The Importance of Money Laundering

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The Importance of Anti-money laundering & know your customer Carol Cohen, U.S. Department of the Treasury Economic and Banking Forum, Baghdad January 2013Money Laundering Overview The Risk of Money Laundering The Importance of Knowing Your Customer Methods to Deter Money Laundering

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The Importance of Anti-money laundering & know your customer:

The Importance of Anti-money laundering & know your customer Carol Cohen, U.S. Department of the Treasury Economic and Banking Forum, Baghdad January 2013

Agenda :

Agenda Money Laundering Overview The Risk of Money Laundering The Importance of Knowing Your Customer Methods to Deter Money Laundering

What is Money laundering?:

What is Money laundering? Any act or attempted act to conceal or disguise illegally obtained proceeds so that they appear to have originated from legitimate sources It is the process used by criminals, terrorists, or corrupt actors to make “dirty” money appear “clean”. Sources of dirty money include: Drug trafficking □ Prostitution rings Arms, gold, antique smuggling □ Corruption Extortion/Kidnapping □ Fraud/Tax Evasion

3 steps of money laundering:

3 steps of money laundering Placement Illicit money enters financial system Layering Complex financial transactions disguise source Integration Bad actors acquire “clean” wealth

Methods of money laundering:

Methods of money laundering Structuring, or “smurfing” Cash is broken into smaller deposits of money Bulk cash smuggling Physically smuggling cash to another jurisdiction or bank with less rigorous enforcement Cash intensive business to mix legitimate and illegitimate cash Casino; parking garage; etc. Trade-based laundering Over-valuing invoices to disguise movement of money

Methods of money laundering:

Methods of money laundering Shell companies and trusts Disguise true owner of money Round-tripping Money deposited overseas in a location with minimal record keeping; then shipped back as Foreign Direct Investment Bank Capture Money launderers buy controlling stake in a bank Real Estate Purchase real estate with illicit funds, then proceeds from sale appear legitimate

The Importance of anti-money laundering controls:

The Importance of anti-money laundering controls Money laundering poses significant risks to banks: Reputational risk Operational risk Legal risk Concentration risk

Money laundering = risk:

Money laundering = risk

AML / CFT & Financial action task force (FATF):

AML / CFT & Financial action task force (FATF) Definition of Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT): “ International effort to bring integrity to financial systems, protecting them from criminal abuse .” AML/CFT international standards set by the Financial Action Task Force (FATF) FATF is an intergovernmental organization founded in 1989 to develop policies to combat money laundering and terrorism financing. The FATF Secretariat is housed at the OECD in Paris.

FATF Recommendations:

FATF Recommendations FATF has issued 40 recommendations to combat money laundering and terrorist financing These are the international standards on combating money laundering and the financing of terrorism & proliferation http://www.fatf-gafi.org/

Global areas of non-compliance with FATF AML Standards:

Global areas of non-compliance with FATF AML Standards Politically exposed persons (PEPs) DNFBP - Designated non-financial businesses and professions (Attorneys. Accountants. Real Estate) Correspondent banking Wire transfer rules Cross-border declaration and disclosure 70% 60% 57% 40% 33%

AML/CFT and Know Your Customer:

AML/CFT and Know Your Customer Adherence to AML / CFT standards appropriately applied can help create confidence and sustainability in your bank and the financial system Main challenge for banks is typically the Know Your Customer (KYC) requirements

Know Your Customer (KYC):

Know Your Customer (KYC) What KYC Means : Making reasonable efforts to determine the true identity and beneficial ownership of accounts; Understanding sources of funds ; Understanding nature of customers’ business ; Understanding reasonable account activity ; Knowing your customer’s customer

Advantages of KYC procedures :

Advantages of KYC procedures Strong KYC procedures greatly improve the safety and soundness of banks: They protect banks’ reputation and integrity of banking systems by reducing the risk of banks becoming a victim of financial crime; They provide an essential part of a sound risk management system – ( KYC provides the ability for a bank to identify, limit and control risk exposures in assets & liabilities )

Core elements of kyc:

Core elements of kyc Customer Acceptance Policy Customer Identification Procedure Risk classification of accounts Risk management Ongoing monitoring of account activity Reporting of suspicious transactions

KYC: Software Automation :

KYC: Software Automation Software solutions automate and simplify KYC programs

KYC: Software Automation :

KYC: Software Automation Software solutions automate and simplify KYC programs Software tracks the documents collected for new bank customers

KYC: Software Automation :

KYC: Software Automation Global Sanction Lists Global Official Lists High Profile Criminals Politically Exposed Persons Relatives & Close Associates Access to customer verification databases save time and reduce customer risk

KYC: Risk Management:

KYC: Risk Management Country risk Countries subject to sanctions Countries funding or supporting terrorists Countries identified by FATF as non-compliant Customer risk Money services businesses Casinos / cash-based businesses Arms dealers Unregulated charities High-value or precious goods (property, gold) Transaction risk International correspondent banking International private banking Increased ML Risk

KYC: Software Automation :

KYC: Software Automation

KYC: Software Automation :

KYC: Software Automation

KYC: Software Automation :

KYC: Software Automation

KYC: Monitoring & reporting:

KYC: Monitoring & reporting Monitoring customer behavior Tracking and investigating alerts Filing Suspicious Activity Reports (SARs) with Financial Investigation Units (FIUs) or other regulatory bodies

KYC: Software Automation :

KYC: Software Automation

KYC: sample ‘sar’ report:

KYC: sample ‘ sar ’ report

Large Banks vs. Small banks:

Large Banks vs. Small banks Importance of AML is the same, but small banks must emphasize due to fewer resources

Measures to deter money laundering:

Measures to deter money laundering Bank Board and management oversight of AML Appointment of senior executive as principal AML/CFT officer with adequate authority and resources Systems and controls to identify, assess & manage money laundering risks Standard reporting to the Board on AML risks and operation /effectiveness of control systems

Measures to deter money laundering:

Measures to deter money laundering Appropriate documentation of AML and risk management policies Screening of employees before hiring and of those who have access to sensitive information Appropriate and continuous staff training Quick and timely reporting of suspicious transactions

Thank You:

Thank You

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