ILLEGAL CASH FLOWS FROM THE ILLEGAL CASH FLOWS FROM THE VIEW VIEW POINT OF FINANCIAL POINT OF FINANCIAL

STABILITYSTABILITY

Kemal Kozarić, Ph.D. The Governor of the Central Bank of BH

Fojnica, March 22, 2012

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What is money launderingWhat is money laundering• In Article 1 of the draft of the EU Directive from

March 1990, money laundering is defined as:– The conversion or transfer of property, knowing that

such property is acquired by committing a serious criminal offense, with the intent to conceal or diguise the origin of property, or to assist any individual who is involved in commiting of such offense to avoid legal consequences and concealing or disguise of the true nature, origin, location, disposition, movement, entitlement to, or ownership of property, knowing that such property is acquired through committing of a serious criminal misdeed.

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The origin of term “money The origin of term “money laundering”laundering”

• The first law on money laundering appeared in the USA in 80-ies, the last century,

• The term “money laundering” origins from the time of prohibition – The money from the illegal sale of alcohol and gambling was changed through a legal business of laundry machines, which operated on coins, which then interfered with illegaly gained profits

• It is estimated that from 2-5% world’s GDP is loundered annually.

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The procedure of money The procedure of money launderinglaundering

1. Placing and injecting in – the placement action of the illegal profit, gained through a criminal misdeed, in the financial institutions through depositing, remittances and purchase of negotiable instruments

2. Layering – the procedure of layering the profit, gained through criminal acting, from its origin through the layers of complex financial transactions

3. Integration – the procedure of using seemingly legitimate transactions to conceal the illegaly gained profits, after gaining the legal ownership in the layering phase

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Motives for money launderingMotives for money laundering

1. The origin and real ownership over funds being “washed” must be hidden

2. Control over processed funds must be maintained

3. The funds must change the form – deposits, shares, bonds, payments documents...

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The offender seeks to take The offender seeks to take advantage of circumstancesadvantage of circumstances

• Insufficiently stricted enforcement of the customs procedure, or the procedure for determining the other side in the business

• Poor or ineffective systemic audit monitoring• Secret agreements of employees in the financial system• Ineffective training of employees in the financial system• The volume of legal transactions within which one can

mask the illegal transactions• Unclear and uncoordinated proceedings, rules and

standards of monitoring

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The assessment of money The assessment of money launderinglaundering risk risk

• Only those clients who meet all the conditions prescribed by the Law on Money Laundering can be classified as clients who carry a slight risk for money laundering

• The clients defined in the guidelines of the competent monitoring authorities to bring a high risk are the high risk clients

• All other clients are middle risk clients

• Pending on a clients risk level, an obliger will carry out the simlified, regular or enhanced deep analisys of the client and apply the time schedule and volume of monitoring over the the clients business activities

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LegislationLegislation

• The state level Law on money laundering is not aligned with the laws on criminal proceedings of the entities

• Financing of terrorist activity involves providing or collecting funds for the financing of the deeds aimed at causing the damage to the country or international organization and intimidating the population.

• The tax evasion is often considered to be the same item as money laundering

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Procedures in finaProcedures in finanncial cial institutionsinstitutions

• Potentiial clients dicrimination– The identification and monitoring of the client are neccessary if

there is a doubt on the validity and adequacy of previously gathered information on the client or real owner

• Slowdown in transactions carrying out– The obligers are required to implement the enhanced measures

of indentification and monitoring of the activities of branches and other organisational units abroad

– The identification proceeding lasts longer if: the authorised representative performs transaction instead of the client; the client is an association, foundation, legal entity who does not perform the economic activity or a religious community; the client has the status of politically exposed foreign person, or he/she performs or performed an confided prominent public function, and his /her closest relatives.

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The segments of the financial The segments of the financial system in which the Law appliessystem in which the Law applies

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Regulators

Fiscalauthorities

Real sector

Financial intermediators and markets

Paymentssystems

Currency

Monetaryauthorities

The internationalenvironment

The consequences for the The consequences for the stability of financial systemstability of financial system

• The consequences of inadequate regulatory framework or its incosistent application to the country’s international credibility and stability of the financial system greatly exceed the effects of potential discomfort on the part of clients. – The reputational risk and the loss of the country’s

international credibility– The exposure of the financial system and the

country’s business cycle to the flows of the short-term capital

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The activities of the institutions The activities of the institutions of Bosnia and Herzegovinaof Bosnia and Herzegovina

• SIPA (State Investigation and Protection Agency)• Participation in the work of the Standing Committee

MONEYVAL• Fulfillment of the recommendations from the Action

Plan• The activities of the CBBH

– Coordination with the banking agencies in this area– Opening of special accounts for the disposal of suspicious

transactions (cca KM 3.9 millions on 31 December, 2011)– Establishment of a Single Registry of Transaction Accounts

that are available to the public and to the majority of law enforcement institutions

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The role of the mediaThe role of the media

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The role of mediaThe role of media

• The role of media and investigative journalism is unquestionable in discovering of money laundering cases and spreading the information about them

• Reporting in this cases should be in rational limits and can not be guided by the need for sensationalism

• The education of all stakeholders in this process is very important

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