AML and CTF in 2009 -Some Outstanding Issues for 2010

Peter Green Duty Head of Financial Security and Group MLRO for BNP Paribas Group Paris (2002 to 2009)

events@amlpforum.com ● www.amlpforum.com

Highlights 2009(1)

Most EU countries finally transposed the 3rd AML directive:However Ireland and Spain outstanding. France and Belgium partial.

Meanwhile 2 new directives with AML implications:E-money directive September 2009

Payment services directive November 2009

Further emphasis on transparency:New Swift cover payment régime from November

Political pressure re tax havens and non cooperative jurisdictions.OECD list. Calls by G 20 for a new FATF list of NCJs (2010?)

Focus on corruption and PEPs.

Highlights 2009 (2)

Increasingly complex financial embargos:Fight against Nuclear Proliferation and WMD Removal of EU embargos against Uzbekistan and imposition of a new embargo against

Rep of Guinea and certain members of the régime.

Further emphasis on controls by regulators:More severe sanctions for deficient procedures and violations

Reputation Issues

FATF developments and actions:Increase in number of member states to 35 (S. Korea)

Statement on cover payments.

Statement on countries with deficient régimes (e.g. Uzbekistan)

AML guidance for insurers and paper on securities sector typologies.

Oustanding Issues (1)

A) Third EU directive:

If (almost) all states have transposed the Directive, interpretations of the texts and official guidelines may still differ:

i) The risk based approach.

The directive sets out specific situations where simplified or enhanced DD is appropriate but firms are struggling to set up effective modules to refine risk assessment.

Verifying beneficial ownership and PEPs remain an issue

(World Bank paper criticizes PEP implementation. )

Outstanding Issues (2)

A) Third European Directive:ii) Third party KYC

FATF consultation paper on recommendation 9 highlights the many different approaches within the EU.

iii) Equivalent countries.

No EU list although some states have published lists

Not to be confused with other lists (OECD, sanctions lists or in house sensitive country lists)

iv) Real need to improve monitoring with a RBA.

Review of existing procedures and IT tools

Equivalent Countries

FATF*

Hong KongJapan

MexicoNew Zealand

Singapore Switzerland

Turkey*

Equivalent countries

ScotlandWales

EnglandNorthern Ireland

(Ulster)

EEA

FATF OBSERVERSIndia

EU CANDIDATESFormer Republic of Yugoslavia

MacedoniaCroatia

GB

EFTALiechtenstein

IcelandNorway

EULithuaniaSlovakiaMaltaCyprusHungaryEstoniaPolandCzech RepublicSloveniaLatviaRomaniaBulgaria

GermanyAustriaBelgiumDenmarkSpainFinland FranceGreeceIrelandItalyLuxembourgNetherlandsPortugalUKSweden

South AfricaArgentinaAustraliaBrazilCanadaRepublic of China*Rep of Korea United StatesRussia

Isle of ManJersey

Guernsey

UK Dependencies

Netherlands AntillesAruba

Dutch Territories

French Territories

MayotteNew Caledonia

French PolynesiaSaint Pierre & Miquelon

Wallis & Futuna

* NB: All FATF member states have been judged equivalent by the EU except: Turkey which is equivalent from the French point of view (Decree of July 21, 2006) the Republic of China which was not a FATF member at the lastpublication of the common EUposition on April 18, 2008.

Outstanding Issues (3)

B) Financial embargos:

i) Embargos remain complex terrorist lists data is still often vague.The UN Security Council has adopted a resolution to improve quality of lists notably in respect of Al Qaida suspects.

ii) US Extra-territoriality is as ever an issue

( US Goods, US persons, USD, etc.)

iii) It is clear that Financial Institutions and other covered parties will be increasingly open to fines or other penalties in case of violations.

Outstanding Issues (4)B) Financial Embargos

iv) Institutions must decide on which lists they adopt and what to filter against them.

( clients; beneficial owners, directors etc.)

v) For the time being a RBA is limited.

There is still a legal obligation of result and therefore the risk of severe penalties for default is still high as is the reputation risk.

Outstanding Issues (5)

c)Proliferation financing and WMD.

There is still an ongoing and sometimes heated debate as to what it is reasonable to expect from the financial community.

(FATF consultations on the subject)

Meanwhile the sector is expected to identify suspect transactions. The quality of customer DD would seem essential to avoid “accidents”

.

The Key (1)

In 2010 many of the outstanding issues from 2009 have still not been resolved.

At a time of crisis and restricted budgets it is necessary to leverage off existing measures and manage the overlaps. A false alert in one area (e.g. embargo violation) may need investigation from an AML standpoint.

As always good CDD is essential. An in depth knowledge of a clients business may help avoid sanctions violations.

An effective assessment of risk and an appropriate assessment tool is a must.

Financial Sanctions

CTF

AML / KYC

Proliferation Finance FATF SR VII

Enhanced Due Diligence

for Correspondent

Banking

The Key(2) – Manage the overlaps

OVERALL ARCHITECTURE FOR RBA

KYC

• ESTABLISHMENT OF BUSINESS RELATIONSHIP• UPDATE• CAC AD HOC

KYC

• ESTABLISHMENT OF BUSINESS RELATIONSHIP• UPDATE• CAC AD HOC

UP

DA

TE

RISK ASSESSMENT

• TYPE OF CLIENT (PPE…)• CLIENT ACTIVITY• COUNTRY•PRODUCT:TRANSACTION• COMPLEX STRUCTURES• SIZE OF BUSINESS• BUSINESS RELATIONSHIP

MLRA

ST Alerts

Flow filters

DB screen

1

2

4

KYC

• ESTABLISHMENT OF BUSINESS RELATIONSHIP• UPDATE• CAC AD HOC

RULES

CLIENT DUE DILIGENCE & MONITORING

• TRESHOLDS• FREQUENCY•LEVEL OF APPROVAL

UNUSUAL

OthersOthers

ALERTS

Cu

stom

erse

nsi

tivi

ty

UPDATE Customer committee

CL

IEN

T D

AT

A

FE

ED

ML

RA

UP

DA

TE M

ON

ITO

RIN

G

3

5

6

7

Sensitivityentity

The Key (2) essential elements

Controls:

Regular controls and audits must not be sacrificed

( legislation can change quickly and good practices forgotten)

Training

Training of staff is a regulatory requirement but above all an essential element for avoiding nasty surprises when the regulator comes.

The Key (3)

And Finally Exchange of information

Data protection is still a major problem but in most countries , particularly within the EU, exchange of information is possible for AML and CTF matters.

In large financial institutions it is also essential to cross inter-departmental and inter-territory barriers.

Key data often exists elsewhere in the company.

Questions?

Thank you

Peter Green Duty Head of Financial Security and Group

MLRO for BNP Paribas Group Paris