What Is AML

Question 0

Describe the 3 phases of money laundering.

Answer 0

1. Placement which is the physical disposal of cash or other assets derived from criminal activity.
2. Layering is the separation of illicit proceeds from their source by layers of financial transactions intended to conceal the origin of the proceeds.
3. Integration is supplying apparent legitimacy to illicit wealth through the re-entry of the funds into the economy in what appears to be normal business or personal transactions.

Question 1

What is FATF?

Answer 1

The Financial Action Task Force

Question 2

What are the two main reasons correspondent banking is vulnerable to money laundering?

Answer 2

• By their nature, correspondent banking relationships create a situation in which a financial institution carries out financial transactions on behalf of customers of another institution. This indirect relationship means that the correspondent bank provides services for individuals or entities for which it has neither verified the identities nor obtained any first‐hand knowledge, and
• The amount of money that flows through correspondent accounts can pose a significant threat to financial institutions, as they process large volumes of transactions for their customers’ customers. This makes it more difficult to identify the suspect transactions, as the financial institution generally does not have the information on the actual parties conducting the transaction to know whether they are unusual.

Question 3

Describe four types of risk associated with money laundering faced by a financial institution.

Answer 3

• Reputational risk is described as the potential that adverse publicity regarding an organization’s business practices and associations, whether accurate or not, will cause a loss of public confidence in the integrity of the organization.
• Operational risk is described as the potential for loss resulting from inadequate internal processes, personnel or systems or from external events.
• Legal risk is the potential for lawsuits, adverse judgments, unenforceable contracts, fines and penalties generating losses, increased expenses for an organization, or even the closure
  of the organization.
• Concentration risk is the potential for loss resulting from too much credit or loan exposure to one borrower or group of borrowers.

Question 4

What is IMF?

Answer 4

International Money Fund

Question 5

What is the OECD?

Answer 5

Organization for Economic Cooperation and Development found in Paris. This is where the FATF is based.

36 members
34 jurisdictions
2 regional organizations

Question 6

Account Monitoring Order

Answer 6

In the UK and several other countries, an order from a government authority requiring a financial institution to provide transaction information on a suspect account for a specified period of time.

Question 7

Affidavit

Answer 7

A written statement given under oath before an officer of the court, notary pubic, or other authorized person. It is commonly used a the factual basis for an application for search ,arrest, or seizure warrant.

Question 8

Alternative Remittance System (ARS)

Answer 8

Underground banking or informal value transfer systems. Often associated with ethnic groups from the Middle East, Africa, or Asia and commonly involves the transfer of values among countries outside of the formal banking system. The remittance entity can be an ordinary hop selling goods that has an arrangement with a correspondent business in another country. There is usually no physical movement of currency and a lack of formality with regard to verification and record keeping. The money transfer takes place by coded information that is passed through chits, couriers, letters, or faxes, followed by telephone confirmations. Almost any document that carries an identifiable number can be used by the receiver to pick up values in the other country. The systems are referred to by different names depending on the country: Hawala: Arabic word meaning Change or transform; Hundi: Hindi word meaning collect: Chiti Banking referring to the way the system operates: Chop Shop Banking: China; and Poey Kuan in Thailand.

Question 9

Anti Money Laundering International Database (AMLID)

Answer 9

A compendium of analyses of AML laws and regulations, including two general classes of money laundering control measures - domestic laws and international cooperation, as well as information on national contracts and authorities. A secure, multilingual database, AMLID is an important reference tool for law enforcement officers involved in cross jurisdictional work.

Question 10

AML Program

Answer 10

The system designed to assist institutions in their fight against ML and TF. In many jurisdictions, government regulations require financial institutions, including banks, securities dealers and money service businesses, to establish such programs. At a minimum, the AML program should include:

1. Written internal policies, procedures, and controls.
2. A designated AML Compliance Officer
3. On-going employee training
4. Independent review to test the program

Question 11

Arrest Warrant

Answer 11

A court order directing a law enforcement officer to seize and detain a particular person and require them to provide an answer to a complaint or otherwise appear in court.

Question 12

Asia/Pacific Group on ML (APG)

Answer 12

A Financial Action Task Force (FATF) style regional body consisting of jurisdictions in the Asia/Pacific region.

Question 13

Asset Manager

Answer 13

A person appointed through a written contract by a company or trust to direct the entity’s investment program. The program can be fully discretionary account, or the contract can impose limitation son it. Fees to the asset manager can be based on performance achieved, trading commissions or a percentage of the valuation o the estate under his or her management. High fees and a close relationship with the owners or beneficiaries can expose the asset manager to potential conflicts between a duty to report unusual or suspicious activity and the fiduciary duty to the client.

Question 14

Asset Protection

Answer 14

A process that includes reorganizing how assets are held so as to make them less vulnerable should a claim be made against a person. Asset protection is also a term used by tax planners for measures taken to protect assets from taxation in other jurisdictions.

Question 15

Asset Protection Trusts (APTs)

Answer 15

A special form of irrevocable trust usually created offshore for the principal purposes of preserving and protecting part of one’s wealth from creditors. Title to the asset is transferred to a person named by the trustee. APTs are generally used for asset protection and are usually tax neutral. Their ultimate function is to provide for the beneficiaries. Some proponents advertise APTs as allowing foreign trustees to ignore U.S. court orders and to simply transfer the trust to another jurisdiction in response to legal action threatening the trust’s assets (so called flying trusts)

Question 16

Automated Clearing House (ACH)

Answer 16

An electronic banking network that processes large volumes of both credit and debit transactions that originate in batches.

Question 17

Bank Draft

Answer 17

Vulnerable to money laundering because it represents a reputable international monetary instrument drawn on reputable institution and is often made payable in cash upon representation and at the issuing institution’s account in another country.

Question 18

Bank for International Settlements (BIS)

Answer 18

An international organization that serves as a bank for central banks and which fosters international monetary and financial cooperation with the purpose of attaining stability in the world economy. It hosts the Secretariat of the Basel Committee on Banking Supervision. The Committee has formulated broad supervisory standards and guidelines on KYC issues.

Question 19

Bank Secrecy

Answer 19

Refers to laws and regulations in countries that prohibit banks from disclosing information about an account or revealing its existence without consent of the account holder. Impedes the flow of information across national borders among financial institutions and their supervisors. One of the FATF’s 40 recommendations states that countries should ensure that secrecy laws do not inhibit the implementation of the FATF recommendations.

Question 20

Bank Secrecy Act (BSA)

Answer 20

The primary U.S. AML Regulatory statute (Title 31, U.S. Code Sections 5311-5355) enacted in 1970 and mostly notably amended by the USA Patriot Act in 2001. Among other measures, it imposes money laundering controls on financial institutions and many other businesses, including the requirement to report and keep records of various financial transactions.

Question 21

Bare Trust

Answer 21

Also known as a dry, formal, naked, passive, or simple trust, in which the trustees have no duties other than to convey the trust property to beneficiaries when called upon to do so. Bare trusts are vulnerable to ML because the final Beneficiary is unknown.

Question 22

Basel CDD Paper

Answer 22

A guidance paper on CDD for banks issued by the Basel Committee on Banking Supervision in October 2001. The paper includes KYC policies and procedures that according to the committee are critical to protecting the safety and soundness of banks and the integrity of banking systems.

Question 23

Basel Committee On Banking Supervision

Answer 23

The Basel Committee was established by the G-10’s central bank of governors in 1974 to promote sound supervisory standards worldwide. Its secretariat is appointed by the bank for International Settlements in Basel, Switzerland. It has issued, among others, papers on customer due diligence for banks, consolidated KYC risk management, transparency in payment messages, due diligence and transparency regarding cover payment messages related to cross border wire transfers, and sharing of financial records among jurisdictions in connection with the fight against terrorist financing.

Question 24

Batch Transfer

Answer 24

Transfer compromising a number of individual wire transfers that are sent to the same financial institution and which may be ultimately intended for different persons.

Question 25

Bearer Form

Answer 25

In relation to a certificate, share transfer or other document, a bearer form enables a designated investment or deposit to be sold, transferred, surrendered, or addressed to a bearer without the need to obtain further written instructions.

Question 26

Bearer Share

Answer 26

Negotiable instruments that accord ownership in a corporation to the person who is in physical possession of the bearer certificate.

Question 27

Benami Account

Answer 27

Also called a nominee account. Held by one person or entity on behalf of another or others, Benami accounts are associated with the hawala underground banking system of the Indian subcontinent. A person in one jurisdiction seeking to move funds through a hawaladar to another jurisdiction may use a Benami account or Benami transaction to disguise his/her true identify of the recipient of the funds.

Question 28

Black Market Peso Exchange (BMPE)

Answer 28

A complex method of TBML. It was originally driven by Columbia’s restrictive policies on currency exchange. To circumvent those policies, Colombian businesses by passed the government levies by dealing with peso brokers that dealt in the black market or parallel financial market. The dollars are placed into the banking system and then are “sold” by the brokers to businessmen in Columbia who need dollars to buy United States goods for export. Goods ready for export are often actually paid for by the peso broker, using the purchased narcotics dollars, on behalf of the Colombian (or other country’s) importer.

Question 29

Blank Check Company

Answer 29

A type of company designed to be used by private corporations intending to issue publicly traded shares through “reverse mergers” without the high expenses involved in making their own initial public offering. Blank Check companies often have few assets, engage in little business activity, and have no business plan or experienced management.

Question 30

Bookmarker

Answer 30

A bookmarker accepts bets from individuals on a variety of matters, mainly sporting events. Bookmarkers are vulnerable to money laundering, since launderers may offer their customers money for winning betting slips, often 7 to 10 percent above the value of the winnings. The launderer then collects clean money from the bookmarker

Question 31

Bureau de Change

Answer 31

Also known as a “Casa de Cambio” or “exchange office”, a bureau de change offers a range of services that are attractive to money launderers: currency exchange and consolidation of small denomination bank notes into larger ones; exchange of financial instruments such as travelers checks, money orders, and personal checks; and telegraphic transfer facilities. In some countries, such businesses are not as heavily scrutinized for money laundering as are traditional financial institutions. Also their customers are often occasional, making it more difficult for these businesses to “know their customers”

Question 32

IOSCO

Answer 32

Montreal based International Organization of Securities Commissions. A global association of governmental bodies that regulate the securities and futures markets.

Question 33

What is the FATF? Financial Action Task Force?

Answer 33

The FATF is an inter-governmental body which develops and promotes policies, both nationally and internationally, to combat money laundering. It has 31 member countries and two regional organisations. It works in close cooperation with other international bodies involved in this area such as the United Nations Office for Drug Control and Crime Prevention, the Council of Europe, the Asia-Pacific Group on Money Laundering and the Caribbean Financial Action Task Force. The FATF defines money laundering as the processing of criminal proceeds in order to disguise their illegal origin.

Question 34

What is KYC? and what is the FATF’s intention?

Answer 34

KYC is most closely associated with the fight against money-laundering, which is essentially the province of the Financial Action Task Force (FATF). It is not the Committee’s intention to duplicate the efforts of the FATF. Instead, the Committee’s interest is from a wider prudential perspective. Sound KYC policies and procedures are critical in protecting the safety and soundness of banks and the integrity of banking systems.

Question 35

What is Reputational risk?

Answer 35

Reputational risk is defined as the potential that adverse publicity regarding a bank’s business practices and associations, whether accurate or not, will cause a loss of confidence in the integrity of the institution.
Reputational risk poses a major threat to banks, since the nature of their business requires maintaining the confidence of depositors, creditors and the general marketplace.

Question 36

What is Operational risk?

Answer 36

Operational risk can be defined as the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. Most operational risk in the KYC context relates to weaknesses in the implementation of banks’ programmes, ineffective control procedures and failure to practise due diligence. A public perception that a bank is not able to manage its operational risk effectively can disrupt or adversely affect the business of the bank.

Question 37

What is Legal Risk?

Answer 37

Legal risk is the possibility that lawsuits, adverse judgements or contracts that turn out to be unenforceable can disrupt or adversely affect the operations or condition of a bank. Banks may become subject to lawsuits resulting from the failure to observe mandatory KYC standards or from the failure to practise due diligence. Consequently, banks can, for example, suffer fines, criminal liabilities and special penalties imposed by supervisors. Indeed, a court case involving a bank may have far greater cost implications for its business than just the legal costs. Banks will be unable to protect themselves effectively from such legal risks if they do not engage in due diligence in identifying their customers and understanding their business.

Question 38

What is concentration risk?

Answer 38

Supervisory concern about concentration risk mostly applies on the assets side of the balance sheet. As a common practice, supervisors not only require banks to have information systems to identify credit concentrations but most also set prudential limits to restrict banks’ exposures to single borrowers or groups of related borrowers. Without knowing precisely who the customers are, and their relationship with other customers, it will not be possible for a bank to measure its concentration risk. This is particularly relevant in the context of related counterparties and connected lending.
On the liabilities side, concentration risk is closely associated with funding risk, particularly the risk of early and sudden withdrawal of funds by large depositors, with potentially damaging consequences for the bank’s liquidity. Funding risk is more likely to be higher in the case of small banks and those that are less active in the wholesale markets than large banks.

Question 39

Mutual Legal Assistance Treaties

Answer 39

The classic getaway usually embodied in a a treaty for mutual legal assistance, provides a legal basis for transmitting evidence that can be used for prosecution and judicial proceedings.

If evidence is required from another jurisdiction, a request can be made for mutual legal assistance. Procedures vary, but, generally, the following happens:
-The central authority of the requesting country sends
a “commission rogatoire” (letters rogatory, or letter of
request) to the central authority of the other country.
The letter includes the information sought, the nature
of the request, the criminal charges in the requesting
country and the legal provision under which the
request is made.
-The central authority that receives the request sends
it to a local financial investigator to find out if the
information is available.
- An investigator from the requesting country then visits
the country where the information is sought, and
accompanies the local investigator during visits or
when statements are taken.
- The investigator asks the central authority for
permission to remove the evidence to the requesting
country.
-The central authority sends the evidence to the
requesting central authority, thereby satisfying the
request for mutual legal assistance.
-Local witnesses may need to attend court hearings in
the requesting country.