Legal regime for AML (Anti Money Laundering)

52
Legal regime for AML (Anti Money Laundering)

description

Legal regime for AML (Anti Money Laundering). Issues for Discussion. Anti Money Laundering Legislation in Pakistan Implications of AML/CFT Measures on the Financial Sector International Scenario Key Issues. What is Money Laundering?. - PowerPoint PPT Presentation

Transcript of Legal regime for AML (Anti Money Laundering)

Page 1: Legal regime for AML  (Anti Money Laundering)

Legal regime for AML (Anti Money Laundering)

Page 2: Legal regime for AML  (Anti Money Laundering)

Issues for Discussion

Anti Money Laundering Legislation in Pakistan

Implications of AML/CFT Measures on the Financial Sector

International Scenario

Key Issues

Page 3: Legal regime for AML  (Anti Money Laundering)

3

What is Money Laundering?

Money laundering is the process by which the proceeds of the crime, and the true ownership of those proceeds, are concealed or made opaque so that the proceeds appear to come from a legitimate source.

Generally money laundering is the process by which one conceals the existence, illegal source, or illegal application of income to make it appear legitimate. In other words, it is the process used by criminals through which they make “dirty” money appear “clean” or the profits of criminal activities are made to appear legitimate.

Page 4: Legal regime for AML  (Anti Money Laundering)

4

Money Laundering

Money laundering generally refers to ‘washing’ of the proceeds or profits generated from:

(i) Drug trafficking

(ii) People smuggling

(iii) Arms, antique, gold smuggling

(iv) Prostitution rings

(v) Financial frauds

(vi) Corruption, or

(vii) Illegal sale of wild life products and other specified predicate offences

Page 5: Legal regime for AML  (Anti Money Laundering)

5

Money Laundering

Money launderers are big time criminals who operate through international networks without disclosing their identity.

The money laundered every year could be in the range of $600 bio to $2 trio. This gives money launderers enormous financial power to engage or coerce or bribe people to work for them

Generally, money launderers use professionals to create legal structure/ entities which act as ‘front’ and use them for laundering of funds

Page 6: Legal regime for AML  (Anti Money Laundering)

6

Money Laundering Process

Money Laundering consists of three stages:1. The first stage involves the Placement of proceeds derived

from illegal activities – the movement of proceeds, frequently currency, from the scene of the crime to a place, or into a form, less suspicious and more convenient for the criminal.

2. The second stage is called Layering. It involves the separation of proceeds from illegal source through the use of complex transactions designed to obscure the audit trail and hide the proceeds. The criminals frequently use shell corporations, offshore banks or countries with loose regulation and secrecy laws for this purpose.

Page 7: Legal regime for AML  (Anti Money Laundering)

7

Money Laundering Process

3. The third stage is called Integration. It represents the conversion of illegal proceeds into apparently legitimate business earnings through normal financial or commercial operations. Integration creates the illusion of a legitimate source for criminally derived funds and involves techniques as numerous and creative as those used by legitimate businesses. For e.g false invoices for goods exported, domestic loan against a foreign deposit, purchasing of property and co-mingling of money in bank accounts.

Page 8: Legal regime for AML  (Anti Money Laundering)

What is Money Laundering ?

Important: All money laundering transactions need not go through this three-stage process.  

Money Laundering is the process by which illegal funds and assets are converted into legitimate funds and assets.

Placement: Illegal funds or assets are first brought into the financial system

Layering: Use of multiple accounts, banks, intermediaries, corporations, trusts, countries to disguise the origin.

Integration: Laundered funds are made available as apparently legitimate funds.

Investments

Purchases

Page 9: Legal regime for AML  (Anti Money Laundering)

9

Typologies/ Techniques employed

Deposit structuring or smurfing Connected Accounts Payable Through Accounts Loan back arrangements Forex Money Changers Credit/ Debit cards Investment Banking and the Securities Sector Insurance and Personal Investment Products Companies Trading and Business Activity Correspondent Banking Lawyers, Accountants & other Intermediaries Misuse of Non-Profit Organisations

Page 10: Legal regime for AML  (Anti Money Laundering)

10

Financing of terrorism

Money to fund terrorist activities moves through the global financial system via different typologies and in and out of personal and business accounts. It can sit in the accounts of illegitimate charities and be laundered through buying and selling securities and other commodities, or purchasing and cashing out insurance policies.

Although terrorist financing is a form of money laundering, it doesn’t work the way conventional money laundering works. The money frequently starts out clean i.e. as a ‘charitable donation’ before moving to terrorist accounts. It is highly time sensitive requiring quick response.

Page 11: Legal regime for AML  (Anti Money Laundering)

11

Combating financing of terrorism

(i) State Sponsored (ii) Other Activities- legal or non-legal Legal Sources of terrorist financing

Collection of membership dues Sale of publications Cultural of social events Door to door solicitation within community Appeal to wealthy members of the community Donation of a portion of personal savings

Page 12: Legal regime for AML  (Anti Money Laundering)

12

Combating financing of terrorism

Illegal Sources Kidnap and extortion; Smuggling; Fraud including credit card fraud; Misuse of non-profit organisations and charities fraud; Thefts and robbery; and Drug trafficking

Page 13: Legal regime for AML  (Anti Money Laundering)

13

Macroeconomic impact

Money laundering can have a range of severe macroeconomic consequences on countries.

IMF has cited unpredictable changes in money demand, prudential risks to the soundness of banking systems, contamination of legal financial transactions, and increased volatility of international capital flows and exchange rates due to unanticipated cross-border asset transfers.

Page 14: Legal regime for AML  (Anti Money Laundering)

14

Macroeconomic impact

The economic and political influence of criminal organizations can weaken the social fabric; collective ethical standards and ultimately the democratic institutions of the society. Organized crime can infiltrate financial institutions, acquire control of large sectors of the economy through investment, or other bribes to public officials and indeed governments

Money Laundering can also have a dampening effect on FDI if a country’s financial sectors are perceived to be under control and influence of organized crime.

Page 15: Legal regime for AML  (Anti Money Laundering)

15

Money Laundering Risks

What are the risks to banks?

(i) Reputational risk

(ii) Legal risk

(iii) Operational risk (failed internal processes, people and systems & technology)

(iv) Concentration risk (either side of balance sheet)

All risks are inter-related and together have the potential of causing serious threat to the survival of the bank

Page 16: Legal regime for AML  (Anti Money Laundering)

16

Penalties imposed on banks

Jan. 2006 ABM AMRO US$ 80 mio Aug. 2005 Arab Bank US$ 24 mio Feb. 2005 City National Bank US$750,000 Jan. 2005 Riggs Bank US$ 41 mio Oct. 2004 AmSouth Bank US$ 50 mio Sep. 2004 City Bank Japan Licence cancelled May. 2004 Riggs Bank US$ 25 mio

Page 17: Legal regime for AML  (Anti Money Laundering)

17

What KYC means?

Customer? One who maintains an account, establishes business relationship, on

who’s behalf account is maintained, beneficiary of accounts maintained by intermediaries, and one who carries potential risk through one off transaction

Your? Who should know? Branch manager, audit officer, monitoring officials, PO Know? What you should know? True identity and beneficial ownership of the accounts Permanent address, registered & administrative address

Page 18: Legal regime for AML  (Anti Money Laundering)

18

What KYC means?

Making reasonable efforts to determine the true identity and beneficial ownership of accounts;

Sources of funds Nature of customers’ business What constitutes reasonable account activity? Who your customer’s customer are?

Page 19: Legal regime for AML  (Anti Money Laundering)

19

Core elements of KYC

Customer Acceptance Policy Customer Identification Procedure- Customer Profile Risk classification of accounts- risk based approach Risk Management Ongoing monitoring of account activity Reporting of cash and suspicious transactions

Page 20: Legal regime for AML  (Anti Money Laundering)

Know Your Customer (KYC) Guidelines

Customer Acceptance - Ensure that only legitimate and bona fide customers are accepted.

Customer Identification- Ensure that customers are properly identified to understand the risks they may pose.

Transactions Monitoring- Monitor customers accounts and transactions to prevent or detect illegal activities.

Risk Management- Implement processes to effectively manage the risks posed by customers trying to misuse facilities.

Guidelines issued by FATF

Page 21: Legal regime for AML  (Anti Money Laundering)

21

Advantages of KYC norms

Sound KYC procedures have particular relevance to the safety and soundness of banks, in that:

1. They help to protect banks’ reputation and the integrity of banking systems by reducing the likelyhood of banks becoming a vehicle for or a victim of financial crime and suffering consequential reputational damage;

2. They provide an essential part of sound risk management system (basis for identifying, limiting and controlling risk exposures in assets & liabilities)

Page 22: Legal regime for AML  (Anti Money Laundering)

22

Risk based approach

The potential risk that a customer carries depends on:

(a) Identity of the customer including beneficial ownership

(b) The nature of customer’s business and his product profile-jewels, precious metals, arms, antiques

(c) Location of business

(d) Products and services offered

(e) Customer’s customer or clientrs; their location & business

Page 23: Legal regime for AML  (Anti Money Laundering)

23

High risk countries

Geography Drug producing nations Drug transshipment countries Drug using countries Secrecy jurisdictions and tax havens, particularly those that

grant offshore banking licenses. Countries with high degree of public corruption Countries linked to terrorist financing Non Cooperative Countries and Territories

Page 24: Legal regime for AML  (Anti Money Laundering)

24

High risk customers

Non-bank financial institutions ( money transmitters, cheque cashiers, full fledged money changers, sellers of stored value cards, security brokers & dealers etc. )

Travel agencies / Property dealers/ builders Professional and consulting firms Exporters or importers of goods and services Cash intensive business e.g. retail stores, restaurants,

gambling casinos, second hand car dealerships etc. Off-shore corporations, banks in secrecy heavens Non-profit organisations e.g charities

Page 25: Legal regime for AML  (Anti Money Laundering)

25

High risk products & services

Wire transfers Electronic banking services which includes services offered

through internet, credit cards, stored value cards Private banking relationships Correspondent banking relationships

Page 26: Legal regime for AML  (Anti Money Laundering)

26

Cross border accounts-deposits

All KYC procedures to be observed Third party verification of documents through Correspondent

bank which is committed to KYC regime and is willing to share KYC information on demand

Verification of document during visit to India Remittance through banking channels

Page 27: Legal regime for AML  (Anti Money Laundering)

27

Payment gateways/ wire transfers

Both domestic and cross border wire transfers carry potential risk of money laundering

Payment gateways facilitate wire transfers for customers of banks located anywhere in the world

Whether AML/ KYC compliance level Ascertain whether it is regulated at the place of incorporation Insist on complete originator information with wire Make payment to beneficiary through account or DD Keep record of transactions

Page 28: Legal regime for AML  (Anti Money Laundering)

28

Salient features of IPO scam

Modus operandi Current account opened in the name of multiple

companies on the same date in the same branch of a bank Sole person authorised to operate all these accounts who

was also a Director in all the companies Identity disguised by using different spelling for the same

name in different companies Multiple accounts opened in different banks by the same

group of joint account holders

Page 29: Legal regime for AML  (Anti Money Laundering)

29

Salient features of IPO scam

Huge funds transferred from companies accounts to the individual’s account which was invested in IPO’s

Loans/ overdrafts got sanctioned in multiple names to bypass limit imposed by RBI

Loans sanctioned to brokers violating guidelines Multiple DP accounts opened to facilitate investment in

IPO Large number of cheques for the same value issued from

a single account on the same day

Page 30: Legal regime for AML  (Anti Money Laundering)

30

Salient features of IPO scam

Multiple large value credits received by way of transfer from other banks

Several accounts opened for funding the IPO on the request of brokers, some were in fictitious names

Refunds received got credited in brokers a/cs Margin money provided by brokers through single

cheque Nexus between merchant banker, brokers and banks

suspected

Page 31: Legal regime for AML  (Anti Money Laundering)

31

Operational deficiencies

Factors that facilitated the scam Photographs not obtained Proper introductions not obtained Signatures not taken in the presence of bank official Failure to independently verify the identity and address of

all joint account holders Directors identity/ address not verified Customer Due Diligence done by a subsidiary

Page 32: Legal regime for AML  (Anti Money Laundering)

32

Operational Deficiencies

Objective of large number of jt. account holders opening account not ascertained

Purpose of relationship not clearly established Customer profiling based on risk classification not done Poor monitoring and reporting system due to inadequate

appreciation of ML issues Absence of investigation about use and sources of funds

Page 33: Legal regime for AML  (Anti Money Laundering)

33

Operational Deficiencies

Unsatisfactory training of personnel No system of fixing accountability of bank officials

responsible for opening of accounts and complying with KYC procedures

Ineffective monitoring and control

Page 34: Legal regime for AML  (Anti Money Laundering)

Legislative Framework

Money Laundering Act, 2010 National Accountability Ordinance, 1999

Control of Narcotics Substance Act 1997

Anti-Terrorism Act 1997.

Page 35: Legal regime for AML  (Anti Money Laundering)

National Accountability Ordinance, 1999 Deals mainly with the detection, investigation,

prosecution and speedy disposal of cases involving corruption and corrupt practices

The following offences under NAO covers the offence of money laundering :• Acquisition of any property / pecuniary

advantage through corrupt, dishonest or illegal means

• Having assets beyond known sources of income which can not be reasonably accounted for.

• Pursuant to Section 20, financial institutions are bound to report suspicious financial transactions to NAB.

Page 36: Legal regime for AML  (Anti Money Laundering)

Control of Narcotics Substance Act 1997

The following offences/ provisions under CNSA covers the AML measures:

Makes the acquisition of assets through drug money an offence

The suspected properties / assets may be frozen and subsequently forfeited through the Court. This measure can be construed as an anti-money laundering measure.

Section 67: it is mandatory for financial institutions to report STRs to ANF, suspected to be related to drug business.

Page 37: Legal regime for AML  (Anti Money Laundering)

Anti-Terrorism Act 1997

Deals comprehensively with the offences of terrorism and financing of terrorism.

Makes compulsory for the proscribed organizations to submit all accounts for it’s political and social welfare activities and disclose all funding sources.

Freezing, Seizure and Forfeiture of assets

Page 38: Legal regime for AML  (Anti Money Laundering)

AML/CFT Measures by SBP Institutional Arrangements

• Setting up of dedicated AML/ CFT Units.• Capacity Building- trainingRegulatory Framework

Issuance of Prudential RegulationsMonitoring & Enforcement

On-site inspection and off-site surveillanceInternational Obligations

UNSC Resolutions- Freezing of accountsCurbing of Informal Value Transfers

Formation of Exchange CompaniesDocumentation of Economy

Restriction on RTCs – Bearer Instruments

Page 39: Legal regime for AML  (Anti Money Laundering)

AML/ CFT UNITS

Primary Responsibilities of the Units• Issuance of regulations and directions to banks and

DFIs in accordance with FATF Recommendations and international best practices

• Receive STRs and process them for suitable action• Coordination and liaison with relevant Govt.

departments, LEAs, International and Multilateral bodies

• Issue directives for freezing of accounts

Page 40: Legal regime for AML  (Anti Money Laundering)

Regulatory Framework

A separate section in new PRs has been dedicated to regulations pertaining to AML and CFT.

PR Compliant with 40 + 9 recommendations In line with Basel Core Principle No.15 Violations of regulations dealt with penal action

Page 41: Legal regime for AML  (Anti Money Laundering)

International scenario

Page 42: Legal regime for AML  (Anti Money Laundering)

International organizations engaged in AML/CFT

Mid 1980s - Growing concern of international community to deprive criminal elements of the proceeds of their crimes.

1989 – Financial Action Taskforce (FATF) set up to ensure global action to combat money laundering.

Forty Recommendations - Complete set of counter-measures against money laundering

Nine Special Recommendations on Terrorist Financing 33 members

1995 - Egmont Group set up to stimulate international cooperation amongst FIUs. Best Practices for exchange of information.

101 Members

1997- Asia/Pacific Group on money laundering (APG) set up to create awareness and encourage adoption of AML measures.

Page 43: Legal regime for AML  (Anti Money Laundering)

International standards – FATF

Legal System and Related Institutional Measures R 1,2,3,26,27,28,30,32 SR II,III

Preventive Measures – Financial Institutions R 4,5,6,7,8,9,10,11,13,14,15,17,18,19,21,22,23,25,29,32 SR VI, IX

Preventive Measures – Non Financial Businesses and Profession R 12,16,20,24

Legal Person and arrangements & Non-profit Organizations R 33 SR VIII

National and International Cooperation R 31,32,35,36,27,38,39,40 SR V

40 Recommendations + 9 Special Recommendations on TF

FATFFATF

Page 44: Legal regime for AML  (Anti Money Laundering)

International standards – FATF

Extension of KYC, CDD & AML/CFT measures to other sectors, as mentioned under 40+9 standards, in case of India, such as: Non-Designated Financial Businesses & Professions

(NDFBPs) (R 12) : Casinos, Real estate agents, Dealers in precious metals and precious stones, Lawyers, notaries, other independent legal professionals and accountants, Trust and company service providers

Exchange Houses and money remitters (R 23) Alternative remittances, Wire transfers, Non-Profit

Organizations, Cash Couriers (SR VI to IX)

FATFFATF

Page 45: Legal regime for AML  (Anti Money Laundering)

Salient Features of FATF Recommendations

Criminalize ML to include all serious offences(R1) Follow standards set in Vienna & Palermo UN conventions for

offence of ML(R2) Confiscate/attach laundered assets(R3) Secrecy laws should not prohibit sharing of information by

financial institutions (FI)-(R4) Give special attention to business relation with countries,

which do not or insufficiently apply FATF standards(R21) FIs should be subject to regulatory & supervisory measures

through licensing, registrations etc. for AML purposes(R23) DNFBPs also be subject to similar regulations &

supervision(R24)

FATFFATF

Page 46: Legal regime for AML  (Anti Money Laundering)

Salient Features of FATF Recommendations

FIs to follow CDD:- no anonymous accounts, verify identity of client & beneficial owner, CDD for politically exposed persons (PEP)(R5,6)

CDD & Record keeping requirements for NDFBPs(R12) CDD for cross border correspondent banking(R7) Do not approve operations with Shell Banks(R18) FIs should develop AML/CFT Programme(R15):

Develop internal AML/CFT policies Set screening standards while hiring employees Train employees Independent audit to test check the system

Pay special attention to non face to face customers(R8) Apply similar standards to branches/offices abroad(R22)

FATFFATF

Page 47: Legal regime for AML  (Anti Money Laundering)

Salient Features of FATF Recommendations

Set up FIU, empower law enforcement agencies and competent authorities for AML/CFT(R26 to 32)

Filing of STRs(R13) Provide legal immunities to financial institutions & their

representatives for disclosures(R14) Maintain all necessary records(R10) Dissuasive civil/administrative/criminal sanctions for

failing to comply with AML/CFT requirements(R17) International cooperation, mutual legal assistance,

extradition & information exchange(R35 to 40)

FATFFATF

Page 48: Legal regime for AML  (Anti Money Laundering)

Salient Features of FATF Recommendations

Special Nine Recommendations on Terrorist Financing (TF) Ratify & implement UN instruments-SR I Criminalize TF as ML offence-SR II Freeze & confiscate terrorist assets-SR III Report STRs on TF- SR IV International cooperation on CFT- SR V KYC/CDD & AML/CFT measure for- SR VI to IX:

Services involved in transmission of money/value Wire transfers Non-Profit organizations Cash couriers

FATFFATF

Page 49: Legal regime for AML  (Anti Money Laundering)

Key Issues

Page 50: Legal regime for AML  (Anti Money Laundering)

Key Issues To what extent should Pakistan be compliant with

these 40+9 FATF recommendations? No country fully compliant These are ideal financial standards best suited for

developed countries where formalization of economy is at an advanced stage

Non-membership likely to have consequences How best can these standards be adopted in

Pakistan?

Page 51: Legal regime for AML  (Anti Money Laundering)

51

Measures to deter money laundering

Board and management oversight of AML risks Appointment a senior executive as principal officer with

adequate authority and resources at his command Systems and controls to identify, assess & manage the money

laundering risks Make a report to the Board on the operation and effectiveness

of systems and control Appropriate documentation of risk management policies, their

application and risk profiles

Page 52: Legal regime for AML  (Anti Money Laundering)

52

Measures to deter money laundering

Appropriate measures to ensure that ML risks are taken into account in daily operations, development of new financial products, establishing new business relationships and changes in the customer profile

Screening of employees before hiring and of those who have access to sensitive information

Appropriate quality training to staff Quick and timely reporting of suspicious transactions

But it doesn't work they way we want

Because

‘The law hath not been dead, though it hath slept’