aml-overview (nus) final

7/25/2019 Aml-overview (Nus) Final

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Industry Working Paper Series 06-02An Overview of Anti-Money Laundering

Rohan Bedi*Saw Centre for Financial Studies

*Executive-in-Residence

Saw Centre for Financial Studies

NUS Business SchoolNational University of SingaporeSingapore 117592Tel: 97629060Email: [email protected]://www.rohanbedi.com


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An Overview of Anti-Money Laundering

Abstract

This paper provides an overview on money laundering risk management issues. It explores the

importance of AML for the senior management of financial institutions (FIs) and the

responsibilities of staff in business functions. It highlights that senior management are under

pressure as fines are levied not just for actual scams but also for shortfalls in compliance

practices. Senior management has a key role to play and need to approve the overall AML/CFT

program while leading the awareness program. The paper highlights the peculiar problems

encountered in cross-border investigations because of banking and corporate secrecy.

Increasingly money laundering schemes are multi-jurisdictional involving many people,

countries, complex offshore structures and offshore accounts a detailed case study illustrates

these concepts. The scope of AML is also increasing and predicate crimes now include terrorist

financing, fraud, corruption, market manipulation and insider trading. There is a need for more

KYC information that is currently out of the public domain. The paper concludes that serious

players in the AML/CFT field whether regulators or FIs - will adopt technology.

October 2006

Keywords: AML, CFT, Money Laundering, Financial Crime, Risk Management, Fraud


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Contents

No. Topic Page

1. Introduction 4

2. Lead Indicator Technology Investment 8

3. Importance of AML for Senior Management 10

4. Responsibility of Staff in Business Functions 13

5. Peculiar Problems in Cross-Border Investigations 16

6. Case Study Offshore Structures 18

7. Predicate Crimes for Money Laundering 22

8. Conclusion 25


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1. Introduction

Money laundering is the process of making

dirty money clean. Money is moved around the

financial system so many times (to launder)

that its origins (drugs, serious crimes) get

obscured and it appears to have originated

from legal sources.

Money laundering is the worlds third

largest business behind foreign exchange and

oil. Important sources of criminal monies include drug trafficking, arms trafficking, financial

fraud, IPR theft and corruption. The International Monetary Fund estimates the amount of money

involved in money laundering is 2%5% of global GDP, which equates to US$590 billion to

US$1.5 trillion annually. The Asia Pacific Group on money laundering estimates that money

laundering in the Asia-Pacific region is around US$200-250 billion annually. In China alone,

criminal monies are laundered to the tune of US$24 billion annually. The value of money

laundering in the USA is around US$300 billion annually.

There are three stages in international money laundering depicted in the diagram below.

These are placement (entry of funds into the banking system), layering (distancing of funds from

point of entry), and integration (usage of funds). Placement covers cash and monetary instrument

deposits including bearer instruments. Layering covers funds transfers including trade linked and

involves complex offshore ownership structures and accounts across multiple jurisdictions

Source: BBC


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involving many people. Integration covers investments in properties, securities, and legitimate

businesses etc. and typically involves longer-term investments.

Detecting money laundering

is easiest in the placement stage

because large value cash and

monetary instrument deposits are

easier to detect even if smurfed

(placed in amounts below the

reporting limits e.g. less than

US$10,000). Detecting money

laundering becomes more difficult in the layering stage. For example, for banks, given the large

number of fund transfers handled by many bank locations, it is a bit like looking for a needle in a

haystack. False trade pricing (underpricing and overpricing) has also emerged as a significant

channel used in the layering stage. Also, identity theft is used to facilitate the first two stages of

money laundering and while this is difficult to detect, with the right tools, it is also not

impossible. Money laundering becomes very difficult to detect in the final integration stage. In

this stage financial institutions typically deal with nominees behind whom the money launder

hides i.e., the front mans identities tend to be genuine. However, asset recovery agencies

recognize that most organised criminals are ultimately aiming for a certain lifestyle i.e., their

assets are a big clue as to who they are, although this is by no means the key to the profiles of all

money launderers.

Whilst anti-money laundering (AML) laws have been around in many jurisdictions as

early as 1992 and in the US from 1986, the events of September 11 2001 drew significant focus

Source: www.unodc.org


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on Combating the Financing of Terrorism (CFT) along with renewed focus on AML. The US

government came out with the USA PATRIOT Act in October 2001 and started lobbying foreign

governments to take action. Terrorists started using money laundering techniques and this

refocused attention on many key AML issues. In some countries, for example, it was found that

there was a link in terrorist financing and corruption monies received by Politically Exposed

Persons (PEPs). High-profile scams linked to money laundering by PEPs through Private banks

underscored the need for reform. The Financial Action Task Force (FATF), the global watchdog

on AML/CFT issues, came out with a revised set of 40 principles for AML in 2003 (this also

incorporated work done by the Basel Committee on customer due diligence standards). The

FATF had earlier in October 2001 issued 8 Special Recommendations on CFT followed by a 9 th

recommendation on cash couriers in October 2004. With regard to CFT, the FATF is specially

concerned about the misuse of non-profit organisations, wire transfers through banks, hawala

transfers (alternative remittances) and cash couriers (for smuggling of cash cross-border).

The experience of enforcement has been that increasingly front businesses are used for

both money laundering and terrorist financing. These are semi-legitimate businesses that have a

legitimate registration and business activity but are also misused. This makes the task of

detecting unusual activity more difficult particularly if the business is a reasonably large one.

While the focus of AML/CFT regulations is to improve financial intelligence through

SARs (suspicious activity reports - called suspicious transaction reports (STRs) in Asia),

prosecution and confiscation are equally critical. Because of the poor track record in confiscating

the proceeds of crime through criminal convictions for technical/other reasons, governments

world-wide are now increasingly turning to civil recovery for AML purposes where the criminal


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case fails. This puts the burden of proof on the defendant to establish the legitimate origins of the

property. It does not lead to a conviction or imprisonment i.e., the focus is on confiscation.


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2. Lead Indicator Technology Investment

The above two developments (USA PATRIOT Act and FATF 40+9 revised principles) created a

wider market for AML/CFT monitoring technologies and know-your-customer (KYC) databases

especially in the US/UK. As highlighted, international money laundering often links multiple

accounts, in multiple jurisdictions, with many people.

Spotting a scheme involves comparing account activity against transaction history

(identify sudden changes), and against peer accounts (how others behave). Transaction trend

monitoring software is essential for this especially (at the minimum a good rules based system)

for larger institutions and online businesses. Specialist technologies like link analysis are also

increasingly becoming essential for effective CFT (e.g. Party A receives funds from B who is

linked to terrorist C ie, transactions in A's account are suspicious).

Similarly, good know your customer (KYC) databases (known and suspected bad guy

lists such as PEPs, terrorists, IPR theft perpetrators and other high-risk categories) interrogated

using name recognition technology, are now indispensable for effective AML/CFT practices.

Other than the US/UK (plus a few others), most other countries especially in Asia are yet

to fully adopt robust AML systems especially the usage of trend monitoring technology. Many

FIs cannot fully see the benefits and this is a bit of a vicious circle with regulators themselves

shying away from requiring technology. However, KYC databases are being purchased including

the use of name recognition technology, because it is simply not practical to screen funds

transfers manually.

Recent data by the US Federal Bureau of Investigations (FBI) released in September

2006 highlights that in a recent review of all SARs that were coded as suspected terrorist


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financing, the agency was able to match 20 percent of those SARs with known subjects of open

FBI terrorism investigations.

Other data released in October 2006 by the US Immigration and Customs Enforcement

(ICE) highlights the role of SARs in busting fraud and money laundering schemes. This data

reflects that better quality of SARs filed owing to technology adoption adds value to

enforcement.


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3. Importance of AML for Senior Management

Well-managed organisations need customer identification and transaction monitoring policies,

procedures, controls, a Money Laundering Reporting Officer (MLRO) (the compliance officer in

Asia) who is responsible for managing and updating the overall program, focused training and

awareness. Internal audit should independently review the overall program and also specifically

scrutinise high-risk accounts. Processes should be risk-based and ideally should incorporate the

use of AML software.

Experience tells us that AML competencies can be improved in at least five key areas

up-to-date and risk-based KYC processes including non-documentary verification processes,

process automation including rectification of documentary shortfalls and risk rating according to

the FIs risk models; better data quality and an integrated view of a customers relationship with a

FI; flagging of high-risk businesses and accounts to allow for enhanced due diligence and

independent testing; the adoption of monitoring technology; interactive and engaging training

(includes e-learning, audios, videos) and separately an awareness program that leverages

technology including ongoing video case clips, knowledge sharing portals, newsletters with

sufficient focus on developing competencies of key players such as internal audit. Bank after

bank with bare SAR files maintained by the MLRO tells us that the monitoring system is not

effective and also that internal audit does not catch this.

In the US and the UK, financial institutions (FIs), especially foreign banks, are fined for

not only actual AML scams but also for poor AML/ sanctions monitoring systems (e.g., a leading

bank was fined USD 100 mn). Institutions are also fined for employee negligence. Regulators

have also started focusing on the importance of personal accountability of senior management


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who now find themselves being asked awkward questions (including in the Police station) and

also paying fines in their personal capacity for negligence. Errant institutions are being named

and shamed causing reputational damage. The UK FSA states its expectations as consistently

engaged senior management; high quality systems and controls appropriate to each firm's risk

profile; and effective delivery. All this is of course easier said than done. Many FIs (particularly

non-bank broker-dealers) find themselves dealing with the basic issue of creating an effective

culture of compliance.

The role of senior management is now well understood and best-practice includes:

Board approved AML/CFT and Customer Identification Programs initially and annually.

A fully mapped out AML/CFT space to ensure that roles and responsibilities are clear and do

not fall between the cracks.

Direct role in facilitating the firm-wide awareness program (treated separately from the

training program) to underscore the requirement for clean business without giving any

conflicting messages.

Direct role in the account opening, transactions and closing of PEP and Correspondent

banking accounts.

Ensuring that the MLRO is a senior experienced person with proper deputy-support and

access to the information needed to perform his/her function.

Ensuring the creation of an effective AML Committee to consider SAR filing cases and

allowing the MLROs perspective to dominate in SAR filing decisions.

Engaging the MLRO on an ongoing basis including being informed on all important

AML/CFT linked SARs by the MLRO at least on a monthly basis and immediately where

warranted.


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Ownership by senior management: developing and annually reviewing and approving the

AML strategy with the MLRO including a full review and approval of the firms risks/the

risk-based approach and a review of the year that was - ideally using the UK MLROs

annual report format. This includes ensuring adequate funding in order to ensure a robust

infrastructure that is capable of managing the compliance needs of a growing business, while

ensuring cost-effective and proportionate procedures.

The Tone at the Top is the most important factor in deciding the firms quality of the

AML/CFT program. For example, an effective CFT program includes focus on KYC

(identification of high-risk categories on the customer database e.g., charities), technology (name

recognition, link analysis, detection scenarios where possible/practical), anti-identity theft

program (with linkages to KYC processes, technology and database monitoring), and monitoring

against bad guy databases (includes sanctions, suspect terrorists, petty criminals etc.). Tone at the

Top has a direct impact on the understanding of AML/CFT issues and hence the investment in

prevention systems.

From recent cases including that of the Bank of New York (BONY), it has been found

that even after a fine and reputational damage, slippage in tone at the top sets in easily reflecting

directly in AML/CFT approaches and controls that do not keep up with evolving risks and

monitoring technologies. BONY for example, has had two written agreements with regulators.


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4. Responsibil ity of Staff in Business Functions

Whilst with the introduction of AML/CFT monitoring technology, the ongoing monitoring for

unusual transaction trends can be taken into back-office, there remains the need for front-line

staff to monitor for non-transactions in face-to-face interactions, for example, customer claims to

be a seasoned importer but seems to know little about Letters of Credit; the customers body

language leaves the front-office staff suspicious (see www.lichaamstaal.com/english/); frequent

changes in address (if the system cant monitor this). In addition, wherever a transaction appears

unusual, the front-office staff should continue to be vigilant as the detection scenarios set up in

the monitoring packages may not be comprehensive or adequately sensitive.

There are three regulatory standards for AML/CFT knowledge, reasonable grounds to

believe, and reasonable grounds to suspect. The FATF reporting standard for filing of SARs is

reasonable grounds to know or suspect (eg, in Singapore). The FATF prosecution standardfor a

money laundering offense is knowledge (in Singapore it is reasonable grounds to believe).

SAR filing is usually time-bound under law with a predefined chain for internal

reporting. The reporting standard underscores that the staff need not have definite knowledge of

money laundering activities suspicion is the threshold for reporting. This includes knowledge

of circumstances which would put an honest and reasonable person on inquiry, but failing to

make reasonable inquiries, which such a person would have made. In the case of a specific bank

in Asia, the compliance officer took eight months to file a SAR because she never understood the

reporting standard and filed the SAR only after sending an investigations team to another

country! The banking regulator was not pleased and issued a letter of reprimand to the bank

CEO.


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Staff have a responsibility to understand the money laundering and terrorist financing

risks (the firms risks models) associated with geographies and countries, businesses (e.g., import-

exporter, cash-intensive) and entities (e.g., PEPs, terrorists, IPR Theft perpetrators, sanctioned

charities), products (eg, mortgages) and transactions (internet banking, offshore holding

structures, lawyer-client accounts (client details are protected by law)) and must factor these into

their day-to-day work processes. The customer due diligence processes typically requires a

standard level of verification and then is varied depending on the risk. It ideally includes

electronic verification where required/possible. Staff must also have an understanding of the

record keeping requirements specified in internal controls and regulations.

Staff also have a responsibility not to tip-off the customer or potential customer on a

possible SAR filing or investigation. They cannot close their eyes to the obvious (willful

blindness). Negligence and complicity are offences and can lead to fines and/or jail sentences. If

a staff files an internal report, he/she has discharged their duty under law.

Importantly, the reporting layers (for internal SAR filing) between the front-line staff and

the MLRO should be as few as possible/ practical to allow for quality checks and improvement

while leaving the ultimate decision of filing on the MLRO. In many institutions, this is not the

case and business line managers often squash an internal SAR filing based on business

considerations. This reflects poor awareness of their roles and responsibilities.

Moreover, SAR filing details (whether internal or external) are highly confidential and

cannot be shared with a third party. Hence, in some institutions, the staff filing the report does

not keep a copy of the SAR on their files (the MLRO does this for the firm) and gets a numbered

confirmation of filing (e.g., CB25/06 received). In fact, even internally within an organization, it

may be possible to share SAR filing information cross-border only for risk management


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purposes and with designated compliance/financial crime staff only. For wider sharing of the

underlying risk related information, the fact of SAR filing may have to be sanitized and the

details made part of a wider internal list of high-risk persons/ entities.


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5. Peculiar Problems in Cross-Border Investigations

Money laundering schemes often use offshore shell corporations and trusts located in multiple

jurisdictions with varying levels of banking secrecy and corporate secrecy. Bearer share

companies; nominees (directors, shareholders and authorized signatories); corporate directors

and shareholders; layered offshore trusts (where a trust is the beneficiary of another trust

arrangement) holding assets through shell companies all these are used to reduce transparency

and exploit the vulnerability of the FI being used as a conduit.

Cross-border investigations are hampered by both banking secrecy and corporate secrecy.

Banking secrecy means that the bank will not share details on an account (account parties,

transaction details) with any third party easily i.e., only as per the law and procedures in the

country concerned for specified purposes. Corporate secrecy implies that the information in the

company registries public records is limited only to basic identifiers e.g., company name, date of

incorporation, company incorporation agent and registered address - typically without details on

the shareholders, directors or beneficial owners.

The revised FATF 40 2003 principles focuses on issues of greater transparency

(recording of beneficial ownership information and availability (either publicly or to support

enforcement) and risk-based due diligence. Nonetheless, to date many jurisdictions have not

transitioned to the higher standards. Also, the revised principles require FIs to identify the

identity of the beneficial owners by forming an understanding of the ownership and control

structureand taking reasonable measuresto verify the identity of such persons. Depending on

the jurisdiction involved in the account opening documentation (e.g., country of incorporation of

the company), this may or may not be fully possible. The FI would need to satisfy itself


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(including digging as deep as is required) failing which it should turn away the business and file

a SAR.

Moving on, there are three gateways for information exchange:

MLAT - The first gateway is when evidence is required from another jurisdiction. Even

when a typical mutual legal assistance treaty (MLAT) exists, regulators must investigate via

a designated enforcement agency. It is believed that the MLAT process takes two weeks and

requires a lot of paper-work. This benefits money launderers, as they can abscond with funds

as soon as they hear about an investigation. Nonetheless, MLATs represent the best in

international cooperation.

FIU-MOU - The second official gateway involves a communication between Financial

Intelligence Units (FIUs eg, the US FinCEN, Singapore CAD where SARs get reported to)

set up to fight financial crime. Unlike the MLAT, this gateway is not ordinarily used for

obtaining evidence. It is used for obtaining intelligencethat might lead to evidence.

Supervisory gateway - The third supervisory gateway is often defined in the legal framework

in which a supervisor operates but it may be also supported through a MOU. Information is

communicated usually for supervisory purposes only. It cannot ordinarily be used as

evidence, nor be shared widely among governmental entities.

The Hong Kong Police stated in 2004 the problem is that criminals know that banks and law

enforcement are nation based. Criminals know that now cost effectiveness in investigation is

important and they see an opportunity to use these weakness at the key to massive organized

multi-jurisdictional schemes.


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6. Case Study Offshore Structures

Mortgage Fraud & Money Laundering

The case study below

illustrates a typical fraud and

money laundering scheme

that uses multiple

jurisdictions to launder

money in order to make it

difficult for investigators to

track the proceeds of crime.

A drug trafficker Tom

Druggie in China uses the

proceeds of drug trafficking to purchase a property partly in cash and the remainder through a

mortgage in the name of a straw buyer Mr. Straw Front who uses a fake identity of someone

with a good credit record.

A mortgage brokerMr. King Corrupthelps to create a false earnings and savings history

for the borrower. Another corrupt appraiserMr. Knight Corrupthelps to fraudulently overvalue

the property by 10% (It is difficult to prove collusion or overvaluation (especially where it falls

in a 10% band), making prosecution difficult).

Toms gang members have befriended the mortgage loan officer Mr. Help-Meof Fast

Mortgages Ltd. who they frequently entertain. The loan officer is going through financial

difficulties and the gang members have lent him a lot of money. He is the son of a very well

Collection of Dirty Money

BANKS

Placement

Layering

MORTGAGE

LENDER

Conversion of cash

from drug sales tomonetary instruments

Payments for down

payments/ installments

On full payment,

property sold off tooffshore shell

company and

further sold to athird party

Typical Scheme

Integration

Monies held offshore

borrowed through anothercompany and invested innew properties, factories,

cars, stocks etc.


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known/ respected CEO of a MNC. The mortgage lending company boasts of a speedy

turnaround time.

The down payments and loan installments are paid in cash and monetary instruments

obtained by changing the cash from drug sales at different banks, keeping transactions below the

limits used by the banks to insist on identification. Most instruments are around US$ 9,000 each.

The cash payments are routed through a lawyer-client account held at a bank into the mortgage

account at the mortgage lender. This is because lawyer-client accounts are not monitored so

thoroughly.

The overvaluation amount is recovered from the seller in cash and is reused to pay

installments. The loan is paid off faster than the agreed schedule and pre-payment penalties are

paid without any fuss. On full payment of the loan, the property is then sold to a shell company

(paper company) Propertz Unlimited Ltd controlled by Tom, for a nominal sum. However,

while registering the property, a false purchase price (at market value) is declared and a clerk in

the property registration office is bribed.

Propertz Unlimited then sells the property to an innocent third party Mr. Innocent Buyer

for the original purchase price. The proceeds of drug trafficking now appear as the legitimate

proceeds of a property sale. The monies are paid into the offshore bank account of Propertz

Unlimited.

Monies held offshore are now borrowed through another offshore front company Water

Front Properties Pte. Ltd.. The monies are invested in new properties, factories, cars, stocks etc.

in China. Tom controls these investments as a signatory of the company under another fake

identity.


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Offshore Structure

Propertz Unlimited Ltd. is an offshore company that is fully owned by another offshore shell

company called Propertz Unlimited Holding International Ltd. in a second jurisdiction,

through bearer shares.

The holding company is an unlisted company with a $2 paid up capital held under a fake ID

of a person with a clean record, aMr. Good Man-one

The offshore bank account of Propertz Unlimited Ltd. is held in a third offshore jurisdiction.

Water Front Properties Pte. Ltd. (borrowing company) is incorporated in a fourth jurisdiction

and is part of a trust arrangement covering the paid up share capital of $100. It is an

operating company.

The trust arrangement is set-up so that while it establishes a beneficiary for the paid up

shares, it keeps the trustees out of the day-to-day operations of the borrowing company.

The jurisdiction of the trust is a fifth offshore jurisdiction while the beneficiary of the trust

structure is another trust in a sixth jurisdiction ie, a layered trust arrangement.

A total of six jurisdictions have been used to deliberately confuse investigators.

Toms name does not figure in any public record. Since Toms name is listed on the

database of an industry vendor monitoring news reports on mortgage fraud, Tom has set up the

trust structure using a fake ID of a person who is of good standing, a Mr. Good Man-two who is

the settler of the trust (person putting assets into the trust). The ultimate beneficiary of the second

trust is Tom under a fake ID.

The trust and company formation agents accept all documents (certified by an

accountant) by email without insisting on any notarization scanning the signature and ID of


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Mr. Good Man-twois easy! The bank accounts are opened with proper notarizations of fake IDs

and fake utility bills with Tom as the authorized signatory under another fake ID.

The offshore companies do not require any filing of annual statements nor any auditing.

The jurisdictions of the trusts have a creditor unfriendly trust law. The trust structures allow Tom

to control the decisions of the trustees through his own front men, while maintaining anonymity.

Banking secrecy ensures that account details are not shared easily.

As can be seen, the offshore bank had poor controls on account opening (fraudulent

documentation) and on transactions. The trust and company formation agents were not regulated

for AML and were equally lax in their controls. Offshore trusts, shell companies including bearer

share companies and bank accounts - are key to the success of many money laundering schemes.

The Caribbean and South Pacific are exploited, amongst other jurisdictions.

The Financial Action Task Force (FATF) expects countries to enhance their controls on

the beneficial ownership of offshore companies, trusts and linked offshore bank accounts.

However, as of now many offshore jurisdictions give this more lip-service than effective KYC.

Trustee and nominee services from trust and company formation agents continue to allow the

launderer to move out of the public eye.


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7. Predicate Crimes for Money Laundering

The FATF revised 40 principles 2003 in its list of 20 minimum predicate crimes for money

laundering, defines various new crimes in addition to drug trafficking. These include terrorist

financing, fraud, corruption, market manipulation and insider trading. Here are some comments:

Terrorist Financing: Given the focus on charities for combating the financing of terrorism

(CFT) purposes, terrorists have also turned to money laundering techniques to clean the

proceeds of crime to be used to finance their activities. For example, the police describe the

Irish Republican Army (IRA) (a designated terrorist organization) as "a colossal crime

machine, laundering huge sums of money".

Fraud: This is a wide-ranging area from credit card fraud, identity theft, account fraud to

mortgage fraud etc. AML trend monitoring technologies and fraud technologies are

fundamentally similar although the scenario being monitored would differ. There are

synergies and the MLRO is now expected to have a good understanding of fraud. This is

because in many countries, in addition to fraud reporting, SAR filing is also required

wherever the fraud gives rise to a benefit (i.e., not for early detection cases). Nonetheless,

prevention of fraud is a specialized area and detection is probably best served under a

separate anti-fraud investigative unit even if the source of alerts is the same system. Some

vendors now offer combined AML and Anti-fraud solutions. On the other hand, other

vendors offer a suite of specialist anti-fraud solutions such as: on-us check fraud, check

deposit fraud, check kiting fraud, credit card fraud, debit card fraud, ATM withdrawal fraud,

employee fraud and wire payments fraud. Identity theft fraud is another area for which there

are both technology and database solutions.


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Corruption: For FIs, the area of concern is corruption of employees leading to complicity

(overt or through willful blindness) in a fraud/ money laundering scam. Know your employee

controls are critical: a comprehensive and well enforced code of conduct, properly

communicated and secure whistle blowing channels, proactive employment practices,

ongoing internal controls, and internal audit focused on this issue including specific tests for

insider complicity and collusion within the firm. Proactive employment practices include:

comprehensive background checks (verification of educational transcripts, credit reports,

reference validation, public records search (including petty criminal records); and ongoing

monitoring/ detection (changes in employees and directors lifestyles, behaviours, and

actions, periodic credit reports and public records searches).

Market Manipulation and insider trading: These are compliance areas relevant to investment

banking and broker-dealer activities. The UK FSA believes that the risk of market abuse is

highest where a client can be made an insider on a forthcoming deal. Whilst these are

specialised areas requiring dedicated monitoring and compliance practices including the

adoption of specialised technology, Chinese Walls to manage insider trading and conflicts of

interest - the important point is that weaknesses in these areas could lead to regulatory action

under AML laws which tend to be more stringent.

The law in some countries criminalizes the laundering of proceeds from narcotics and a list of

other categories of serious offenses (can go up to 200). This can include ones committed

overseas which would be serious offenses if they had been committed in the country. The UK

goes a step further and has an all crimes reporting regime for AML purposes this includes

tax evasion.


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In terms of enhancement of KYC effectiveness, regulators need to review KYC

information that is currently largely out of the public domain (e.g. suspect terrorists lists with

enforcement, lost and stolen passports, indirect PEPs (friends and relatives), mortgage lending

significant misrepresentations, IPR Theft investigations, SARs filed) to see how much more

information can be shared, and how it can be collected and shared e.g. through secure channels.

This would include a cost-benefit analysis that would take account of privacy considerations.

Other public domain information e.g. of petty crimes, should also be examined to see if there is a

cost-benefit case for asking banks to review transactions for CFT purposes against these lists (the

London 7/7 terrorists had petty criminal records).


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8. Conclusion

As can be seen, the AML/CFT field is ever expanding with the scope of the laws increasingly

covering industries and crimes hitherto regarded as out of its fold. Institutions and CEOs are

being fined and some banks have lost their licenses in some markets. All this is creating serious

pressures on senior management and also on staff in both front-office and back-office functions.

Whilst for a long time, many senior management executives argued against the usefulness of the

AML/CFT philosophy, recent data from the US has proven that SARs are increasingly very

useful both during an existing investigation and now also in originating a new investigation.

Hence the quality of SARs is critical and the key to AML/CFT effectiveness lies in the adoption

of technology in a proportionate risk-based manner. Both regulators and FI chiefs in Asia must

realize this and it must reflect in budgets for AML/CFT systems.

Keeping up with money launderers and terrorists is expensive this is now the cost of

doing business.

Rohan Bedi is author of Money Laundering Controls and Prevention and senior anti-money laundering implementation manager atan international bank. He is an Executive-in-Residence at the Saw Centre for Financial Studies and is listed in the Marquis WhosWho in the World, 2007.

Disclaimer: the opinions in this article are the authors own and do not represent the organisations in which he works and is/wasassociated with.

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