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ACAMS Certification exam 1. Risks and Methods of Money Laudering and Terrorist Financing Par tic ula rs Details Details 1 Definition of Money Laundering United nations 2000 conventions against transnational organized crime aka “Palermo convention” - Concealing/disguising illicit source/assisting/evading- ilegal consequences - Concealment of Location/disposition/move ment/rights of property - Acquisition/possession/use- property-crime FATF 40 Recommendation on Money laundering and terrorist financing/ 4 th European Union Directive on prevention and use of the financial system for the purpose of money laundering and terrorist financing (2015) - Knowlegedge/intent-prove money laundering offence —based on factual circumstances. - Legal principle of “ willful blindness” to prove knowledge -prerequisite-money laundering definition -"Knowledge" that money derived from criminal offence "Willful blindness"=" Deliberate avoidance of Knowledge of illegal sources of funds"/actual
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Page 1: siorik.com  · Web view-Open-loop prepaid cards-permit l payments-global payment networks. -. Prepaid card providers - sell their product internationally through agents or online-compact

ACAMS Certification exam1. Risks and Methods of Money Laudering and Terrorist FinancingParticulars Details Details

1 Definition of Money Laundering

United nations 2000 conventions against transnational organized crime aka “Palermo convention”

- Concealing/disguising illicit source/assisting/evading-ilegal consequences

- Concealment of Location/disposition/movement/rights of property

- Acquisition/possession/use-property-crime

FATF 40 Recommendation on Money laundering and terrorist financing/ 4th European Union Directive on prevention and use of the financial system for the purpose of money laundering and terrorist financing (2015)

- Knowlegedge/intent-prove money laundering offence—based on factual circumstances.

- Legal principle of “willful blindness” to prove knowledge

-prerequisite-money laundering definition-"Knowledge" that money derived from criminal offence"Willful blindness"="Deliberate avoidance of Knowledge of illegal sources of funds"/actual knowledge of illegal source of fund-intentions of customersWillful blindness = Purposeful indifference

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2 Terrorist Financing

funds from perfectly legitimate sourcesHide the purpose and destination rather than sourcefunds-operating expenses of terrorist/terrorist acts.

3

3 stages of Money Laundering Placement

-physical disposal of cash/other assets-criminal activity- introduce funds-FIs- place in funds circulation via FIs/casinos/legitimate businesses(national-international)

funds in circulation through financial institutionsBlending of funds-commingling illegitimate and legitimate fundsforeign exchange- buy with illegal fundsBreaking up amounts-small amount-depositing-under thresholdCurrency Smuggling-physical -cross borderLoans- repayment - cash

4 Layering

- Conceal origin/separate –illicit source –layers of financial transaction

- Converting proceeds- another form

Electronicall moving funds-countries/dividing financial options/market

- Moving FIs- accounts- Converting cash-monetary

instruments- Reselling high value goods- Reselling-prepaid cards/store

value products- Investing real

estate/legitimate business- Stocks/bonds/life insurance- Shell companies-obscure

ultimate benfeciary/assets

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5 Integration

- illicit wealth legitimate- Re-enter funds in economy as business/personal txn- difficult -legal vs illegal wealth- increase wealth byproceeds of crime

spot integration disparity in person source of income and person incomeeg:-buy luxury propertiesinvestments into business

6The Economic and Social Consequence of Money Laundering Increase Crime and Corruption

-ML haven- attract criminals-low number of predicate crime(criminal offences) for money launder-limited types of institutions/persons covered by money laundering laws-No enforcement of laws/penalties-free-limited supervising compliance to money laundering laws- increase in corruption-weaker laws and enforcement-corruption-money laundering.

7Undermining the Legitimate Private Sector

Use Front Companies-legitimate business-commingle funds-Subsidize products and services below market rates difficult to compete against

misallocation of resources from artificial distortion prices of assets/commodity prices-control whole industries/sector-front companies-vehicle for evading taxes

8 Weakening Financial Institutions -first internet bank-European union

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bank-riggsSignificant civil money penaltiesloss of charter

9Dampening effect on Foreign Investments

Commercial and financial sectors are perceived to be compromised/influence by organized crime

10Loss of control/mistakes/decisions regarding economic policy

-dwarf government budgetsmeasurement errors in macroeconomic statistics-control or mistakes in economic policyvolatility in exchange and interest rates due to unanticipated cross-border transfers of funds as a result money shifts from one country to another-resulting in misleading monetary datathreat of monetary instability due to the misallocation fo resources from artificial distortions in assets and commodit prices

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Economic distortion and instability

-not profit generation from the investment-protecting/hiding proceeds.- invest not economically beneficial- economic growth suffer

11 loss of tax revenue

- Tax evasion-macro economic impact

- Honest taxpayers-higher tax- Government collection

difficult

12 Risks to privatization

- corruption/insider dealings govt award privatization tender to criminal org. - criminals purchase ports/resorts/casinos hide illicit proceeds

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Reputation risk for the -country

- Loss global opportunities-extra scrutiny-too expensive

- Legitimate business-loss market access-extra scrutiny and controls

- Financial reputation damage- huge costs-restore

13 Risk of International Sanctions

-Office of Foreign Assets Controls(OFAC) of us department of the treasury] administers economic and trade sanctions -Comprehensive sanctions: prohibits virtually all transaction with specific country-Targeted Sanctions: prohibit txn -specified indiv., entity, OFAC specifically designated ind. and blocked parties list- OFAC list- high risk-non-cooperative jusrisdictions- FATC-countermeasure -jurisdiction-EDD to business relations/transactions-natural/legal person-improve AML/CFT regime

14 social costs

-increase govt. exp--increased law enforcement/treat drug patientsOther adverse consequences incl. concetration risk for FIs. -loss-profitable biz

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-liquidity prob.- withdrawal of funds -termination of corresponding banking facilities -investigation costs and fines -asset seizures -loan losses -reduce stock value of FIs

15 Reputational risk

-loss of public confidence-organization -loss-high quality borrowers-reduce loans portfolio -unaticipated withdrawals-liquidity crisis

16 Operational risk

-terminated inter-bank or correspondent banking services -increased borrowing and funding costs

17 legal risk

-Legal risks:lawsuits, adverse judgements, unenforceable contracts, fines and penalties-unenforceable contracts by the fraud of criminal customer-fines/penalties

18 Concentration risk -too much loan/credit -one/group borrower -not knowing benefecial owner of the large borrower--may be criminally linked.--aggravated when common source of income/assets for repayment-loss-unenforceable contract-fictitious person

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2014

Financial Crimes Enforcement Network(FinCEN) of US department of Treasury and US FIU Advisory to FIs

Strong culture of compliance- Entire staff responsible for

AML/CFT compliance

2015

Memorandum on “Individual Accountability and Corporate Wrongdoing” from US Department of Justice’s Deputy Attorney General, Sally Quillian Yates

- Investigations- corporate misconduct- focus-individual wrongdoing

- Resolution of corporate case- no protection individual-criminal/civil liability

19 2015

United Kingdom, the Financial Conduct Authority(FCA) published financial rules for Senior Manager Regime

- Individual accountability in banking sector

- Money Laundering Reporting Officer(MLRO)= senior manager or excecutive level

- Senior manager personally accoutable

20

June 30,

2016

New York State of Department of Financial services(DFS) issued Final rule requiring related Institutions to maintain”Transaction Monitoring and Filtering Program”

New York SpecificApplies to-banks/trusts/private banks/saving banks/saving and loans ---chartered pursuant -New York banking lawAll branches and agencies of foreign banking corporations licensed- under banking law- conduct banking operations New York

- Non-banking FIs with Banking Law License- check cashers and money transmitters

- Monitor txn- compliance Bank Secrecy Act/ AML- SAR

- Prevent unlawful txn- economic sanctions-OFAC

BOD and senior officers - annual certification-taken necessary steps-comply trasaction monitoring and filtering program by jan 1 , 2017

21 Methods of Mon

FATF and FATF-style Regional bodies publish periodic typology reports to “monitor changes and better understand the underlying mechanism of money laundering

- Key methods and trend in these areas

- FATF 40 recommendation remain effective and relevant

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ey Laundering and terrorist financing”

22 Electronic Transfers of Fund

- Electronic means- ACH, ATM, electronic

terminals, mobile phones, telephone or magnetice tapes

- Federal Reserver Wire Network(FedWire), Society for worldwide Interbank Financial Telecommunication(SWIFT), Clearing House Interbank Payments System(CHIPS)

- Commingle funds

23 Indicators of Money laundering - cash advance- stolen credit card-put in a/c to receive funds- layering stage- varying amount sent- under threshold-using reputable org-fund transfer--financial secrecy haven/high geographical location no apparent biz reason-incosistent pattern with customer history-large incoming fund transfers- behalf of foreign client-no reason-small, incoming fund transfers-deposits by checks/money orders--tranfer to different geographical location--inconsistent pattern with customer business or history-payments/reciepts-not link –contracts goods/services-sent/reciept same person--different

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persons24

25 Remote Deposit Capture

-scan check-electronic image to bank -deposit -also with mobile phones- banks -decrease cost-not paper based --ML-set up multiple imaging devices(scanners/mobiles phones)--allow others to process checks --ML-set up account for others and ability to deposit checks-- lead-violations of sanctions requirement- txn in sanction countries--Fraud-altered check or multiple deposits of same- as no human intervention

26 Mitigations

-reviewed sequential number cheques -money order without payees -total volume of activity-an account- via RDC--overall txn monitoring -limits on check deposit -facility to appropirate customer

Money order is prepaid financial instrument

27 Correspondent Bank

-provision of banking services by one bank(correspondent bank) to another bank(respoendent) -check clearing , fcy exchage services/payable through a/c, wire trf- respondent banks- international financial txn-for themselves/customers-jurisdiction no physical presence

28 Due diligence of Respondent bank -who owners are

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-nature of regulatory oversight -based on credit risks for letters of credit/business account for credit card--provide non-credit, only cash management-less known respondent bank

29 Vulnerable Money Laundering

TWO MAIN REASONS -indirect relationship-services to individuals/entities-niether verified identities nor obtain first hand knowledge -large volume of txn-not have information on actual parties conducting txn- difficult to identify suspicious

Additional risks-difficult to determine-degree and effectiveness of supervisory regime of respondent bank but can know what laws govern respondent bank -effectiveness of respondent bank's AML controls- have rely on respondent bank for due diligence on the customers- questionnaire may give some confort -respondent bank acting as correspondent bank for other institutions known as nesting- not know about sub-respondents/type of financial services

Credit union- small cooperative- non profit-return given to member

MSB has specific meanings in different jurisdictions, but generally includes any business that transmits money or representatives of money, provides foreign currency exchangesuch as Bureaux de change, or cashes cheques or other money related instruments.

30 Payable through accounts

-respondent bank's customer doing own txn(wire trf,deposit and withdraw, maintaining checking

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accounts)-via correspondent account-without clearing txn in responsdent bank - directly control funds-corresponding accountRisks: -unlimited number-sub-account holder- sub-account holder not identified

31 Money laundering perspective

-PTAs with licensed offshore-nascent supervision -respondent bank sole cusomer-fail CDD policies-respondent bank customer -PTA arrangement where currency deposit and withdrawal by sub account holder -PTAs used by respondent banks’ subsidiary, representative or other office

32 Concentration Account

-internal accounts-processing and settlement-multiple and individual customer txns within bank-same day-know as special use, omnibus, settlement, suspense, intraday, sweep or collection -aggregate funds -centralized account -used for private banking, trust and custody accounts, fund trf and international facilities

33 Money laundering perspective

-Customer-identifying information like txn amt& account number,seperated from financial txn-audit trial lost-misuse a/c

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34 control policies

-dual signatures-general ledger ticket(approve by, prepared by) -prohibit direct access-customer txn shown in customer statement-no knowledge to customers- information on txn and customer identifying information-independent reconciliation-timely discrepancy resolution-monitoring recurring names

35 Private Banking

-highly personalized- confidential-wealthy client- at fees-under "assets under management"- semi-autonomous- competitive- compensation based on assests under management

36 Money laundering perspective

-high profitability -intense competition -powerful clientele -high confidentiality -close trust -clients -commission based compensation -culture of secrecy and discretion-relationship manager -RM advocate-client -using private investment companies- of reduce transparency of beneficial owner -client-personal/business wealth in numerous jurisdictions-client control legal entities for estate planning

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37

Shell company-hold assets-in offshore-for tax/trust relate matters-client confidentiality /conceal beneficial owner via nominee/a Private investment companies

-private banking customer -international financial centres or offshore-non-residents -assets moved overseas-corporate vehicles-PIC- secrecy havens -established by bank customers and others -offshore-hold assets -are shell companies-client confidentiality-tax or trust related -conceal beneficial owner -company formation agent-nominee director-hold title to company -attorney-client privilege-undisclosed beneficial owners -private bank establish PICs through affiliated trust company-offshore secrecy haven -complex shell company networks-company in one offshore linked to other offshore company.

Hold mail servicesThe Bank maintains a registry with all related bank documents for enrolled clients, who have the option of collecting them at their convenience.

38

Politically expo

sed pers

on

FATF’s International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation(2012) Foreigns PEPs

-prominent public functions -heads of state orgovernment, senior politicians, senior government, judicial or military officials,seniour executives state owne corporations, important political party officials

39 Domestic PEPS

-prominent public functions domestic country -government, senior politicians, senior government, judicial or military officials,seniour executives state owne corporations, important political party officials

40 Structuring -evade triggering reporting/record

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keeping -reported by filing STR -depositing cash/purchase monetary inst.- done in banking, MSB, casinos

smurfing

- Multiple individuals-multiple cash deposits or purchasing monetary instruments-reporting thresholder

41 Foreign Money Brokers

Foreign money broker-numerous checking accounts-fictitious names-identification of dead people. -open accounts -inconspicous amounts -deposit funds to cover living exp -account opened-blank check signed-leaving payee, date, amt blanks-send checks money broker in other country-by courier

- Lot of checking account two dozen or more-accumulated -withdrawn to pay exports

42Microstructuring -breaking large txn very small

amounts43 Detecting -counter deposit slips instead of

preprinted deposit slips(identifying customer) -frequent activity -account with incomplete documentation -frequent cash deposits-nominal account-inconsistent pattern -cash deposit-ATM withdrawals-high risk

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-cash deposit by third party-business acccount-no relation to company

44 Smurfing

-multiple persons-multiple cash deposits-multiple purchase monetary inst under reporting

45 Credit Unions and Building Societies

-not-for-profit, member-owned,democratic financial cooperatives-members are owners -financial needs of members -one member-one vote -member purchase initial capital shares- accessing product/services- common bond-linked by depositing and borrowing-particular community, organization, religion, place of employement -few to hundred members-thousands of dollars in assets under management- personal banking relationship but may include—small to medium corporations -no trade-based, correspondent banking, large corporate relationship with international financial needs

46 Credit Union central -trade associations for credit unions -owned by member trade credit unions -services like capital liquidity, research, training, advocacy -shared operational, back-offices processes check clearing, electronic fund transfers

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-shared contracts for common services

47

-included in FATF definition of Financial institution ,-national AML/CFT regime that follow FATF recommendations will treat credit union similar to banks

2006 NovemberUK Joint Money Laundering Steering Group(JMLSG)

- Credit union vulnerable to ML- large financial services-high

risk- large clientele-large range

conceal funds

48 2014 November JMLSG guidance

High risk transactions:- money trf to third parties- third party paying cash to

someone else- reluctance to provide identity

information- opening account- erratic behavior- txn larger than usual amounts.- Unusal activity in minor

account-account draw less attention

49 Non-Bank Financial Institutions(financial intermediaries)

Credit Card InsdustryCredit card association(Americal Express/Master card/Visa)

- License member bank to issue bank cards

- Authorize merchant to accept the card

50 Issuing Bank -solicit customers -issue cards

51 Acquiring bank -process transactions for merchants-accept credit cards

52 Third-party payment -contract with issuing or acquiring Not subject to

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processors(TPPP)

banks - provide payment processing-merchants/biz enitities -no relation with TTPS's FI -bank customers

AML/CFT requirements

Money laundering perspective

Not in placement stage-restricts cash payment-layering and integration phase

- Prepaying card -illicit funds already in banking system- creating credit balance-credit refund-obscure origin of funds(layering) -putting money in offshore funds-accessing via debit/credit cards

- - credit card txn- done via TPPP or FIs don’t have to be significant amount-suspicious-like large or small dollars payments- Need strong CDD and txn monitoring

2002

Extent of money laundering through credit cards is unknown, US Government Accountability Office, the congressional watchdog of United states Money laundering perspective

- Illicit deposit in front biz- assess via credit cards in other countries- money deposited in a/c-used to pay credit card loan or prepays credit

-Third party payment processors - Merchant/biz entities- use

commercial bank accounts- of TPP-conduct payment processing

- Conduct merchant transaction like credit card payments, ACH, creating and depositing

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RCC, demand drafts,retail or internet based establishments, prepaid and internet gaming

TPPP Money Laundering Perspective

- FI no relation-underlying merchant- on whose behalf txn being done- types of merchant- vulnerability money laundering, identity theft, fraud like telemarking, internet gaming, -TPP maintain accounts-multiple institution FIs-not see-customer entire txn||Done on purpose-TPP-hide suspicious -send funds from foreign jurisdiction -directly to FI by international ACH||done in large number- not detected)-high average rate of returns for unauthorized txn-at merchant level-criminal merchant average rate of return will proportionate toTPPP txn volume, but at individual originator-it will be higer.

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55Money Service Business/ Money or value Transfer Services(MVTS)

- FATF def- transmits or converts currencies -currency exchange, money transmission, check-cashing ,money order services,

United States, FinCEN Defines MSB Person or business -whether or not on a regular basis doing following business:--

1. Dealer in Foreing exchange: convert currency-operates @ international borders, airports, communities with foreign individuals

2. Check casher: also services for paying bills

3. Issuer of Traveler’s Checks or Money orders: may use agent

4. Money transmitter: electronically like paypal, western union

5. Seller of prepaid access/store value: funds paid in advance- retrieved via card,code, electronic serial number, mobile identification number, personal ID

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- Open loop prepaid cards:any merchant/use on Payment network associated with card- access cash via ATM connected to affiliated ATM network(like American express, visa)

- Closed loop:sepicifi merchant issuing card

6. US postal serviceMSB -registered with FinCEN- even not physically located in US but providing MSB type services(FinCEN final rule 2012) without exceptionBusiness like grocery, drug store, restaurant bars- ancilliary MSB services-MSB- region- limited/no banking services—lower cost of services in relation to FI

-provide service like payday lending(advance salary), -prinicipal and agent relationship -principal provide MSB services like check cashing services-AML policies/internal controls, BSA officer/education and training, audit/monitorAgent-MSB services-in addition to

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existing product services-may be principal MSB if check cashing-primary services. Money transmission via principal MSB. Agent-helps increase market less overheadAgent-follow state and federal regulations as principal MSB

56 ML and Fraud perspective to MSB

-present fraud check-not ask payee identity-not file currency transaction reports-bribe customers-compromised by insider employee- business friendly -low cost workers compensation insurance policy -deflating payroll-renting policies other for fee||payroll amount by cashing checks -trf money-via money remitters/currency exchange- fund available criminal org-destination country at local currency by transmitting dollars and selling it to legitimate company for purchase of goods of export-misconception-minimal oversight- MSB set up easily-small-not sufficient AML program-confirm- have AML/CFT program, licensed, registered

Mass-marketing fraud (or mass market fraud) is a scheme that uses mass-communication media – including telephones, the Internet, mass mailings, television, radio, and personal contact – to contact, solicit, and obtain money, funds, or other items of value from multiple victims in one or more jurisdictions. The frauds where victims part with their money by promising cash, prizes, and services and high returns on investment are part of mass market fraud

57 Insurance Companies

-business done via intermediaries-agents/independent brokers -Susceptibility not high as Fis-property/casualty/title/health-not

Title Insurance.once a

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investment features-cash build-ups/trf of funds/hide fund -life insurance/annuities primary target-ML risks- similar security sector- life insurance with no cash surrender value-leas attaractive -cash surrender value and nominate benefeciaries first day--most attractive -annuities- exchange illicit funds-immediate/deferred income

property owner purchases and takes possession of a property, title insurance will defend against any litigation that challenges the validity and legality of the new property owner.

58 ML perspective

- policy holder-interest in cancellation than benefits 1. Lack of oversight/controls over intermediaries: great control and freedom to agents regarding policies2.Decentralized oversight over aspects of the sales force: employees(captive agents) -agents work -multiple insurance companies-lack of oversight-prefer to work with weak AML oversight3. Sales-driven object -agents work for comission

59 Examples of money laundering

-overfund policy-withdrawal penalties-insurance pay checks-similar as unit trust or mutual funds- purchase and redemption-single

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premium insurance bonds-redeem at discount- balance paid at sanitized cheques -Free look period- short period after policy signed policy-premium paid-back out policy without penalty- insurance check-more readily detected and reported - -policyholder interested-policy cancellation than benefits paying penalty-

602004-2005 FATF Money Laundering Typologies

- life insurance attractive to ML-high degree flexible-non-negligible returns-whole/permanent life insurance-investment value-cash value above original investment-cancelled by policy holder -funding by unidentified third party- source of fund and relationship between policyholder and third party not clear. -substantial payment in life insurance single premium policies-investment opportunity rather insurance coverage||large premium deposit—fund annual premiiums||annual premiums paid from account –funded with total amount

61 Assessing ML and TF risks

-cash -purchase-insurance products-purchase-single or lump sum payments -lending against insurance

62 Securities Broker-Dealers -provide anominity - world capital markets dwarfing

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deposit bankinglittle currency -run by electronic transfer/paper -layering stage

1992

FATF inconjunction with Montreal-based International Organization of Securities Commissions(IOSCO), global association of governmental bodies that includes the commodity futures trading commission(CFTC) Difficulty in dealing ML

- Little currency involved

- Run by electronic trf and paper

- Layering stage-after money in financial system.

63 Money laundering perspective -international nature -speed of txn ease -conversion of holding-cash -withouth significant loss of principal- routine wire trfs-multiple jurisdictions -competitive,comission-disregard source of client funds -brokerage-maintaining securities account as nominees/trustees-hide true benefeciaries -weak AML programs

Illicit money to laundered generated from outside sector:security transaction via legal entities/shell -obscure source of fundsInside sector: embezzlement, insider trading, securities fraud, market

A securities account sometimes known as a brokerage account is an account that hold financial assets such as securities on behalf of an investor with a bank, broker or custodian. Investors and traders typically have a securities account with the broker or bank they use to buy and sell securities.

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manipulation Dual advantage: laundering and acquire additional profitML=hold fund in customer account not used for trading-avoid banking channels -wash trading/offsetting transactions-involve entry of matching buys and sells in particular securities-illusion of trading-offsetting profit/losses-trf position to diff accounts-not appear to be commonly controlled

64FATF-greatest money laundering vulnerabilities

-wholesale markets -unregulated funds -wealth management -Investment funds -Bearer Securities -Bills of exchange

65 ML Challenges -customized security product—complex and esoteric

-under-regulated/illegitimate securities -sold over-the-counter-pink sheets-minimal reporting-obscure beneficial owner-difficult to determine association with sanction jurisdictions//trading many platforms

-many intermediaries-financial institutions, broker-dealers,financial advisors, transfer agents, securities lenders, custodians, brokers and sales

A transfer agent is a trust company, bank or similar financial institution assigned by a corporation to maintain records of investors and account balances. 

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agent- cross border and standardized control not applicable.

66 FATF -supicious indicators -long standing client-liquidates all-remove wealth jurisdiction -purchase product for loss/commission-including early cancellation -appear as depository a/c-wire transfers/payment-not security activity- customer txn-sustained loss-trfing value-txn with loss(buy-high&sell-low)-trf value-invest without knowledge- but want to invest -insider trading-close relatives-held non-public information -two or more unrelated accounts dealing illiquid-low price security-suddenly and simultaneously -deposit physical securities ---large quantities ---title in diff name from the account ---not bear restrictive legend ---aquiring securities lack sense-Case study: stock issuers-promotional campaign-customers trading

When a reverse1:50 split happens, the market systems adjust the stock price upward by a factor of 50. While the company valuation remains the same, the number of outstanding shares is reduced. Shareholders who end up with less than a share after a reverse split may be automatically cashed out of their holding by their broker.

Restrictive legend: buy shares in unregistered, private sale from issuing company of from affiliate issuers. Bear restrictive legend that it can be sell in public market only if no objection is raised by

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SEC.

67 case study

-pump and dump- fraudulent reports about company prospects- sharp increase value-launder funds via sale of shares -dumping of shares by sale at artificial price -settlement in certified checks

Over-the-counter (OTC) or off-exchange trading is done directly between two parties, without the supervision of an exchange. 

68 control policies

-Retail Brokers-frontline defense-most vulnerable access point- commission driven as client base and manage more assets

A certified check or certified cheque is a form of cheque for which the bank verifies that sufficient funds exist in the account to cover the cheque, and so certifies, at the time the cheque is written.

United States, SEC and Financial Industry Regulatory Authority(FINRA) directed by BSA

AML programs ---appoint BSA officer:perfom CDD, STR monitoring, independent audit

69 Non-Financial Business and Professions

70 Casinos

-proficient cash-generating business -bookmaking(betting) -excuse-large wealth-no legitimate source -placement stage- buy chips-illicit funds-repayment from cheque drawn on casino’s account or use casino credit-withdrawn from other jurisdiction-layering stage- cash to checks, casino

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credit for layering of txn and eventually transferring-use casino line of credit-illicit funds to repay credit -horse and gaming(FATF 1997-98typologies) --gamble all-recover his stake-checks/fund transfers-verifiable winnings from gaming -Junkets-casino-based tourism- ---move funds across borders- work multiple casinos --obscurity-source of funds/identities of players --pool funds-obscure spending lsof individua --licensed junket operator acting front-other operator in another country --unlicense sub-junket operator incountry of gambling --unlincesed sub-junket operator-unlicense collector of credit-tie with criminal

71

FINCEN's 2008 Guidance and FATF's 2009 report on casions and gaming sector

1.Attempt to evade AML reporting or record-keeping requirement -pays large credit debit/markers/bad checks via currency txn -not exceeding threshold -purchase small chips-minimal gaming-request check -recieves large payout-but requests

$3,000 recordkeeping threshold for the currency purchase of monetary instruments(cashier’s cheque, money orders, travelers checks or foreign drafts) to avoid having to produce

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payment below threshold and balance in chips-redeems chips less threshold-structuring with other customer-avoid CTR/filing tax form-reduces no of chips—when asked for ID2.Use cage solely for financial services--wire trf non-gaming proceed-country not residence/place of biz --temporary repository funds-deposits into casino account- wire trf to domestic and foreign based accounts

3.Minimal gaming activity-no reasonable explanation

--purchase large chips-minimal gaming-redeems chips-casino checks

--casino credit-buy chips-minimal gaming-pays credit in currency--

redeem chips for checks --large deposit in small denomination-

withdraws chips-minimal game-exchange chips in large denomination--bill stuffing(small denominations in

slot machine)-minimal/no play-exchange voucher at kiosk/cage-large

denomination or casino checks--purchase chips-minimal-walks away-

no cashing checks--transfer funds-deposit-front money

account-withdraws chips-minimal play-chips into checks

4. Unusual gaming and transaction patterns

identification in the process

$10,000 CTR filing threshold to FINCEN for each deposit, withdrawal, exchange of currency, other payment or transfer to FIs

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-betting -offset profit/loss --roulete(black/white, odd/evem) --baccarat(with, against) --craps(pass line/come line and don’t pass line/don’t come line)-hedging(offsetting) -casino check payable-third parties-specified payee -large deposits or pay large markers- with multiple instruments-below threshold $3000 -large withdraw-multiple casino checks-below threshold -high value deposit-dormant-withdraw -structuring with other customer -

73 controls -don't allow play --accept revenue-without verifying source of funds- in case of high rollers- no explicit requirement that source of funds to be known—casinos more information regarding high risk txn like international wire transfers, large cash deposit -identify source of funds/CDD -at time funds accepted -share information, criminal and judicial, securities and exchange, financial, governmental, worldwide list, political exposure, negative news, business association- for ID verification/CDD by frontline

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operations74 casa de cambios Mexican money exchange houses

75 online gamin ML riks

- regulated in UK, gambling commission if operate in UK, any equipment in UK, even not done via British facing business.- regulated in Antigua and Barbuda(under Interactive Gaming and Interactive Wagering Regulations)-cyber criminals-txn through credit or debit cards -site operators-unregulated offshore firms- offshore bank a/cs use domestic correspondent banksDetection: merchant code-type of business accepting credit card/transaction code-whether physically present in casinos or not -online gaming funded via pre paid cards, wire transfer, peer to peer transfer, virtual currency, mobile phone carrrier billing(sms banking)

2013

MONEYVAL(Committee of Experts on the Evaluation of Anti Money Laundering Measures and Financing of terrorism)

The Use of Online Gaming For Money Laundering and The Financing of Terrorism Purpose”---identified typologies for money laundering

Colludes with online gaming-deposits illicit funds in gambling account-withdraws winnings-tax authorities- operator gets commission colludes with professional gambler-money in account-takes winnings-after comission - deposit illicit money with stolen identity- bets-obtain winings

76 control cards -use code in card-type of txn-presence of customers

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77Dealers in High value Items(Precious Metals, jewelry, art tec)

Januay 2006, USA patriot act- certain dealers -implement Anti Money laundering programs

July 2015 FATF

Money laundering/Terrorist Financing risks and voulnerabilities associated with gold—typology report

-Gold-high instrinsic value-portable- --buy and sell easy-anonymity for currency -- acceptable than precious stones --readily accepted --melted in diff forms-- holds value-regardless of form- facilitating trf of wealth --high demand-religious valueTwo major Findings:--extremely attractive--convert illicit cash-anonymous, transferable gold--gold market target--very lucrative

--owner/seller -gold-divert cash-third party

78 ML risks

1. Payments or retursn to persons other than the owner: --delivers/assert ownership/authority-sell-but direct payment third party||tranfer asset in one form to another or one person to another-internation finance2.Precious Metal pool accounts --receive and hold precious metal credits-drawn by customer-withdraw/deposit and tranfer

Carousel scheme=moving in circle

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Diamonds Direct purchase from ill gotten money

79 FATF indication to ML

--retaill foreign exchange txns, fruad and fraudulent invoicing --commingling of legitimate and illicit proceeds in accounts of diamond trading--internation fund trf in these accounts--money laundering of both illicit diamond trafficking or diamond trading used as money laundering

80 ART Industry ML risks

-anonymous agent-bids millions of dollars-auction houses -payments-wired-these agents' principals-offshore havens.

81Controls by art dealers and auctioneers

-art vendors-names & addresses-self declaration(dated and sign) that are not stolen/authorized to sell -verify IDs and address of vendors and customers. Suspect -art item-asking price not consistent- market price -suspect art stolen-contac the Art Loss Register(www.artloss.com) -skeptical to customer paying cash-accept cash if strong and reputable reason -aware of money laundering regulations -senior staff member -reporting Suspicious activities

82 Travel Agency

-commingle illegal funds with clean-purchsing high price airline tickets, other vaccation exp.

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83 ML risks

--Buy High price ticket for another- then ask for refund --structuring wire transfers from foreign countries --establish tour operator networsks-false bookings and documents-justify payment from foreign travel group

84 Vehicle Sellers ML risks

- Include seller of Vehicle/fixed wing airplanes, helicopter, new boats

-structuring cash deposits or purchase vehicle-sequential number checks/money orders -complex trading of used and new cars creating layering of txns-layering stage -third party payments- high risk jurisdiction -unreported currency to pay automobiles-common money laundering element

-criminal trading expensive car for cheap model and getting difference in checks

85Gatekeepers:Notaries, Accountants, Auditors and Lawyers

-either block or faciliate entry -illegitimate money in financial system - repsonsiblity-identify clients, conduct due diligence, maintain records, report suspicious activities, not tipping off

86 2013 Typology report FAFT indicators to ML risk -creating/managing corporate vehicles or complex legal

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arrangements(trust)-obscure link between criminal proceeds and perprtator- Buing and selling property. Use in laying(cover for transfer) and integration stage(ivnestment)- performing financial txns:issuing checks,deposits,retail foreign exchange, stocks, international fund transfers- providing tax evasion advice -introducer to FIs. -undertaking litigation -managing charity -provides respectability-dissuade questioning-or added step in chain of investigation -misuse client's account

87 2013 Typology report of FATF Red flags of ML and TF

1.Client --secretive --using agent/intermediary-avoid personal contact unreasonably -- refuse give information-txn execution --PEP --subject of investigation-acquisitive crime -- ties to criminals -- unusual interest – ordinary standards 2.Parties --belong to High risk countries --interconnect without no business

acquisitive crimea crime committed to gain

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reason --ties create doubt-txn --multiple txns-short time --incapaciated-under age-unreasonable involvement --attempt to disguise benefecial owner --not directing txn --unsuitable representative3.Source of funds --provided byUnusual payment arrangements --is collateral-high risk country --significant increase in capital/foreign capital for rencently established-no logical --Relatively high capital-similar business --from stocks with very high and low price --from unjustifiable large txns.4.Lawyer --significant distance from client/txn-no reason --no experience in providing particular service --higly paid-unusually --frequently changed orclient with multiple advisors --doing refused services 5.Retainer --unusual txn-type, size, frequency, execution --no knowledge of the job

possessions. Examples of acquisitive crimes include theft, burglary, and robbery.

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---complicated ownership structure-dealing high risky countries ---client txn inconsistent not related company activities--abrupt changes to instruction ---no sensible(commercial/financial/tax) for complicationg txn that raised high tax rates --exclusively keeping documents/goods-holding large deposits-using client account without any services --abandon txn without concern for fee after receipt of fund --no logical reason -getting authority-disposal of assets --litigation settled easily-no involvement of legarl profession --payment -third parties-no reason

89 Controversial issue

--attorney client priviledges Way out for this Deferring regulation Imposing CDD/internal control-

regard to non-privileged Join govt.-pvt sector-regulate

laywers require registration- involved in financial txn

Hybrid approach-guidance from FATF

90 Investment and Commodity Advisors Vehicles

-Commodities: goods traded via futures contract -Commodity pool:combines fund various investors to trade

An Omnibus account is a stock holding account generally held by

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infuture/options contract-futures/futures contract: buy or sell-set quantity of commodity-future date at set price -Options contract: create right not obligation-buy/sell -set price- after set date -Omnibus accounts: a/cs by futures commission merchant(FCM) for another—transaction of multiple accounts holder combine-identities unknown to holding FCM

multiple brokers or merchants. The broker or merchant holds the stock for multiple clients and transact on their holdings, thereby making it easier for them to manage accounts for clients

91 Commodity Trading Advisors(CTA)

-advises on various securities derivatives- responsible for managing future contract- know money laundering activities-implement compliance program

92 Other actors 1.Commodity pool operator-combines fund members- trades futures/options contracts2. Future commission merchant(FCM):firm/person accepts orders on future contracts- accepts fund for execution 3.Introducing broker-dealers in commodities(IB-Cs):firm/person-accept future oders but no funds a.Guaranteed Introducing broker:FCM responsible for broker performance-there is agrementb.Independent Introducing broker:mimimal capital and financial reporting requirements—introduce accounts to any FCM

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4.Investment advisor:also hold client assets

93 ML risks

-asset trf to unrelated a/c or high-risk -frequent deposit/withdrawals -wire trf -unrelated party- clients- asking custodial arrangements-remain anonymous -trf fund to advisor then another-investing illegal proceeds for a client- movement funds -disguise origin

94 Trust and Company Service Providers(TCSPs)

-formation agent of legal persons -acting/arranging-director/secretary/partner of company -providing registered office/correspondencehave confidentiality privileges with a client-acting/making other to act as trustee-acting nominee shareholder for another

Express trust = trust formed without intervention of court

95 2010 Money laundering Using Trust and Company Services

FATF suggestions to ML -tcps-not recognized in jurisdiction -provided by lawyer(can hold asset outside client’s jurisdiction)- tcps-confidentialiyt and privileges to client Red flags-no applying AML-limited market restriction for practitioners with lack of skills/competence/integrity

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-inconsistent record keeping-Unlicensed operation-TCPS’s CDD performed by third party

96 Other ML risks

-use of complex legal entities -consultancy fees payment to shell companies. -use of TCSP in high risk jurisdictions- not provide information on beneficial owenrs -use of TCSP in weak jurisdiction -use legal persons-tax haven jurisdiction -multiple intercompany loan txn or multi-jurisdictional wire transfer

97 control

need to regulate service provider as they provide tools for money laundererRegulation -regarding- operation and select directorsGilbratar-first to regulate- 1989AML compliance-necessary- requirement for licensingDifficulty:Legislation-bars-gaining access-client permissionDifferent standards for regulation

Real Estate - Classical money laundering- political/economical/monetary stability

. When sellers are looking for an all-cash offer, they are looking for an offer that does not require financing from the seller, and that does not

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contain any contingency for financing from any other source. It means that if the buyer does not deliver all cash to the seller on or before the stipulated closing date, then the buyer agrees to forfeit their good-faith deposit to the seller.

98 Escrow Accounts

-held by brocker, real estate agents, other fudiciaries -fund entrusted to someone-protection and disbursement -large diverse txns via multiple instruments -easily disguise illicit proceeds-account- money can be paid-straw men/shell company-different legitimate txn: sales proceeds, mortgage payment, comiision -size and volume of routine escrow account-smooths ups and downs in the account

Title insurance agent

-multiple cash deposit-under threshold related to non-existent closing deals

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99 Reverse Flip

-buy propery -lower price(to stay under radar)-pay difference under table -sell at original price

100 Loan Back

-criminal gives money- loan or mortgage to trafficker same amount- necessary documentation. Schedule legitimate payments

April 2008 FinCEN

Suspected Money Launderingin the Real estate Industry

- About SAR- File SAR only related

mortgage fraud schmes

- Not relating money laundering-since launderer integrate illicit funds through regular and timely payments

101 2015

Australian Transaction Reports and Analysis Centre(AUSTRAC) real estate attrative to money laundering

-purchased with cash -beneficial owner disguised -stable, reliable investment -value increase renovations/improvement- not complicated- used in all 3 stages

102Money Laundering methods in australia

-straw buyers/cleanskins -loan and mortgages/lump sum payments -property flipping-disguise undisclosed cash payments by manipulating prices- structuring- purchase-disguise illicit funds as rental income -criminal activity(drugs) in purchase house

Solicitor:a member of the legal profession qualified to deal with conveyancing, the drawing up of wills, and other legal mattersconveyancing is the transfer of legal title of real property

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-illicit cash for propery improvement-reselling at high value -front companies/shell/trust-hide benefecial owner -use of gatekeepers(agents, conveyancers, solicitors)-conceal criminal involvement, complicated ML process-give legitimacy -investment by overseas criminals-hide/avoid confiscation -use of LLPs

from one person to another, or the granting of an encumbrance such as a mortgage or a lien.

103Red flags of ML when real estate deal with FIS

- various ways of accumulation of cash for purchae/downpayment/repay loans -multiple buy and sell-short time, over and under valuation,straw buyers -off-shore lending - unknown source fund via wire trf-originator and beneficiary same -non-resident cutomer-purchase real estate only

104 FINCEN Geographic Targeting Oders(GTO) -Order by United States Secretary of Treasury -Require United States domestic Fis that exist within geographic area-report transaction greater than specified value -last for limited period of time -helped law enforcement identify individuals -acquiring luxury residential via limited liability companies. Other opaque structures without use of bank financing

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-title insurance companies-identify natural person behind shell companies-purchasing-highend real estate

105 International Trade Activity

ML via currency exchange, FTZ, cross-border payment, shell companies-trade based money laundering and black market peso exchange -successful -illicit financing- both manipurate FTZ

106 Free Trade Zones

-3000 free trade zones (FTZs) in over 135 countries, -designated geographic areas with special regulatory and tax treatmentsfor certain trade-related goods and services - located in developing countries near ports of entry but are separate from traditional ports of entry -located in regional fnancial centers that link international trade hubs with access to global fnancial markets

107 Marc 2010

Report on the Money Laundering Vulnerabilities in Free Trade Zones

FATF suggestions to ML1. Inadequate AML/CFT safeguards.2. Minimal oversight by local authorities.3. Weak procedures in inspect goods and legal entities, lack of appropriate record-keeping andinformation technology systems.4. Lack of cooperation between FTZs and local customs authoritiesFTZ large in size-difficulty in monitor incoming and outgoing

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cargo/repacking and relabelling

108TRADE-BASED MONEY LAUNDERING TECHNIQUES

Money laundering, tax evasion, terrorist financing

Used in integration phases

June 2006, Trade based Money Laundering

- process of disguising the proceeds of crime-moving value using trade transactions -legitimize their illicit origins -done via misrepresentation of the price, quantity or quality of imports or exports-vary in complexity-used in combination with other ML techniques2

Feb 2016

Guidance paper on Combating Trade based money laundering developed by Hongkong association of banks

Methods

Understand commercial purpose of underlying txn

109 Over-invoicing:

- invoicing the goods or service at a price above the fair market price-seller receive value from the buyer

110 Under-invoicing:

-invoicing the goods or service at a price below thshelfe fair market price-seller transfer value to the buyer

111Over-shipping or Short-shipping:

-difference in the invoiced quantity of goods and the quantity of goods that are shipped

112 Ghost-shipping:

-Fictitious trades where a buyer and seller prepare all the documentation indicating goods were sold, shipped and payments were made -no goods were actually shipped.

113 Shell companiesreduce the transparency of ownership in the transaction.

114 Multiple Invoicing:

numerous invoices are issued for the same shipment of goods-money launderer -make numerous payments

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115 Black market trades:

Black Market Peso Exchange -domestic transfer of funds is used to pay for goods by a foreign importer

Letter of credit

Used to finance export-money laundering to trf fund from lax exchange controls- using wire transfer with LC to show legitimancy-july 2012, asia/pacific group on money laundering”APG typology report on trade based money laundering” Great obstacle- lack of statistics in TBML for advising strategies

Exchange controls are governmental limitations on the purchase and/or sale of currencies. These controls allow countries a greater degree of economic stability by limiting the amount of exchange rate volatility due to currency inflows/outflows. 

116 funnel account

-an individual or business account in one geographic area that receives multiple cash deposits-cash reporting threshold - Funds are withdrawn in a different geographic area-With little time elapsing between thedeposits and withdrawals

117How to identify funnel account activity

-account-receives numerous cash deposits of less than-currency reporting requirement-unidentifed persons at branches outside of the geographic region where account is domiciled. -account deposits take place in a different geographic region from

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where the business operates.- Individuals opening or making deposits to funnel accounts-lack information -activity of the account, the account owner, or the source of the cash business account recieves- out-of-state deposits with debits- not related to its business purpose -notable difference in handwriting on payee, amount that of signature- check issued from an account that receives out-of-state cash deposits -Wire transfers or checks issued from a funnel account -deposited into, or cleared through-US correspondent account of a Mexican bank.

118 BLACK MARKET PESO EXCHANGE -reduce risk of seizures- trf money transfer -money launderers utilize individuals or businesses that have control over numerous bank accounts at numerous banks - bulk cash smuggle from the United States -smuggled US dollars are deposited into foreign institutions(Mexico,Central and South American countries) -wired back to the US and other prominent trade countries as payments for international trade goodsand services.

1st stage: Columbian cartel receive drug proceeds in US dollar2nd Stage: cartel contact peso broker to launder dollars3rd stage:broker exchange dollar for pesos.4rt stage: broker deposits US dollars in US banks5th stage: Broker offer Columbian importer dollar for pesos6th stage:importer

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uses drug US dollar money to pay for import.

119

New Payment Product and services likePrepaid Cards, Mobile PaymentsAnd Internet-Based Payment Services, digital precious metals

-Risk related:functionaliy of services and funding mechanism

Prepaid card same as cash -portable,valuable, exchangeable and anonymous. -either open loop or closed loop(limited online or physical location) - reloadable or non-reloadable -linked to one accounts or pooled account - issued by depository institution or non-bank organization

Digital precious metals, a relatively new way of transferring value online, enable users to secure cash deposits against precious metals held offshore

October 2006, FATF report

- Market where legitimate demand-ML and TF risk exists

- Cross border -new payment service- high risk

120 Open-loop prepaid cards

-network branded by American Express, Visa or MasterCard -purchased and loaded with money by one person -like regular debit cards - make purchases or ATM withdrawals

121 Closed-loop prepaid -limited use for a specifc purpose or service -with a certain merchant or retailer, whether online or at a physical

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location

122 Risk factor pre-paid cards

• Anonymous cardholders.• Anonymous funding.• Anonymous access to funds.• High value limits and no limits on the number of cards individuals can acquire.• Global access to cash through ATMs.• Offshore card issuers - high jurisdictions.• Substitute for bulk-cash smuggling

123Electronic purses(e-purses or stored-value or smart cards)

-ectronically store value on integrated circuit chips. -store funds on memory chips

124 Measures- limit the vulnerability

• Limiting the functions and capacity of the cards maximum value/ turnoverlimits/no of vstf per customer).• Linking to financial institutions and bank accounts.• Requiring standard documentation and record-keeping • Allowing access to records by by investigating authorities.• Estab0lishing international standards for these measures.

125 2012 Joint Money Laundeering Steering Group’s Guidance on E-Money Guidance

Electric money products(prepaid cards, virtual purses)

- electronic money:prepaid means of payment-used to make payments to multiple persons(legal or ntural entities-card-based or online account-based -issued by banks, building societies,

UK e-money institutions are regulated by UK Financial Conduct Authority(FCA) and governed under

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and specialist electronic money institutions -prepaid cards - pay for goods at a range of retailers, or virtual purses - pay for goods or services online.

Electronic Money Regulations(2011) that required compliance with all AML/CFT and sanctions requirements.

building societynounBRITISH

1. a financial organization which pays interest on investments by its members and lends capital for the purchase or improvement of houses.

126Joint Money Laundeering Steering Group’s Guidance on E-Money Guidance

risk factors inherent in e-money

• High, or no, transaction limits.• Frequent cross border transactions.• higher risk businesses such as gambling.• Funding with unverifed persons.• Funding with cash that leaves no electronic trail to the source of funds.• Funding with other electronic money that lacks verifed persons and/or source of funds.• Non-face to face transactional activity.

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• Features that increase the functionality of the card in terms of executing transactions suchas person to person, business to person, business to business, person to business.• Ability of customer to hold numerous purses.• Segmentation of the business value chain.

127 2006

Typology report, FATF”Guidance for a risk-based approach prepaid cards,mobile payments and Internet-based payment services”

inherent risks with what it called new payment methods (NPMs)

Non face-to-face relationships and anonymity: - quickly move funds around the world-purchase and access cash through ATM network -anonymity while purchasing, registering, loading,reloading -easily be passed on to unrelated third parties -Customers established through agents, online or through a mobile payment system. -customers providing inaccurate information -identity fraud-disguise illegal activity

128 Geographical reach: -Open-loop prepaid cards-permit l payments-global payment networks. -Prepaid card providers - sell their product internationally through agents or online -compact size of prepaid cards-vulnerable to misuse than cash in

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cross-border transportations. -Mobile and online payment services can transfer funds globally -different regulatory AML/CFT regimes-where payments originate versus where ultimately received.

129

Methods of funding: -allowing cash funding -possibility of reloading without any limit-alternative to the physical cross-border transportation of cash-funded using numerous methods such as banks accounts, non bank methods money transmitters, electronic monies, virtual currencies

130

Access to cash: -prepaid cards-allow funding in one country-cash withdrawals in another-via ATM networks-Increasing connectivity-mobile and online payment methods with prepaid card-fund or withdraw in cash

131 Segmentation of services: -require several parties to execute transactions like program manager, issuer, acquirer, payment network, distributor and agent -Mobile and online services-oordination with numerous interrelated service providers-partner with international counterparts to provide cross-border transactions

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-Use agents and unaffliated third parties - customer acquisition- NPM provider maintain bank accounts-ettle accounts with agents or partners -banks do no know ultimate customer

132 Mitigatio of Risks as suggested by guidance

Customer due diligence (CDD):

-based on level of risk posed by the product. -greater the functionality of the NPM-enhanced CDD -non face-to-face verifcation using third party databases/ open-source information

133 Loading, value and geographical limits: — Setting initial load limits.

— Setting geographical or reloading limitations.— Limiting the functionality of a product to certain geographical areas.— Limiting the functionality of a product for the purchase of certain goods and services.— establishing individual tiers of service provided to customers.— For prepaid cards:> Limits on loading, duration, and ability to make cash withdrawals.> Limitations on the amount that is prepaid and accessible.— For Mobile:> Maximum amount allowed per single transaction.> Maximum cash withdrawals.> Frequency or cumulative value of

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transactions.> Limits based on day/week /month/ year or a combination thereof

134

Source of funding: -limited allowable sources of funding for a specifc product. -identifcation for cash-based funding depending upon load or account limits

135Record-keeping, transaction monitoring and reporting:

— Retain transaction records of payments and funds transfers.— Retain identifying information on the parties to the transaction.— Retain and identify any account(s) involved.— Retain the date of the transaction and the amount involved.— For Mobile, obtain the phone number of the sender and receiver.— Implement and utilize transaction monitoring

136 Virtual Currency

- medium of exchange in digital space - converted into either a fat (e.g., a government-issued currency) or it can be a substitute for real currency- two types: centralized and decentralized- Decentralized (e.g., Bitcoin) VCs have no repositories or administrators but work as peer-to-peer media of exchange as cryptographic protocal without any need for an intermediary - non-convertible VCs (i.e., Q Coins and World of Warcraft meGold) that are intended to be specifc to a

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particular domain. -value to be able to be transmitted anywhere in the world without the requirement of a centralized bank or institutional authority -Bitcoin derives its value from what another party is willing to trade for that item - Bitcoins, there is a value that is expressed in fiat currencythat is based upon economic and market forces. -Bitcoin, in a transferbetween two individuals, no personally identifable information is disclosed to the two individuals or to any third-party intermediaries. -each transaction is registered in the blockchain and thepublicly available distributed ledger-valuable information than cash-to-cash exchange-not actual identities- behind the corresponding wallets.VC businesses facilitate -use, purchase, transfer of VCs- provide wallet ownership and source of fund information.

137 March

2013

FinCEN-participants in VCs based on interpretative guidance on VCs

User:person that obtains virtual currency to purchase goods or services Exchanger: person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency.

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Administrator :person engaged as a business in issuing a virtual currency -authority to redeem such virtual currencyAdministrator and exchanger are usually MSB- comply with registration, reporting, record-keeping

138Corporate Vehicles Used to Facilitate Illicit Finance - Anominity to ownership

Sheltering assest -hiding and protecting asset

139Public Companies and Private Limited Companies

Public traded- information available freely-significant regulation -private limited companies are not publicly traded, restrictive in the number of shares, ownership can be one or many, and are subject to minimal regulatory oversight.

140limited liability company (LLC)

-corporate vehicle subject to misuse is the limited liability company (LLC) -virtually anyone can own or manage an LLC, including foreign persons and other business entities. -A member of an LLC is equivalent to a shareholder in a corporation. -A manager, is equivalent to an executive offcer or a member of the board of directors - An LLC may lack managers in which case the members manage the LLC

141 International business corporations (IBCs)

-International Business Corporation(IBC)entities formed outside of a person or businesses’country of residence, typically in offshore jurisdictions -for confdentially or asset protection

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purposes. - reduce transparency between its owner in his/her home country and that of the offshore entity where the company is registered -asset protection, access to multiple investment markets, estate planning, legitimate tax benefts and serving as holding companies. - created in a tax haven and usually require incorporation with a local agent, who may further reducethe transparency of the IBC (e.g., serving as a nominee owner or director) and facilitate opening accounts in the name of the IBC.

142 Private investment companies (PICs)

-established and used in a similar manner as IBCs - they are typically limited to holding investment assets in tax-neutral offshore fnancial jurisdictions.

143 BEARER SHARES IN CORPORATE FORMATION

-Bearer bonds and bearer stock certifcates or bearer shares -prime money laundering vehicles belong on the surface to the “bearer.” - transfer physically handing over the bonds or share certifcates no registry for owners.- person who holds the bonds or shares gets to claim wnership.- concealing ownership for tax optimization purposes. anominity

144 Mitigations -ask questions about the identity of benefcial owners before issuing,

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accepting or creating bearer shares and trusts -keep registries of this information-book entry transfer

145 Shell and Shelf Companies

October 2006, fatf,”The misuse of corporate vehicles, including trust,and company service providers”

- may established to commingle criminal proceeds with legitimate revenue or claim proceeds at legitimate revenue- easily created and dissolved - conceal the sources of funds while keeping their ownership concealed. - shell- set up in onshore as well as offshore locations -ownership structure different forms -shares can be issued to a natural or legal person or in registered or bearer form. -single purpose and multiple purpose- legally incorporated and registered by criminal - . Often purchased “off the shelf” from lawyers, accountants or secretarial companies - stock of these shell corporations is issued in bearer shares- tax haven/strict secrecy laws- conceal true ownership- information held by professional who claim secrecy

146 Shelf company - no activity - created and put on the shelf - sold to one who prefers a previously registered corporation over a new

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one.

147 Shell company/corporation:

at the time of incorporation has no signifcantassets or operations.

148 2001“Money Laundering in Canada: An analysis of RCMP cases” Reason to establish shell/shelf

- converting the cash proceeds of crime into alternative assets. - can create the perception that illicit funds have been generated from a legitimate source.- commercial accounts can be created at banks or other fnancial institutions. Illicit revenues can then be deposited into bank accounts as legitimate revenue - shell companies are businesses that customarily handle a high volume of cash transactions, such as retail stores, restaurants, bars, video arcades, gas stations or food markets. - offer criminals legitimate sources of employment in the community

149 - wide range of legitimate and/or bogus business transactions can be used to further the laundering process.-These include lending money betweencriminally-controlled frms, paying out fctitious expenses or salaries, disguising the transfer ofillicit funds under the guise of payment for goods or services, or purchasing real estate with the proceeds of crime or disguising payments for real estate as mortgages issued by a shell company.- are flexible and can be tailored to a

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launderer’s specifc needs. - criminal organizations laundering money through real estate can incorporate real estate agencies,

-concealing criminal ownership. - Nominees can be used as owners, directors, offcers or shareholders. - Companies in one country can also be incorporatedas subsidiaries of corporations based in another country (especially a tax haven country with strict secrecy and disclosure laws), inhibiting investigations into their ownership. - used to hide criminal ownership in assets, by registering theseassets, such as real estate, in the name of a company

150

151 criminally controlled companies:

- use real businesses to launder illicit money - businesses differ from shell companies in that they operate legitimately, offering industrial, wholesale or retail goods or services.

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152

“Money Laundering in Canada: An analysis of RCMP cases” :following money laundering techniques used in conjuction with criminally controlled enterprises

Using Nominees as Owners or Directors:

-Nominees will often used as owener/officer/director,but not necessarily, have no criminal record. -established by lawyers in lawyers name

153 Layering

- many companies are connected through a complex hierarchy of ownership - conceal criminal ownership - transfer of illicit funds between companies, muddying any paper trail.

154 Loans

- lending money between criminally-controlled companies. - properly integrated into the economy.

155Fictitious business expenses/False invoicing

- criminal enterprise controls corporate entities in different jurisdictions - laundering technique known as “double invoicing.”- one company selling goods and receiving money from other both owned by criminal agencies. Tax saving purpose

156 Sale of the business

- legitimate source of capital - ostensibly exhibit signifcant cash flow

157Buying a company already owned by the criminal enterprise

- Criminal proceeds from offshore are used to buy a company that is already ownedby the criminal enterprise - returns a large sum of money that had been secreted out of the country.

158Paying out fctitious salaries:

- makes certain criminal participants legitimate by providing them with

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salaries.159160 Trusts - private fduciary arrangements

- allow grantor/settlor to place assets for future distribution to benefciaries - grantor/settlor will usually appoint a third party, a trustee--dminister the assets in accordance with the instructions provided in the trust documentTrust assets= principal - first stage(placement) of converting illicit cash into less suspicious assets - Trusts fall into one of two categories: revocable, irrevocable - Trusts will also name remaindermen who are designated to receive any residual assets after the conclusion of the trust’s term - disguise the criminal ownership of funds - conceal the identity of the true owner or benefciary of the trust property - hide assets from legitimate creditors, to protect property from seizure under judicial action- link between other ML vehicles like real estate, shell,nominees - asset protection trusts (APTs) are a special form of irrevocable trust usually created (i.e., settled) offshore -- protecting part of one’s wealth from

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creditors- tax neutral -ML by Payments to the benefciaries - money laundering - payments do not have to be justifed - llicit money is placed in a law frm’s general trust account in a fle set up in the name of the client, a nominee, or a company controlled by the client-trust are formed in strict secrecy laws to conceal ultimate beneficiary 0r hide the links of ML and tax evasion

161 Terrorist Financing

G-7 nations marshaled FATF to hold an “extraordinary plenary session” on October 20, 2001, Washington to addres terroris financing

Issued first eight special recommendation

Recommendation 5 FATF

- criminalize terrorist fnancing and the fnancing of terrorist organizations and individual terrorists with or without a link to a specifc terrorist act - terrorist crimes are designated as money laundering predicate offenses-increase prosecution and deterrence

162

DIFFERENCES AND SIMILARITIES BETWEENTERRORIST FINANCING AND MONEY LAUNDERING Money laundering terrorist fnancing

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163 originof the funds.

uses funds for an illegal political purpose-money is not necessarily derived from illicit proceeds - support terrorist activities - individuals responsible for raising the funds are not the benefciaries of the laundered funds

- proceeds of illegal activity - purpose of laundering is to enable the money to be used legally. - individuals responsible for the illegal activity- ultimate benefciaries of the laundered funds

164

165 SIMILARITIES Same technical perspective

- need for the terrorist group to disguise the link between it and its legitimate funding sources

Hawala system: informal value transfer-

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--continued and uncompromised future use of that source -- use methods: cash smuggling, structuring, purchase of monetary instruments, wire transfers, and use of debit, credit and/or prepaid cards. The hawala system, -- money raised for terrorist groups is also used for mundane expenses like food and rent, and is not always strictlyused for just the terrorist acts themselves.

internationally-outside legitimate banking system-based on trusted network of individuals

166 2004 “Monograph on Terrorist financing”

During 9/11: money laundering control focused on drug trafficking and large scale financial fraud.

167DETECTING TERRORIST FINANCING Case study:september 9/11

- Identifcation used to open the accounts were visas issued through foreign governments. - Accounts were opened within 30 days after entry into the United States. - Some of the accounts were joint accounts. - Addresses used usually were not permanent addresses, but rather were mail boxes and werechanged frequently - The hijackers often used the same address and telephone numbers on the accounts. Transaction profiles: --directly received and sent wire transfers of small amounts to and from foreigncountries such as United Arab

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Emirates (UAE), Saudi Arabia and Germany. --numerous attempts to withdraw cash in excess of the limit of the debitcard. -- Numerous balance inquiries were made. -- After a deposit was made, withdrawals occurred immediately. -- Overall transactions were below reporting requirements. -- Funding of the accounts was by cash and overseas wire transfers. -- ATM transactions occurred with more than one hijacker present -- Debit cards were used by hijackers who did not own the accounts International activity: --deposits made on hijackers behalf by unknown individuals. --purchased traveler’s checks overseas and brought them into the US --same hijacker opened an account in UAE, giving a power of attorney over theaccount to the same individual who had been wiring money to his German account.--More than $100,000 was wired from the UAE account of the hijacker to the German account of the same hijacker in a 15-month period.

16824

april FATF”Guidance for Financial institution in detecting terrorism financing” Susceptible to Terrorist Financing

=FIs to exercise “reasonable judgment”evaluating potential

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2002

suspicious activiyt - Use of an account as a front for a person with suspected terrorist links. - Appearance of an account holder’s name on a list of suspected terrorists. - Frequent large cash deposits in accounts of non-proft organizations. - High volume of transactions in the account - Lack of a clear relationship between the banking activity and the nature of the account holder’sbusiness. - dormant, low-sum accounts that suddenly receive wire transfer deposits followed by daily cash withdrawals that continue until the transferred sumis removed, and lack of cooperation by the client in providing required information.

169 HOW TERRORISTS RAISE, MOVE AND STORE FUNDS

-Global sanction efforts reduce-state sponsor terror - forged destructive and very proftable links with drug and criminal syndicates

- they abuse charitable causes to trick individuals to contribute - raising money through the oil trade, extortion, undetected cash couriers, kidnapping for ransom,traffcking of humans and arms, and racketeering.

170 Us Alternative remittance systems (ARSs) or informal value transfer - associated with ethnic groups from Reason for legitimate

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e of Hawala and Other Informal Value Transfer Systems systems (IVTSs)

Africa, Asia and the Middle East - international transfer of value outside the legitimate banking system and are based on trust. - Hawala (an Arabic wordmeaning “change” or “transform”), Hundi (a Hindi word meaning “collect”), Chiti banking (referringto the way the system operates), Chop Shop banking (China), and Poey Kuan (Thailand) - There is usually no physical movement of currency and a lack of formality with regard to verifcation and record-keeping - money transfer takes place by coded information that is passed through chits, couriers, letters, faxes, emails, textmessages, or online chat systems,--followed by some form of telecommunications confrmation. - document that carries an identifable number can be used by the receiver to pick upthe values in the other country.

use of Hawala:-cheap and faster money transfer-lacking banking access in remittance receiving company, cultural preference-lack of trust in banking system

171 Money laundering risk

-leaves little to no paper trail --details of the customers who will receive the funds are communicated to the receiving brokers viatelephone, fax and e-mail - effective means of placement: when

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the hawaladar receives cash, he can deposit thecash in bank accounts. - He will justify these deposits to bank offcials as the proceeds of legitimatebusiness. He may also use some of the cash received to pay for his business expenses, reducinghis need to deposit the cash into the bank accoun- Hawaladars often operate w legitimate or front business to provide cover for the activity and commingle the funds in thebusiness accounts- Layering: Following the money even more diffcult. This can be done by usinghawaladars in several countries, and by distributing the transfers over time.-transform money in any formIntegration phase=reinvested in legitimate business.

- No formal government oversight

- Recordkeeping in idiosyncratic shorthand-maintained for short time

172 Use of Charities or Non-Proft Organizations (NPOs)

173Terrorist FinanceTracking Program (TFTP)

After the September 11, 2001, United States government initiative

174 2014 FATF “Risk of Terrorist Abuse in Non-Profit vulnerable to misuse for terrorist

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Organizations(NPO) fnancing

• Enjoying the public trust.• Having access to considerable sources of funds.• Being cash-intensive. - global presence, often in or next to areas exposed to terrorist activity. - subject to little or no regulation and/or having few obstacles to their creation

175 2002FATF best practices for charities in combating the abuse of non-profit organizations

objective of Recommendation 8

- prevemt Terrorist organizations posing as legitimate entities - prevent Exploiting legitimate entities as conduits for terrorist fnancing - Concealing or obscuring the clandestine diversion of funds intended for legitimate purposes toterrorist organizations

176FATF best practices for charities in combating the abuse of non-profit organizations FATF Recommends NPOs

- full program budgets that account for all expenses - Conduct independent internal audits and external feld audits,--funds ued for intended purposes. - use formal bank accounts--subject to the bank’s regulations and controls-KYC and montioring

177

Charities Commission -regulator of charities in England and Wales

Their role

- protect the public’s interest in charities - work for the public beneft - charities remain independent from private, government or political interests

178Charities Commission “counterterrorism strategy report”

four-strand approach to preventing abuse of charities

- Co-operation with government regulators and law enforcement

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by terrorist fnanciers:

nationally and internationally.• Raising awareness in the sector of the risks charities face from terrorism.• Oversight and supervision-via proactive monitoring- areas of higher risk.• Intervention when abuse, or the risk of abuse, related to terrorist activity is apparent.

Emerging Risks for Terrorist Financing Self-funding by FTFs

- Advent social media, FTF(Foreign terrorist fighters) and terrorist sympathizers communincate terrorist organization at low cost

- Terrorist act on soft targe(civilian, non military-unprotected)-self funded

- Self funding-sources employment income, social assistance, family support, bank loan- impossible to detect

Straw purchase: agent agrees to acquire goods or service for someone who is unable or unwilling to purchase the good or service themselves and agent transfers the goods or services to that person after purchasing them.

Online peer to peer lender

Raising funds through the use of social media

- Raise money- Crowdfunding, sharing

virtual or prepaid account information

- Difficult for law enforcement-increased due to dispersion of the

Crowdfunding- group of people contributing small money

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activity -need cooperation from FIs and social media platforms

New payment product and services

Exploitation of natural resources

-take control of natural resources – poor government control-extort companies-extract resources to fund terrorist activity-sold to black market-complicit companies who integrate them in global trade sector

-identify geography where terrorist control, determine current commodity prices-strong multi-jurisdictional partnership necessary.

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