Copy of Chapter 9-1

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MR RAYMOND LIEW

Chapter 9

Money Laundering


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What is Money Laundering?

The process by which criminals attempt toconceal, use or process the true origin and

ownership of their criminal wealth andactivities AMLA 2001

- illegal arm sales - embezzlement

- smuggling - bribery

- drug trafficking - computer fraud

- human trafficking - corrupt practices

- prostitution


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Kinds of Frauds

& Scams

Telemarketing Frauds

Consumer Scams & Schemes

Business Opportunities

Money Laundering

Business Scams

Investment Frauds

Criminal Operations


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What is Money Laundering?

Illegally

obtained money

Conversion

Criminal Activity Drugs / Arms TraffickingTerrorism

Extortion

Appears tooriginate from

legitimatesource


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Who are Money Launderers?

Billions of dollars flow through offshore banks.

- Russian mafia

- Colombian drug lords

- terrorist groups

- corrupt government officials

- tax evaders


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December 2007 Dead 156 Injured 448

Dec 1 Three ETA gunmen kill one Spanish civil guard and mortally woundedanother (who died 4 days later) in Capbreton, France

Dec 6 A parcel bomb explodes in Paris, France and kills one, seriously injures

another, and injures several other people Dec 11 Bombings in Algiers kill 37 or more and injure 17 Dec 12 A car bomb kills Brigadier General Francois al-Hajj (a top candidate to

head Lebanon's military) and his driver, and injures dozens more. The bombingoccurs in front of the municipal building in Baabda, a Christian suburb ofBeirut

Dec 12 Three car bombs detonate in rapid succession, killing at least 40 andwounding 125 in the Shi'ite city ofAmarah. Iraqi State television reports that

many of the casualties i

nvolve women and children. Dec 21 A mosque suicide bombing kills at least 50 in Sherpao, targeting Aftab

Khan Sherpao, the Interior Minister of Pakistan

Dec 24 Police stop a would-be bomber with 3.5 kg of plastic explosives inIstanbul, outside a subway station.

Dec 24 Four French tourists are gunned down in Aleg, Mauritania; the family'sfather survi

ves, but with serious injuries. Mauritanian police say two of thethree suspects are affiliated with a salafist group close to Al-Qaeda.

Dec 27 Pakistani opposition leaderBenazir Bhutto is assassinated by anattacker who shoots her after a campaign rally in Rawalpindi and then blowshimself up; at least 20 are known dead. A Baitullah

Mehsud Islamic Terrorismleader or elements within the Pervez Musharrafgovernment are suspected.


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ORGANISATION AT RISK OFMONEY LAUDERING

Financial institutions-banks, credit unions

Insurance companies

Professionals Accountants. Lawyers

Real estate

Gaming-casino

Commerce-some of the lending manufacturers

in the world have been unwilling victims tomoney laudering

Non-profit organisations-charities


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HOW MUCH?

Funds laundered in the world rangebetween 2 and 5 percent of the worldsgross domestic product.

1996 statistic these percentages wouldestimate between USD590 bil and USD1.5tril.

1-8


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Techniques in Money Laundering

PlacementGetting Currency into the

financial system so as to convert

illicit funds from cash straight

into a financial instrument or

bank account

LayeringThe movement of funds from

institution to institution to hide

the source and ownership of the

funds, obscure the audit trail

and sever the link with the

original crime

IntegrationThe reinvestment of those funds in an

ostensibly legitimate business so that

no suspicion of its origins remains

and to give the appearance of

legitimizing the proceeds


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Placement

Immersion or Soaking

The physical disposal of bulk cash

proceeds derived from illegal activity


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LAYERING

Soaping / Scrubbing

The separation of illicit proceeds from

their source by creating complexlayers of financial transactions

These disguise the audit trail & provide

anonymity


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Integration

Repatriation / Spin DryReinjecting laundered proceeds intoeconomy so that they reenter

financial system as normal businessfundsProvides an apparently legitimate

explanation to criminally derivedwealth


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Techniques in Money Laundering

Smurfing

Shipping Money

Abroad

Placement through

Banks

Use of Pass

Through or Payable

Through Accounts

Electronic Wire

Transfers

Insurance Products

Investment Related

Transactions

Tax Havens &

Offshore Banks

BankSecrecy Law as

a layering tool

Corporations & ShellCompanies as a

layering tool

Use of trusts

Use of walking

accounts

Establishing self

owned bank

Use of intermediaries

Use of haven bankcredit cards

Receiving asconsulting ordirectors fee

Arrangement ofcorporate loans

Proceeds of gambling

Real estatetransactions

StockPurchase Use of business

Internationalimporting andexporting

Use of free tradezones

Placement Layering Integration


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International Initiatives

USA Providing Appropriate Tools Required toIntercept and Obstruct Terrorism Act 2001(PATRIOT)

United Nations Convention against Illicittrafficking in Narcotic Drugs and PsychotropicSubstances 1988

Council of Europe Convention on Laundering,Search, Seizure and Confiscation of theProceeds from Crime 1990


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International Initiatives

EC Directive 1991

Financial Action Task Force on Money

Laundering (FATF) Asia/Pacific Group on Money Laundering

Caribbean Financial Action Task Force

Gulf Cooperation Council


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The FATF Forty Recommendations

Drafted by FATF 1990

Revised in 1996 and 2003

Adopted by most countries


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The FATF issued the Forty Recommendations in 1990 andcompletely revised them in 1996 and 2003. The current (2003)Forty Recommendations require states, among other things, to:

implement relevant international conventions

criminalise money laundering and enable authorities toconfiscate the proceeds of money laundering

implement customer due diligence (e.g. identityverification), record keeping and suspicious transactionreporting requirements for financial institutions anddesignated non-financial businesses and professions

establish a financial intelligence unit to receive and

disseminate suspicious transaction reports, and cooperate internationally in investigating and prosecutingmoney laundering.


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EXAMPLES OF SUSPICIOUSACTIVITIES/TRANSACTIONS

Crmininal arranged for money held in an offshoreaccount ot be lent as loans to their on-shore entities

Domestic corporation which bills an offshore company forbogus goods or services provided

Transactions involving an offshore shell bank whosename may be very similar to the name of a majorligitimate institutions

Pass-through banks accounts accounts used for

frequent inward remittances that are swiftly followed byoutward payments

Transactions involving huge amount of funds

Unidentified source of funds


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Malaysian Initiatives

Anti-money Laundering Act andTerrorism Financing Act 2001

BNM and LOFSA

Securities Industry Act 1983

Futures Industry Act 1990 Securities Industry (Central Depositories act 1991)

Securities Commission

Anti-Corruption Agency

Inland Revenue Board

Royal Malaysian Police

Ministry of InternalSecurities


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Under s 4 of the AMLA there is a RM5.0 million fine or

imprisonment of five years or both on conviction for an

offence of moneylaundering.

Almost 100 money laundering cases being prosecuted

July 19, 2010

Ninety-four money laundering cases are in various stages of prosecution with

more than 3,000 charges involving proceeds amounting to RM1.2 billion, said

Bank Negara Malaysia Deputy Governor Datuk Zamani Abdul Ghani.

The modus operandi of such methods involved the smuggling of dirty monies into

Malaysia by the agents of a criminal ring, where the agents would subsequently

deposit cash into the accounts of various entities and individuals in several bank

branches operating in border towns. The deposits will

remain in the accounts onlyfor a limited period of time, where the runners or the agents will withdraw the cash

to be further wire-transferred and or smuggled to another neighbouring country, as

instructed by the syndicate.


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MANAGING MONEY LAUDERINGRISK

Establishment of internal policies

Implementation of customer due diligence

Know-your-customer policy

Record keeping and centralisation of information

Establishment of reporting of suspicious procedures Oversight and compliance programme

On-going training

Independent audit function

Designation of comp

liance officer at management

leve

l

Enhancement of MIS

Development of the Risk-based Approach

Best Practice generally accepted industry standard


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THE WAY FORWARD IN ELIMINATINGMONEY LAUNDERING

Strengthening compliance, supervisory and

enforcement frameworks

Extension of regu

latory net

Management of forfeited assets

International-cooperation

Develop clear strategies endorsed at the top


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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 thepotential of causing serious threat to thesurvival of the bank


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Factors which severely hamper law enforcement efforts

Acceptance of flight capital by western countries

Laws and limitations of other countries

Jurisdictional conflicts and lack of international coordination

Bankings role in facilitation of the activity

BankSecrecy

Volume and complexity of international transfers of funds

Internet based banking

Tax heavens as sanctuaries

Offshore corporations

Having to prove fraudulent transfer

Shortfall of reporting requirements

Criminals influencing Government and Bank support

The widespread use and acceptance of trade mis-pricing


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Reputational Risk:

The potential that adverse publicity regarding abanks business practices, whether accurate ornot, will cause a loss of confidence in the

integrity of the institution Reputational Risk : a major threat to banks asconfidence of depositors, creditors and generalmarket place to be maintained

Banks vulnerable to Reputational Risk as theycan easily become a vehicle for or a victim ofcustomers illegal activities


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Operational Risk

The risk of direct or indirect loss resultingfrom inadequate or failed internalprocesses, people and systems or fromexternal events

Weaknesses in implementation of banksprogrammes, ineffective control

procedures and failure to practise duediligence


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Concentration Risk

Mostly applies on the assets side of the balancesheet: Information systems to identify creditconcentrations; setting prudential limits to restrictbanks exposures to single borrowers or groupsof related borrowers

On liabilities side: Risk of early and suddenwithdrawal of funds by large depositors-

damages to liquidity


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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 Licencecancelled

May. 2004 Riggs Bank US$ 25 mio


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Early indicators of Fraud (Red Flags)

Unreasonable returns compared to market rate of returns

Promise for free money

Magical solutions / products

Show off /Affinity

Clandestine Meetings / Maintenance of Secrecy Anonymity / One man / small team officiating

Oral Representations / No formal approvals ordocumentation

Claims ofAuthority / Registered in a different country Urgency in collecting finances

Flouting of Laws

Short cut formulae


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SUSPICIOUS TRANACTION

Suspicious transaction means atransaction whether or not made in cashwhich, to a person acting in good faith

gives rise to a reasonable ground of suspicionthat it may involve the proceeds of crime; or

appears to be made in circumstances of

unusual or unjustified complexity; or appears to have no economic rationale or

bonafide purpose;


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Suspicious Transactions

Providing misleading information / informationnot easily verifiable while opening an Account

Large cash withdrawals from: a dormant or

inactive account or account with unexpectedlarge credit from abroad

Sudden increase in cash deposits of anindividual with no justification

Employees leading lavish lifestyles that do notmatch their known income sources


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What KYC means? Customer?

One who maintains an account, establishesbusiness relationship, on whos behalf accountis maintained, beneficiary of accountsmaintained by intermediaries, and one who

carries potential risk through one off transaction Your? Who should know?

Branch manager, audit officer, monitoringofficials, PO

Know? What you should know? True identity and beneficial ownership of the

accounts

Permanent address, registered & administrativeaddress


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What KYC means?

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

Sources of funds

Nature of customers business

What constitutes reasonable account activity?

Who your customers customer are?


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KYC DOES NOT MEAN

Denial of Service to the Common Person

Intrusive Behaviour

Use of information for cross selling Harassment of customers- threatening to

close down the accounts arbitrarily


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Core elements of KYC

Customer Acceptance Policy

Customer Identification Procedure-Customer Profile

Risk classification of accounts- risk basedapproach

Risk Management

Ongoing monitoring of account activity Reporting of cash and suspicious

transactions


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Measures to deter money

laundering Appropriate measures to ensure that ML risksare taken into account in daily operations,development of new financial products,

establishing new business relationships andchanges in the customer profile

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

Appropriate quality training to staff

Quick and timely reporting of suspicioustransactions

S i f


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Summary: Prevention of Money

Laundering

Money Laundering

Prevention

Observing Rules for

Bankers

Compliance with

Laws

Identifying

Irregular / Suspicious

Transactions

Customer

due Diligence


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Investment Frauds Ponzi Schemes

o A Ponzi Scheme is basically an investment fraud where investors are enticed with thepromise of extremely high returns or dividends over a very short period of time.

o Named after Carl Ponzi, who collected $9.8 million from 10550 people (including

three fourth of the Boston Police Force) and then paid out $7.8 million in just 8months in the year 1920 at Boston by offering profits of 50% every 45 days

o Ponzi schemes are a simple fraud whereby initial investors are paid exceptionaldividends as interest payouts from the deposits of a growing number of new

investors. Profits to investors are not created by success of the underlying business

ventures but instead are derived from capital contribution of other investors. A few

people invest in the scheme, then as news of the offer spreads, more investors are

drawn in.


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