (US $1000) for corporate enterprises.- Ibid.

As rightly observed by Hull, et al, op cit, legal persons can also be charged with ML under the said National Drug Law Enforcement Agency (NDLEA) Act, which carries a penalty of ten years to life in prison, and forfeiture of assets.- Alter ego doctrine to operate as in the Zambian case of Shamabanse.

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If a bank fails to report transactions for amounts over a half million naira, it may carry a penalty of imprisonment, fines, or both. Corporations convicted of such an offense may be forced to forfeit their property and assets.- Ibid

The CBN also has a responsibility to coordinate efforts among financial organisations to increase efficiency in regulatory oversight. This is done through the Financial Services Regulation Coordinating Committee (FSRCC), representing a framework for coordination of regulatory and supervisory activities in the Nigerian financial sector (with the CBN being the chair).- Ibid

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Alongside the work of the CBN to monitor the banking sector the Nigerian Stock Exchange has a number of structures and measures in place to check money laundering in Nigeria.

These include a Central Securities Clearing System (CSCS) aimed at making transactions more transparent;

Administrative Guidelines to ensure the proper documentation of legitimate capital importation through Nigerian banks; and

Know Your Client Requirement and membership of the International Federation of Stock Exchanges, which subjects them to international standards and code of best practice. 

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Freezing of Accounts- CBN’s RoleThe National Drug Law Enforcement Agency Act,

the Foreign Exchange (Monitoring and Miscellaneous Provisions) Decree (previously the now repealed Exchange Control (Anti-Sabotage) Act) and the Money Laundering Act all authorise the freezing of assets.- Ibid

Freezing accounts may be administrative or judicial, coming from the Central Bank of Nigeria, or as the result of a judgment handed by an authorized court or tribunal.- Ibid

Assets can be frozen at the request of another government in cases where both governments share mutual legal treaties in cases of criminal or civil matters.- Ibid

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A final measure introduced in Nigeria has been the creation of the due process office in the Presidency. This is one of the Nigerian Government’s greatest efforts to enthrone accountability and transparency in the public service. Since its creation, over N85 billion has been recovered by the office.- Ibid

These success stories are attributable to a number of concerted efforts by all stakeholders such as the distribution of a booklet, “Know Your Customer,” to banks throughout Nigeria, as well as convening seminars and conferences on ML.- Both the Central Bank and Commercial banks deserve credit hereon.

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The FRSCC’s members are the Central Bank of Nigeria (as chairman), the Securities and Exchange Commission, National Insurance Commission, Corporate Affairs Commission and the Federal Ministry of Finance. Observers are the National Board for Community Banks, the Nigerian Stock Exchange and the Nigeria Deposit Insurance Corporation.

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Iii. Money Laundering Techniques

Placing, Layering and Integration of illicit funds/value executed in a single or multiple combination of the following 10 complex typologies or mechanics among others:- Dadoo

1) Retail Businesses: These businesses may be used as mere fronts where most of the sales disclosed are fictitious. Owners of such fronts may convert their illegally obtained income into legitimate income by showing sales through the retail business and paying the requisite taxes as applicable. The same technique as applicable to retail sale also applies to wholesale businesses;

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2) Charity Shows: ML by way of organizing charity and entertainment shows constitutes an effective method ML. The key to laundering money by this mode lies in the fraudulent sale of tickets. The extant to which fraudulent tickets can be sold is the extent to which money can be laundered; 3) Lottery tickets: The lottery constitutes big business in several countries. Launderers acquire lottery tickets from genuine winners by paying them the lottery prize with their illegitimately acquired proceeds. The encashment of these tickets leads to the legitimization of their proceeds. A similar technique of legitimizing illegal proceeds is given effect by purchasing winning tickets of racecourses;

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4) Casinos: ML is given effect in casinos by way of the launderers taking their proceeds to the casinos and buying large number of casino chips with which they did little or practically no gambling. At the end of the day, the launderer conveniently cashes the casino chips passing them off as genuine winnings;5) Property: The sale of property at random prices constitutes an effective way of laundering money. Sale of low value property at highly inflated prices is one such technique. The level to which the price is inflated is the extant to which money is laundered;

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6) Inheritance laws: Laws of inheritance related to jewellery comprise yet another technique of laundering money. Illegal proceeds may be laundered to this extant by the families of such married women;

7) Securities market: The capitalization of markets is one of the primary ways to mobilize funds for economic growth. The markets so capitalized are also known as the stock exchanges. The stock market characterizes as one of its features that as long as the prices of shares moves up or down, the participants in this market make money. In the securities market, the profits can easily be recorded on paper to launder the illegal proceeds;04/11/23 46

8) Insurance sectors: Insurance companies offer life insurance and other forms of general insurance, including health and property insurance. Laundering of money is given effect by investing in very expensive insurance policies and after paying a few premiums, applying for premature encashment of policies at a discounted rate. The payment of the premature policies received by the insurer is passed on as legitimate money.

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9) Amnesty schemes: ML an offence which is punishable by law but it is no secret that laws against money laundering have not entirely succeeded in curbing its practice. Sometimes governments, therefore, introduce amnesty schemes from time to time. These schemes are introduced to bring black money into the open. Under these schemes governments facilitate for the people to declare their illegally acquired proceeds on the payment of a certain amount of tax. The scheme also make provisions for non-inquiry of the source of the money and after payment of tax it becomes legitimate money. An example is the Indian Government which implemented such a scheme in the form of the ‘Indira Vikas Patras.’’- Dadoo, op cit; and

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10) Illegal Oil Bunkering: In Nigeria for example, this is big business, just like the financial fraud (“419” scams), accounting for as much as around 10% of Nigeria’s daily production and generating between US$1.5 billion and US$4 billion per year. Numerous cartels operate in various districts of the Niger Delta, including Bonny, Akassa, Cawthorne Channel and Okrika to name a few. These employ sophisticated techniques to siphon oil from legitimate companies’ pipelines. It is then sold on the black market. The profits generated from the sale of illegal oil are laundered in Nigeria, in the case of lower-level cartel foot soldiers, or internationally, in the case of cartel leaders and associates, who in some cases hold very high positions in public office.- Robert Hull, Jonathan Evans and Stephen Davis, MONEY LAUNDERING AND NIGERIA, at 5.

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Fundamental AML Principles

Derivative Offence- Founded on other underlying crimes;

Predicate offences- Underlying offences e.g. corruption;

Burden of Proof- May Shift to accused (Illicit enrichment);

PEP- Notion of strict liability implied on Politically Exposed Person;

Asset Recovery and Property Forfeiture- Entry, Search, Warrant, seizure, confiscation, freezing and finally forfeiture of proceeds to the State (in rem and/or in personum);

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Lis Pendens- Pre- hearing seizure of real property;

Bona Vacantia doctrine- Failure to prove source of resources;

Cybercrime and Banking Law- Principles of Electronic Evidence, ATM Skimming, Phishing etc.;

FIUs- International Cooperation Among FIUs; andFSAs- International Cooperation Among Financial

Supervisory Authorities.

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Laundering as a Process

i. Placement

ii.Layering

iii.Integration

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Purpose of ML

i. Legitimation;

ii.Evading the Law;

iii.Concealing and Broad Disguise;

iv.Investment for criminal purpose; and

v.Advance World Terrorism- 9/11 Twin Tower.

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Methods and Typologies of ML

i. Domestic Laundering- Commercial Banks Major Target

ii. Cross-Border Laundering- Safe Heavens(Sese Seko Case)

iii. Trade Based Laundering- Lawyers, Insurers, Bankers etc.

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IV. International AML Systems : NIGERIA’S SUCCESSFUL Prevention and Response

Mechanisms

In terms of prevention and response mechanisms to ML, there are a number international legal instruments and initiatives that contribute, through binding norms or otherwise, to the shaping of the landscape of jurisprudence manifesting themselves in various forms including the following among others:

Conventions; -Vienna ConventionRecommendations; - FATF 40+9 RecommendationsPrinciples;- Basel Principles on the Prevention of

Criminal Use of the Banking System for the Purpose of ML (1988)

Directives;- European Union Council Directive on the Prevention of the Use of the Financial System for the Purpose of Money Laundering (91/308/EEC)

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Declarations;- Kingston Declaration on Money Laundering (November 5-6, 1992)Standards & Guidelines;- Papers issued by the International Association of Insurance Supervisors (IAIS)Model Laws; and- UN Model ML and Proceeds of Crime Bill(2000),International ML Information Network (IMoLIN).

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The Financial Action Task Force- FATF Among the international efforts and works on ML,

the FATF is the most significant and prominent.Origin- In response to mounting concern over ML,

the FATF was established by the G-7 Summit that was held in Paris in 1989.  Recognising the threat posed to the banking system and to financial institutions, the G-7 Heads of State or Government and President of the European Commission convened the Task Force from the G-7 member States, the European Commission and eight other countries.-http://www.fatf-gafi.org/pages/aboutus/historyofthefatf/

In 1990, the FATF issued a report named The FATF Forty Recommendations which served as a worldwide framework to combat ML.

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The Forty Recommendations were endorsed by more than 130 countries and it today considered the leading AML standard.

The success of the FATF and its Recommendations was that the report clearly expressed its objectives and mechanisms to combat ML, providing broad standards and principles that may equally be applicable in different jurisdictions with diverse legal frameworks and traditions.- Dadoo, op cit.

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Nature and Mandate - Inter-governmental body for development and promotion of policies, both at national and international levels, to combat money laundering through recommendations.

Membership- Direct Members; Associate Members; and Observers.

Like the rest of African countries, with the exception of South Africa, Nigeria is not part of the current 34 ‘direct’ Member States of FATF but an ‘indirect’ Member State of the FATF-Style Regional Bodies (FSRBs) namely GIABA.- http://www.fatf-gafi.org/pages/aboutus/membersandobservers/

Functions- (a) Rule- making; and (b) Enforcement (FSRBs setting up, monitoring and supervision).

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FATF Activities- From Inception to Date At inception, the FATF was given the

responsibility of examining money laundering techniques and trends, reviewing the action which had already been taken at a national or international level, and setting out the measures that still needed to be taken to combat money laundering.

In April 1990, less than one year after its creation, the FATF issued a report containing a set of Forty Recommendations, which were intended to provide a comprehensive plan of action needed to fight against money laundering.

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In 2001, the development of standards in the fight against terrorist financing was added to the mission of the FATF.

In October 2001 the FATF issued the Eight Special Recommendations to deal with the issue of terrorist financing. The continued evolution of ML techniques led the FATF to revise the FATF standards comprehensively in June 2003.

In October 2004 the FATF published a Ninth Special Recommendations, further strengthening the agreed international standards for combating ML and terrorist financing (TF)- the 40+9 Recommendations.

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In February 2012, the FATF completed a thorough review of its standards and published the revised FATF Recommendations.

This revision is intended to strengthen global safeguards and further protect the integrity of the financial system by providing governments with stronger tools to take action against financial crimes. They have been expanded to deal with new threats such as the financing of proliferation of weapons of mass destruction, and to be clearer on transparency and tougher on corruption.

The 9 Special Recommendations on TF have been fully integrated with the measures against money laundering. This has resulted in a stronger and clearer set of standards.

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The FATF Forty Recommendations

Key responsibilities of Member States:i.Ensuring compliance and providing an appropriate regime of sanctions for failure to comply; ii.Application of Counter Measures;iii.Implementation, Monitoring and Evaluation; iv.Devise Methodology of Assessing Compliance with the FATF 40 Recommendations and FATF 9 Special Recommendation (2006); andv.Establish own FIU to serve as a national centre for the collection, analysis and dissemination of suspicious transaction reports and other information.

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FATF 9 Special Recommendation (2006)

Legislate against ML in furtherance of

Terrorism;

Establishes and recognises the connection

between ML and Terrorism; and

Supplements the FATF 40 Recommendations.

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Other FATF regional and international AML Initiatives

Asia/Pacific Group on Money Laundering (APG);Caribbean Financial Action Task Force (CFATF);Eastern and Southern African Anti-Money

Laundering Group (ESAAMLG);Financial Action Task Force for South America

(GAFISUD);Inter-Governmental Action Group against Money

Laundering in West Africa (GIABA);MONEYVAL Committee of the Council of Europe

(the select Committee of experts on the evaluation of anti-money laundering measures); and

Offshore Group of Banking Supervisors (OGBS).04/11/23 65

The Role of International Financial Institutions (IFIs)

The following international organisations have observer status with the FATF. They have, among other functions, a specific anti-money laundering mission or function. 

i. The International Monetary Fund (IMF)- ii.The World Bank (WB)- iii.The African Development Bank (ADB)-iv.The Inter-American Development Bank

(IADB)-

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Nigeria’s Scores on the International and Regional Stage

Regional EffortsNigeria played a major role in the

establishment of Inter-Governmental Action Group Against Money Laundering In Africa (GIABA) a regional action group against ML.

The countries involved are Nigeria, Benin, Burkina Faso, Cape Verde, Cote d' Ivoire, Guinea Conakry, Gambia, Ghana, Guinea Bissau, Liberia, Mali, Niger, Senegal, Sierra Leone and Togo.

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The Economic and Financial Crime Commission (EFCC) anchored the hosting in Nigeria of ECOWAS Legal Experts in November 2003 to consider legislative framework for Member States.

The EFCC also facilitated the meeting between GIABA and Development Partners in May 2004 to draft a two year Strategic Action Plan for a FATF styled regional body. The plan was adopted by ECOWAS Council of ministers at its meeting on 1 July 2004 in Abuja.

The commission also facilitated the 3rd Technical Commission and Ministerial Meeting of GIABA. The commission also co-sponsored the 3rd plenary of GAIBA.

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International Co-operation

There are also cases of effective joint working between Nigeria and state organisations outside of Africa.

The cooperation between the EFCC and Scotland Yard over attempts to prosecute two Nigerian State Governors for money laundering is one such example.-Hull et al, op cit.

Another is the reported collaboration between the EFCC and US officials regarding Nigerian politicians’ purchase of property with embezzled funds. Assistance from developed countries is increasingly becoming a more structured and consistent fixture.- Ibid

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Of all these, the most internationally lauded attempt to address cooperation with international bodies is the Gulf of Guinea Energy Security Strategy that was drafted at the behest of President Obasanjo in August 2004.- Ibid

The Strategy links Nigeria’s domestic efforts with those of specific international partners in the first instance being the US and UK governments, and then extend other governments and international financial institutions with the specific aim of closing down ML channels specifically linked to crude oil theft and illegal arms importation.- How far advanced today?

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ML, Banks & Terrorism

Often a time, money to fund terrorists is laundered and transmitted through the financial sector.

This explains the concern of many multilateral financial institutions with the scourge of money laundering and its impact on the stability and soundness of the financial sector in many countries.

Modern financial systems, in addition to facilitating legitimate commerce, also allow criminals to order the transfer of millions of dollars instantly using personal computers and satellite dishes.04/11/23 71

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PART II: SPECIFIC BASE:- THE ROLE OF CENTRAL AND COMMERCIAL BANKS IN COMBATING ML

Commercial Banks- 10 Key Mandates

1. ML Detection;2.KYC, Customer Identification and Due Diligence Enforcement; 3. Staff Training, sensitization and education;4. Record Keeping Requirements Observation;5. Suspicious Transaction Reporting;6. Cash Transaction Reporting;7.Internal Controls, Compliance office set up, forensic Auditing and Forensic Accounting;8. Forensic Investigations- Cooperation & Disclosure; 9. Judicial Proceedings/Orders- Adducing Evidence; and 10. Client Fiduciary Obligations vs. Public Policy Demands- Balance.

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Central Banks- 10 Key Mandates1. Supervisory Role- All Financial Institutions;2. Compliance Monitoring;3. Formulation of Regulations;4. Setting Minimum Standards of Practice;5. Unfair Competition Regulation;6. Fiscal Governance;7. Staff Training and Appraisal/Capacity building;8. IC & MLA;9. FIU Representation and TA thereto; and10. Government Liaison- Advisory Policy Directions on ML.

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ConclusionsRole of Central and Commercial Banks herein may be

classified into two: (a) Prevention; and(b) Response.

ML requires embracing of economic liberalization, a consequence of which is greater integration of financial and banking systems worldwide.- Dadoo, op cit.

While offences of ML tend to be dependant upon the occurrence of some underlying criminal behaviour, or ‘a predicate offence’, the act of terrorism can involve use of ‘clean money’ which does not necessarily originate from an illegal source or activity, but both need the banks as intermediaries. 04/11/23 75

Because ML relies to some extent on existing financial systems and operations, the criminal’s choice of ML vehicles is limited only by his or her creativity (Mwenda, op cit), therefore, Bank staff need to be careful how much ingenuity they pass to ‘clients’ as they may peradventure be aiding the commission of ML as accessories before the fact.

Indeed, money is laundered through currency exchange houses, stock brokerage houses, gold dealers, casinos, automobile dealerships, insurance companies, trading companies, private banking facilities, offshore banking, shell corporations, free trade zones, wire systems, and trade financing.04/11/23 76

Typical indicators of ML in the banking sector include among others:- Bankers, WATCH OUT!!!large deposits and transfers;false name accounts;accounts of friends, relatives and cronies;smurfing (electronic structured transactions of electronic cash);shell and front companies, usually offshore, for layering transactions; andlawyers, accountants, consultants, trustees, fiduciaries

‘collection or clients pool accounts.’04/11/23 77

recommendations- Bankers’ RoleConsidering the major role played by banks in the

laundering process, it is mandatory to note that ML can greatly be checked if all banks file appropriate reports in time. Bank's role in preventing ML begins with ensuring KYC requirements and to watch activities inconsistent with customer's business.

Banks operating staff should persistently monitor suspicious activities/transactions like large deposits immediately followed by wire transfers, large cash transactions, changing currency to higher denomination notes etc. It must be born in mind that illegal money can be moved by all manners of means. Criminal groups may deposit heavy cash by cheque in some account and withdraw it by debit cards or wire transfers.’

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Without violating Banking Law, bankers should regulate the use of automated banking. The more automated the banking and financial system becomes, the less face-to-face contact between clients and employees and greater the holes in the detection unless client information is electronically scanned for abnormal patterns and connections. There is much disenchantment with suspect transaction being reported. It is actually difficult to distinguish between objectively suspect transactions or those which short of the threshold, are merely suspected. Ordinary transactions may present vital information as related to laundering money. In an effort to curtail the activities related to ML, banks must closely observe the transactions being carried out by suspect customers.- Dadoo, op cit.

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Bankers should set up and/or strengthen their AML programmes. As stated by Mwenda, op cit, a good AML programme should Provide for an early warning system, covering effective and efficient risk management and compliance to deter and counter money laundering activities.

Such a programme must involve the use of internal control measures like the KYC, due diligence, know the counter partners, know your business, know your administration, recognize suspicious transactions, and continuous education and training.

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Equally important, a good AML Programme should emphasise preventive measures against money laundering through continuous in-house exchange of new hints and trends on effective compliance;

The MLRO in a financial institution, such as a bank, should be independent in his or her functions (i.e. reporting and accountable only to the Board) and should be serving at managerial level so that there is no interference from other sections of management.

There is also need for a strong whistle-blower protection program if AML efforts are to succeed so that whistle-blowers are not victimised by perpetrators of money laundering.- Mwenda- op cit. 04/11/23 81

Though not necessarily a proposal for bankers hereon, law reforms should be considered to lower the standard of proof in criminal law cases of ML from the traditional beyond reasonable doubt to the civil law standard of balance of probabilities. Bankers may lobby legislators hereon.

Such a measure would remove the onerous and strenuous task on the prosecution – especially given that law policing and criminal investigation offices in many developing countries are understaffed and have limited resources at their disposal – to prove beyond reasonable doubt that the accused committed the offence of money laundering.

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Lastly, there is need to introduce technologically advanced computer systems that can identify trends in outward financial transactions and detect unusual/suspicious transaction by bookmarking them with alerting red tape.

Reported CBN working closely with the EFCC to do so, how far so far?

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End of PresentationOn behalf of IFE- Zambia, Dr Caleb Fundanga

(former bank of Zambia governor) and indeed on my own behalf, I wish to most sincerely thank the current governor of the central bank of Nigeria for inviting as the key resource person and all of you for having accorded me this rare opportunity to interact with your busy selves in the manner we just did herein Nigeria. Stay well!!!

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