Risks and Methods of Money Laundering and Terrorist Financing Flashcards
Definition of Money Laundering
- The conversion or transfer of property, knowing it is derived from a
criminal offense, for the purpose of concealing or disguising its illicit origin or of assisting any person who is involved in the commission of the crime to evade the legal consequences of his or her actions - The concealment or disguise of the true nature, source, location,
disposition, movement, or rights with respect to or ownership of property, knowing that it is derived from a criminal offense - The acquisition, possession, or use of property, knowing at the time of its receipt that it was derived from a criminal offense or from participation in a crime
Legal principle of willful blindness
- “deliberate avoidance of knowledge of the facts” or “purposeful indifference”
and have held that willful blindness is the equivalent of actual knowledge of
the illegal source of funds or of the intentions of a customer in a money
laundering transaction.
Money laundering cycle stage 1:
Stage One: Placement—The physical disposal of cash or other assets derived
from criminal activity. (洗錢)
During this phase, the money launderer introduces the illicit proceeds into the
financial system. Often, this is accomplished by placing the funds into
circulation through formal financial institutions, casinos, and other legitimate
businesses, both domestic and international.
e.g. Blending of funds, Purchasing significant stored value cards with currency, Foreign exchange, Breaking up amounts, Currency smuggling, Loans:
Money laundering cycle stage 2:
Stage Two: Layering—The separation of illicit proceeds from their source by
layers of financial transactions intended to conceal the origin of the proceeds
The second stage involves converting the proceeds of the crime into another
form and creating complex layers of financial transactions to obscure the
source and ownership (轉移/轉售至他國或空殼公司)
e.g. Electronically moving funds from one country to another and dividing them
into advanced financial options and/or markets,
Moving funds from one financial institution to another or within accounts at
the same institution,
Converting the cash placed into monetary instruments, Reselling high-value goods and prepaid access or stored value products,
Investing in real estate and other legitimate businesses, Placing money in stocks, bonds, or life insurance products, Using shell companies to obscure the ultimate beneficial owner and assets
Money laundering cycle stage 3:
Stage Three: Integration—Supplying apparent legitimacy to illicit wealth
through the reentry of the funds into the economy in what appears to be
normal business or personal transactions (合法收益)
The third stage entails using laundered proceeds in seemingly normal
transactions to create the perception of legitimacy. The launderer, for
example, might choose to invest the funds in real estate, financial ventures, or
luxury assets. By the integration stage, it is exceedingly difficult to distinguish
between legal and illegal funds.
This stage gives a launderer the opportunity to increase his wealth with the proceeds of crime. Integration is generally difficult to identify unless there are great disparities between a person’s or company’s legitimate employment, business, or investment ventures and a person’s wealth or a company’s income or assets.
e.g.
* Purchasing luxury assets, such as property, artwork, jewelry, and high-end
automobiles
* Entering into financial arrangements and other ventures in which
investments can be made in business enterprises
The Economic and Social Consequences of
Money Laundering
The potential macroeconomic consequences of unchecked money
laundering include:
* Increased exposure to organized crime and corruption
* Undermining the legitimate private sector
* Weakening financial organizations
* Dampening effect on foreign investments
* Loss of control of, or mistakes in, decisions regarding economic policy
* Economic distortion and instability
* Loss of tax revenue
* Risks to privatization efforts
* Reputation risk for the country
* Risk of international sanctions
* Social costs
* Reputational risk
* Operational risk
* Legal risk
* Concentration risk
AML/CFT Compliance Programs and
Individual Accountability
Regulation
US: Financial Crimes Enforcement Network (FinCEN) and the US financial intelligence unit (FIU) issued an advisory to financial organizations (2014), memorandum on “Individual Accountability for Corporate Wrongdoing” (2015)
UK: the Financial Conduct Authority (FCA) published final rules for the Senior Managers and Certification Regime (SM&CR). It equires a financial organization to give explicit responsibility to a senior manager, such as an executive-level money
laundering reporting officer (MLRO), for ensuring that its efforts to combat
financial crime are effectively designed and implemented. The senior manager is personally accountable for any misconduct within the organization’s AML/CFT regime.
The New York State Department of Financial Services (DFS) issued a Final Rule
requiring regulated organizations to maintain “transaction monitoring and
filtering programs” reasonably designed to monitor transactions after their
execution for compliance with the Bank Secrecy Act (BSA) and AML laws and
regulations, including suspicious activity reporting requirements, and prevent unlawful transactions with targets of economic sanctions administered by
OFAC.
This Final Rule, which went into effect on January 1, 2017, includes very specific
requirements concerning the implementation of transaction monitoring
systems, including:
- Risk-Based Models: Models should be risk-based and commensurate with
the organization’s own risk assessment and profile. - Model Performance Calibration: Organizations must perform ongoing
analysis and testing of the AML/CFT models to assess the scenario logic,
performance, model technology, assumptions, and model parameter
settings. - End-to-End, Pre- and Post-Model Implementation Testing: End-to-end
testing is required to ensure rules are validated and data are complete and
accurate
Electronic Transfer of Funds
Def: any transfer of funds that is initiated by electronic means, e.g. internet-based transfers, an automated clearing house (ACH), an automated teller machine (ATM), mobile telephones, and other devices.
e.g. 1 money launderers might initiate unauthorized domestic or international
electronic transfers of funds—such as ACH debits or cash advances on a
stolen credit card—and place the funds into an account established to receive
the transfers. 2. stealing credit cards and using the funds to purchase merchandise that can be resold to provide the criminal with cash
Indicators of money laundering (出題用的Electronic Transfer of Funds的特征)
* Funds transfers occur to or from a financial secrecy haven or high-risk geographic location without an apparent business reason or when the activity is inconsistent with the customer’s business or history.
* Large incoming funds transfers are received on behalf of a foreign client, with little or no explanation or apparent reason.
* Checks and money orders are used to receive many small, incoming transfers of funds or to make deposits. Upon credit to the account, all or most of the transfers or deposits are wired to another account in a different geographic location in a manner inconsistent with the customer’s business or history.
* Funds activity is unexplained, repetitive, or reveals unusual patterns.
* Payments or receipts are received that have no apparent link to legitimate
contracts, goods, or services.
* Funds transfers are sent or received from the same person to or from
different accounts.
Business - Remote deposit capture (RDC)
Def: allows customers to scan a check and transmit an electronic image to the bank for deposit
-> Fraud Risk: Because RDC minimizes human intervention in reviewing
cleared items, it decreases the ability to identify potential fraud indicators,
such as an altered check and multiple deposits of the same item. Often, the
resulting fraud is not prevented but rather detected after it has already
occurred.
Control measure:
1. RDC are reviewed for sequentially numbered checks and money orders without payees;
2. the total volume of activity processed for an account via RDC is
incorporated into the overall transaction monitoring system,
3. RDC limit on customer deposit;
4. approach appropriate customers;
5. follow up action after fraud is detected via RDC items.
Business - Correspondent Banking (代理銀行)
Def: Correspondent bank provides services for individuals and entities for which it
has neither verified the identities nor obtained any firsthand knowledge.
Risk:
1. The correspondent does not or cannot conduct typical due diligence to
know the customers of the respondent (KYC)
2. The correspondent does not have data on respondent transactions that
typically enable transaction monitoring controls to identify unusual
patterns.
3. The correspondent can identify the respondent’s regulators, but not
always the degree of supervision to which the respondent is subject.
- The correspondent might have limited information on the respondent’s
anti-financial crime controls—perhaps through a questionnaire—yet still
needs to rely on the respondent to have and use sufficient, effective
controls on its customers. - Some respondents are, themselves, correspondents to third banks, a
practice called “nesting.” Nested accounts further shield correspondent
banks from knowing the parties involved.
Due diligence should address specific risk indicators, such as 1. the respondent bank’s geographic risk, ownership and management structures, customer base, and
products and services offered.
2. The determination of the level and scope of due diligence that is required on a respondent bank should be made after considering the relationship between the respondent bank and its ultimate parent (if any).
If the parent does not exercise substantial and effective control, due diligence should be conducted on both the respondent and the parent. The Wolfsberg Group has a Correspondent Banking Due Diligence Questionnaire that provides a standardized set of questions that can be used to perform due diligence
Operation - Payable-Through Accounts (通匯賬戶)
Features: 1. virtually unlimited number of subaccount holders, including
individuals; commercial businesses; finance companies; exchange houses, or
casas de cambio; and even other foreign banks.
Elements of a PTA relationship that can threaten a correspondent bank’s
AML/CFT defenses include the following:
- PTAs with foreign institutions licensed in offshore financial service centers
with weak or under-developed bank supervision and licensing laws - PTA arrangements in which the correspondent bank regards the
respondent bank as its sole customer and fails to apply its customer due
diligence (CDD) policies and procedures to the customers of the
respondent bank - PTA arrangements in which subaccount holders have currency deposit
and withdrawal privileges (資金存取權) - PTAs used in conjunction with a subsidiary, representative, or other office
of the respondent bank, which might enable the respondent bank to offer
the same services as a branch without being subject to supervision
Operation - Concentration Accounts (集中賬戶)
Def 1. internal accounts established to facilitate the processing and settlement of multiple or individual customer transactions within the bank, usually on the same day. (bank level A/C for normal operation, no sub-A/C!!)
Risk: no audit trail,
Actions:
* Requiring dual signatures on general ledger tickets
* Prohibiting direct customer access to concentration accounts
* Capturing customer transactions in the customers’ account statements
* Prohibiting customers’ knowledge of concentration accounts and their
ability to direct employees to conduct transactions through these
accounts
* Retaining appropriate transaction and customer identification information
* Frequently reconciling accounts by an individual who is independent of the
transactions
* Establishing a timely discrepancy-resolution process
* Identifying and monitoring recurring customer names
Business - Private Banking
The following factors can contribute to the vulnerabilities of private banking to
money laundering:
* Perceived high profitability
* Intense competition
* Powerful clientele
* High level of confidentiality
* Close trust developed between relationship managers and their clients
* Commission-based compensation for relationship managers
* Culture of secrecy and discretion developed by the relationship managers
for their clients
* Role of relationship managers as client advocates to protect their clients
* Use of private investment companies by clients to reduce transparency of
their beneficial owners
People - Politically Exposed Persons (政治重要人物)
Foreign PEPs: Individuals who are or have in the past been entrusted with
prominent public functions by a foreign country (e.g., heads of state or of
government; senior politicians; senior government, judicial, and military
officials; senior executives of state-owned corporations; and important
political party officials).
Domestic PEPs: Individuals who are or have in the past been entrusted
domestically with prominent public functions (e.g., heads of state or of
government; senior politicians; senior government, judicial, and military
officials; senior executives of state-owned corporations; and important
political party officials)
International organization PEPs: Individuals who are or have in the past been
entrusted with a prominent function (e.g., managing director, secretary
general, executive director, chairperson, and president) by an international
organization, such as the United Nations’ six principal organs and multiple
specialized agencies, the IMF, the World Bank, the North Atlantic Treaty
Organization, and the Organization of American States (OAS), among
many others.
ML Method - Structuring (拆分)
- A customer breaks a large transaction into two or more smaller transactions.
- A large transaction is broken into two or more smaller transactions that are
conducted by two or more people - An individual sends his fortune to another country
ML Method - Microstructuring
Smaller version of structuring
1. The use of counter deposit slips instead of preprinted deposit slips
2. (A/C opening )Frequent activity in an account immediately following the opening of the account with only preliminary and incomplete documentation
3. Frequent visits to make cash deposits of nominal amounts that are
inconsistent with typical business or personal banking activity
4. Cash deposits followed by ATM withdrawals, particularly in high-risk
countries
5. Cash deposits made into business accounts by third parties with no
apparent connection to the company
Credit Unions and Building Societies
Credit unions serve only the financial needs of their members and are governed by a “one-member, one-vote” philosophy. A member must purchase an initial capital share of the credit union, permitting him to access the products and services offered by the credit union. Credit union membership is based on a common bond, a linkage shared by savers and borrowers who belong to a specific community, organization, religion, or place of employment
Non-FI Credit Card Industry
Scope 1. AE, Master, Issuing banks, Acquiring banks, which process transactions for merchants who accept credit cards, Third-party payment processors (TPPP),
Used for layering and integration stages
e.g. 1. Layering on Credit refund of credit card , which enables him to further obscure the origin of the funds. Integration -> use illicit in bank A/C and the refund to pay new goods
2. use
