Chapter 3 - Managing Risk of Financial Crime Flashcards
What is the goal of money laundering?
To turn money derived from criminal activities (‘dirty money’) into money which appears to have been legitimately acquired and which can, therefore, be more easily invested and spent (‘clean money’).
What is Terrorist Financing?
Terrorist financing relates to the financial support of organisations or groups that seek to perform
terrorist acts and also to any financial transactions undertaken to move such money around the globe in
order to enable terror attacks to be carried out.
What are the key differences between money laundering and terrorist financing?
• Often, only small sums of money are required to commit terrorist acts, making identification and
tracking more difficult.
• If legitimate funds are used to fund terrorist activities, it is difficult to identify when the funds
become terrorist funds.
What re the 3 stages to successful money laundering?
- Placement
- Layering
- Integration
How do Banks play a role in Placement?
The ‘placement’ stage requires the money launderer
to introduce cash into the financial system. This requires cash in hand to be replaced by some valuable
claim on assets or benefits.
How do Banks play a role in Layering?
Any transaction that exchanges one asset for another, or changes the registered owners of an asset, could be a step of layering. As the purpose of layering is to disguise the original source of the money and the eventual end recipient, layering processes will often be protracted and detailed – yet each individual step will be designed to appear innocent, such as the usual activity of an investor managing their affairs.
What is the FATF?
The FATF is an intergovernmental body whose purpose is the development and promotion of national
and international policies to combat money laundering and terrorist financing.
What were the most recent changes to FATF’s 40 pricniples?
• adding tax crimes as predicate offences for money laundering
• the extension of obligations on financial institutions to conduct enhanced due diligence on a risk
basis to domestic politically exposed persons (PEPs)
• the introduction of more rigorous requirements in relation to the information which must
accompany wire transfers
• the requirement for countries to establish mechanisms to record basic company information and to enable financial institutions, competent authorities and others to determine beneficial ownership
and conduct appropriate customer due diligence (CDD)
• the introduction of a new step-by-step process for the identification of beneficial ownership and
control of companies as part of CDD measures.
What does the FATF do?
• Sets international standards to combat money laundering and terrorist financing; and provides best
practice papers and guidance including implementing a risk-based approach.
• Assesses and monitors compliance with the FATF standards; and provides a list of non-cooperative
countries for use by countries to help apply Recommendation 21
• Conducts studies of money laundering and terrorist financing methods, trends and techniques.
• Responds to new and emerging threats, such as proliferation financing.
What is FATF Recomendation 21?
Financial institutions need to give special attention to business relationships and transactions with
persons, including companies and financial institutions, from countries which do not, or insufficiently
apply the FATF Recommendations. Whenever these transactions have no apparent economic or visible
lawful purpose, their background and purpose should, as far as possible, be examined, the findings
established in writing, and be available to help competent authorities. Where such a country continues
not to apply or insufficiently applies the FATF Recommendations, countries should be able to apply
appropriate countermeasures
What is Proliferation Financing?
Proliferation financing refers to the act of providing funds or financial services which are used, in whole
or part, for the manufacture, acquisition, possession, development, export, transfer or use of nuclear,
chemical or biological weapons and their means of delivery and related materials (including both
technologies and dual-use goods used for non-legitimate purposes).
What is a predicate offense?
A predicate offence is the underlying criminal offence that gives rise to criminal proceeds, which is then
the subject of a money laundering charge.
What re examples of Predicate Offenses?
- Fraud
- Embezzlement
- Bribery
- Corruption
What is a Ponzi Scheme?
The term ‘Ponzi scheme’ is used to describe a financial services product that claims a level of investment
return that is not supported by the investment activity undertaken. The shortfall between the returns
generated and those claimed is made up by using the money of new investors, who have been attracted
to the scheme due to the high headline returns being publicised.
What is a Boiler Room scheme?
‘Boiler room’ scams involve fraudsters selling customers overvalued, if not worthless, securities by
means of an intensive selling campaign through numerous salespeople by telephone or direct mail.
What is a risk when using Offshore Trusts?
In some cases the trust might be established such that the identity of the beneficiaries is not stated. Such models are referred to as ‘orphan structures’, and the use of orphan models might be used to disguise the chain of ownership for certain assets – either because the assets have dubious origins or because the beneficiary is trying to evade tax.
What is Mortgage Fraud?
Mortgage fraud is a crime in which the intent is to materially misrepresent or omit information on a
mortgage loan application to obtain a loan or to obtain a larger loan than would have been obtained
had the lender known the truth.
What is a Misstatement of Financial Circumstances?
A misstatement is defined as a difference between the amount, classification, presentation, or disclosure
of a reported financial statement item and the amount, classification, presentation, or disclosure that is
required for the item to be in accordance with the applicable financial reporting framework
What is Corporate Fraud?
Fraud is the use of deception to obtain goods or services, and is a criminal offence in major jurisdictions. As fraud is an illegal action, it follows that any money received as a result of fraud represents proceeds of financial crime.
Corporate fraud arises when an organisation adopts such deceptive means as part of running its
business.
What is Tax Avoidance?
Tax avoidance is the use of legally permissible methods to reduce the amount of tax owed.
What is Tax Evasion?
Tax evasion, on the other hand, is an illegal practice where a person, organisation, or corporation
intentionally avoids paying part or all of their tax liability.
What is Tax-Aggressive?
Although the difference between tax evasion and tax avoidance is clear, there is a grey area referred to
as ‘tax-aggressive strategies’.
What is Counterparty Risk?
The potential that a firm may be unable to deliver on its promises to another is termed ‘counterparty risk’ (or sometimes ‘default risk’).
What re the epxectations of an authorised financial firm regarding AML?
• identify, and manage effectively, the risks in their businesses and this will include ensuring appropriate
action is taken in relation to combating the financing of terrorism (CFT), AML, combating financial
crime (CFC) and anti-corruption (AC)
• appoint a nominated officer to process disclosures
• appoint an MLRO with certain responsibilities
• ensure the MLRO has adequate resources devoted to AML/CFT
• understand the potential personal liability if legal obligations are not met.
