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MONEY LAUNDERING AND

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TERRORIRST FINANCING
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Prepared by: AdviseCube Consulting

info@advisecubeconsulting.com

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 Table of Contents
Chapter 1 – Money Laundering and Terrorist Financing .............................................................................. 4

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What is Money Laundering? ..................................................................................................................... 4

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Stages and its Red Flags of Money Laundering......................................................................................... 4

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The Economic and Social Consequences of Money Laundering ............................................................... 6

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Compliance Program and Individual Accountability ................................................................................. 7
Methods of Money Laundering – Banks and Other Depository Institutions ............................................ 7

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Electronic Funds Transfers .................................................................................................................... 7
Remote Deposit Capture (RDC) ............................................................................................................ 8

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Correspondent Banking ........................................................................................................................ 9
Payable-through Accounts .................................................................................................................. 10

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Concentration Accounts...................................................................................................................... 11

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Private Banking ................................................................................................................................... 12
Use of Private Investment Companies (PICs) in Private Banking ........................................................ 13
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Politically Exposed Persons (PEP)........................................................................................................ 14
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Structuring .......................................................................................................................................... 15
Microstructuring ................................................................................................................................. 15
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Credit Unions and Building Societies .................................................................................................. 16

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Methods of Money Laundering – Nonbank Financial Institutions (NBFI)............................................... 17

Credit Cards Industry .......................................................................................................................... 17
Third-Party Payment Processor .......................................................................................................... 18
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Money Service Business (MSB) / Exchange Houses ............................................................................ 18

Insurance Companies .......................................................................................................................... 19
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Securities Broker-Dealers.................................................................................................................... 19
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Methods of Money Laundering – Nonbank Financial Businesses and Professions (NBFP) .................... 20
Casinos ................................................................................................................................................ 20
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Dealers in High-Value Items (Precious metals, Art, Jewelry etc.) ....................................................... 20

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Travel Agencies and Websites ............................................................................................................ 21

Vehicle Sales........................................................................................................................................ 22
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Gatekeepers: Notaries, Accountants, Auditors, and Lawyers ............................................................ 22

Investment and Commodity Advisors ................................................................................................. 23
Trust and Company Service Providers ................................................................................................ 24
Real Estate........................................................................................................................................... 24

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 International Trade Activity .................................................................................................................... 25
Free Trade Zones................................................................................................................................. 25
Trade-Based Money Laundering ......................................................................................................... 25
Black Market Peso Exchange .............................................................................................................. 27
Wildlife Trafficking .............................................................................................................................. 27

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Risk Associated with New Payment Products and Services .................................................................... 28

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Prepaid Cards ...................................................................................................................................... 28

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Electronic money / e-Money .............................................................................................................. 28

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Virtual Currency .................................................................................................................................. 29
Corporate Vehicles Used to Facilitate Illicit Finance............................................................................... 30

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Public Companies and Private Limited Companies ............................................................................. 30
Bearer Shares ...................................................................................................................................... 31

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Shell and Shelf Companies .................................................................................................................. 31

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Trusts................................................................................................................................................... 32

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Terrorist Financing .................................................................................................................................. 32
Hawala................................................................................................................................................. 34
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Use of Charities and Nonprofit Organizations (NPOs) ........................................................................ 34
Emerging Risks for Terrorist Financing ............................................................................................... 35
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Chapter 2 – International AML / CFT Standards ......................................................................................... 36

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Financial Action Task Force (FATF)...................................................................................................... 36

Performing Countries Assessment ...................................................................................................... 36
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FATF Recommendations ..................................................................................................................... 37

FATF designated thresholds: ............................................................................................................... 38
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FATF Membership Criteria: ................................................................................................................. 38

Non-Cooperative Countries: ............................................................................................................... 38
BASEL Overview .................................................................................................................................. 39
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EU Directives on Money Laundering ................................................................................................... 40

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FATF-style regional bodies (FSRBs): .................................................................................................... 45

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Organization of American States: Inter-American Drug Abuse Control Commission......................... 45

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Egmont Group of Financial Intelligence Units (FIU) ............................................................................ 45

The Wolfsberg Group .......................................................................................................................... 46
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Anti-Money Laundering Act (AMLA) of 2020 ...................................................................................... 52

USA Patriot Act.................................................................................................................................... 53
The Reach of the US Criminal Money Laundering and Civil Forfeiture Laws ...................................... 55
Office of Foreign Assets Control (OFAC) ............................................................................................. 55

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 Chapter 3 – AML / CFT Compliance Programs ............................................................................................ 57
Assessing AML / CFT Risk ........................................................................................................................ 57
Assessing Risks – AML / CFT Risk Scoring Model .................................................................................... 57
AML / CFT Program ................................................................................................................................. 59
Know Your Customer (KYC) ......................................................................................................................... 61

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Customer Due Diligence (CDD) ............................................................................................................... 61

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Enhanced Due Diligence (EDD) ............................................................................................................... 62

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Identification of a Beneficial Owners ...................................................................................................... 62

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Consolidated Customer Due Diligence ................................................................................................... 63
Customer Monitoring and Screening ...................................................................................................... 64

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What are Economic Sanctions ............................................................................................................ 64
Types of Economic Sanctions .............................................................................................................. 64

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Who impose Economic Sanctions ....................................................................................................... 64

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Sanctions List Screening .......................................................................................................................... 64

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Politically Exposed Persons (PEP) Screening ........................................................................................... 65
Know Your Employee (KYE) ..................................................................................................................... 65
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Suspicious and Unusual Transaction Monitoring and Reporting............................................................ 65
Automated AML/CFT Solutions............................................................................................................... 66
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Chapter 4 - Conducting and Responding to Investigations......................................................................... 68

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Investigations Initiated by the Financial Organisations .......................................................................... 68

Sources of Investigations .................................................................................................................... 68
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Conducting the Investigation .............................................................................................................. 70

Suspicious Activity Report (SAR) Decision-Making Process ................................................................ 70
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Closing the Account ............................................................................................................................ 72

Communicating with Law Enforcement on SARs ................................................................................ 72
Investigations Initiated by Law Enforcement ......................................................................................... 73
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Decision to Prosecute a Financial Organization for Money Laundering Violations ............................ 73

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Responding to a Law Enforcement Investigation against a Financial Organization ........................... 73

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Monitoring a Law Enforcement Investigation against a Financial Organization ................................ 74

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Cooperating with Law Enforcement during an Investigation against a Financial Organization ......... 74
Obtaining Counsel for an Investigation against a Financial Organisation .......................................... 75
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Notices to Employees as a Result of an Investigation against a Financial Organization .................... 75

Interviewing Employees as a Result of a Law Enforcement Investigation against a Financial
Organization ........................................................................................................................................ 75
Media Relations .................................................................................................................................. 76
AML/CFT Cooperation between Countries ............................................................................................. 76

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 FATF Recommendations on Cooperation between Countries ........................................................... 76
International Money Laundering Information Network (IMoLIN) ...................................................... 76
Mutual Legal Assistance Treaties (MLATs).......................................................................................... 77
Financial Intelligence Units (FIUs) ....................................................................................................... 77

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Chapter 1 – Money Laundering and Terrorist Financing

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What is Money Laundering?
Money laundering is the process of making illegally-gained proceeds (i.e. "dirty money") appear legal (i.e. "clean").

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It is typically done by disguising the proceeds as legitimate income from a real business. Money launderers use a
variety of techniques to do this, such as structuring financial transactions (i.e. breaking into smaller transactions) to

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evade reporting requirements, using shell companies or offshore accounts to hide the true ownership of assets, and
using virtual currencies or other non-traditional financial systems to move money anonymously.

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Money laundering is bad for economies for several reasons:

1. By introducing money obtained illegally into the economy, it compromises the integrity of the financial

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system. This can lead to unstable financial markets, a loss of public confidence in the financial system, and
market distortions.

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It can harm law-abiding firms by establishing an unfair playing field because money launderers can undercut
honest companies by failing to pay taxes or follow regulations.
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3. It may result in illegal activity such as financing of terrorism, human trafficking, drug trafficking, and
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smuggling.

4. It can also affect the reputation of the country and discourage foreign investments.
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5. Furthermore, money launderers often invest in non-productive activities like real estate and luxury goods,
increasing prices and making basic necessities more expensive for ordinary people.
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Stages and its Red Flags of Money Laundering

Money laundering typically involves three stages: placement, layering, and integration.
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Stage Definition Red Flag

Placement This is the initial stage of money laundering,  Large cash deposits: A sudden influx of large
where the launderer physically introduces amounts of cash into an account, especially if the
"dirty" money into the financial system. For account is not typically used for cash transactions,
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example, a drug dealer might deposit large may be a red flag for money laundering.
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amounts of cash into a bank account, or use  Structuring: This is when a person makes multiple
cash to purchase a high-value item such as a deposits just under the reporting threshold, this is
car or real estate. The goal of placement is to called "smurfing" and it is a red flag.
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separate the illegal funds from their criminal  Use of shell companies: If a company appears to
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origins. have no real business purpose, or if its ownership

is difficult to determine, it may be a shell company
used to launder money.
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 Use of third-party transactions: Transactions

conducted through intermediaries or third parties,
such as money service businesses or casinos, may
also be red flags for money laundering.
 Unusual or suspicious wire transfers: Large or
frequent wire transfers, especially those with no
clear business purpose or those that involve

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 countries known for money laundering, may be a
red flag for money laundering.
 Use of virtual currencies: The use of virtual
currencies, especially those that offer anonymity,
may be a red flag for money laundering.
Layering This is the second stage of money laundering,  Complex transactions: A series of complex
where the launderer takes the "dirty" money financial transactions, such as multiple wire

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and moves it through a series of complex transfers or the use of multiple bank accounts,
financial transactions to obscure the trail of may be a red flag for money laundering.

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the money. For example, the drug dealer  Use of offshore accounts: If a large amount of

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might transfer the money from the bank money is transferred to an offshore account or to
account to multiple other accounts in a bank in a country known for money laundering,

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different countries, or use shell companies to it may be a red flag for money laundering.
make it appear as though the money is coming  Use of shell companies: If a company appears to
from a legitimate business. The goal of have no real business purpose, or if its ownership

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layering is to make it difficult to trace the is difficult to determine, it may be a shell company
money back to its criminal origins. used to launder money.
 Use of nominee accounts: If an account is held in

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the name of an individual or entity that is not the
true beneficial owner, it may be a red flag for
money laundering.

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 Use of trusts: If a trust is used to obscure the true

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ownership of assets, it may be a red flag for
money laundering.
 Use of precious metals or artwork: If a launderer
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uses precious metals or artwork to move money,
it may be a red flag for money laundering.

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Use of Non-Profit Organization (NPO): If launderer
move funds through NPO, it may be a red flag for
money laundering.
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Integration This is the final stage of money laundering,  Unexplained wealth: If an individual or entity
where the launderer reintroduces the "clean" appears to have a higher standard of living or
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money back into the economy. For example,
the drug dealer might use the money to
purchase a legitimate business or invest in real 
estate. The goal of integration is to make the
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more assets than their income would suggest, it
may be a red flag for money laundering.
Real estate purchases: If an individual or entity is
purchasing real estate with cash, especially if the

illegal money appear as if it was legally property is being purchased at an inflated price, it
obtained. may be a red flag for money laundering.
 Use of luxury goods: If an individual or entity is
using cash to purchase luxury goods, such as cars,
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boats, or jewelry, it may be a red flag for money

laundering.
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 Use of shell companies: If a company appears to

have no real business purpose, or if its ownership
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is difficult to determine, it may be a shell company

used to launder money.
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 Unusual or suspicious financial activity: If an

individual or entity is engaging in unusual or
suspicious financial activity, it may be a red flag for
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money laundering.

Let’s understand each stage in a scenario way:

Imagine a drug cartel that is generating large amounts of cash from illegal drug sales.

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 1. The placement stage of money laundering in this scenario could involve the cartel members physically
transporting the cash across the border and depositing it into various bank accounts under different names.
They may also use the cash to purchase high-value items such as real estate or luxury cars.
2. The layering stage of money laundering could involve the cartel members using shell companies and other
financial instruments to move the money around, making it difficult to trace the origin of the funds. They
may also use the money to invest in legitimate businesses or other financial instruments, such as stocks or
bonds, in order to further distance the money from its illegal origins.

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3. The integration stage of money laundering could involve the cartel members using the "clean" money to

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purchase legitimate businesses, invest in real estate, or engage in other legal activities that will make the
money appear to have come from a legal source. For example, they may open a chain of restaurants and

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use the laundered money to finance the business.

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The Economic and Social Consequences of Money Laundering
Money laundering has numerous economic and social consequences that can have far-reaching effects on

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individuals, businesses, and even entire countries. Some of the major consequences of money laundering are:

1. Damage to the Economy: Money laundering can negatively impact the economy in several ways. By
allowing criminals to hide the proceeds of their illegal activities, it undermines the integrity of financial

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systems, and can lead to a loss of public trust in financial institutions. This can make it difficult for legitimate
businesses to access financing and can also lead to reduced foreign investment.

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For example, suppose a drug dealer launders money through a car dealership by using cash to buy cars,

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then reselling them for a higher price and depositing the profits into a bank account. In that case, the dealer
is able to hide the origin of the illicit funds and inject them into the economy, potentially leading to inflation.
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2. Increased Crime: Money laundering is often associated with organized crime, terrorism financing, and other
illegal activities. By providing a way to hide the proceeds of criminal activities, money laundering can
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encourage criminal behavior and fund the growth of criminal organizations. This, in turn, can lead to
increased crime rates and social instability.
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For example, if a drug cartel is able to launder its money through legitimate businesses, it can use those
profits to expand its operations, leading to more drug-related crimes and violence.
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3. Damage to Society: Money laundering can have a corrosive effect on society by eroding public trust in
institutions and promoting inequality. When wealthy individuals and organizations are able to hide their
wealth through money laundering, it can lead to a sense of unfairness and create a perception that the
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system is rigged in favor of the wealthy.

For example, if a corrupt politician is able to launder money through offshore accounts, it can create a
perception that the political system is corrupt and that the interests of the public are being ignored in favor
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of the wealthy and powerful.

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4. Reputational Risk: Reputational risk refers to the potential harm to an individual or organization's
reputation that can result from their association with certain activities or events. When money laundering
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occurs in a country, it can pose a significant reputational risk for the country itself, as well as for its financial
institutions, businesses, and citizens.
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In addition to the reputational risk for the country as a whole, financial institutions and businesses operating
in the country can also face reputational damage if they are found to be involved in money laundering. This
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can lead to loss of business, decreased customer trust, and potential legal and regulatory consequences.

5. Operational Risk: Operational risk refers to the risk of loss resulting from inadequate or failed internal
processes, systems, human error, or external events. When money laundering happens in a country, it
poses significant operational risks to the financial institutions operating in that country.

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 Financial institutions such as banks have a duty to prevent and detect money laundering. If they fail to do
so, they can be penalized by regulators and suffer reputational damage. Additionally, if money laundering
goes undetected, it can create systemic risks to the entire financial system, as the illegal funds may be used
to finance terrorism or other criminal activities.

Moreover, if a country is seen as a safe haven for money laundering, it can have negative impacts on its
economy and global reputation. Investors may be less willing to invest in a country that is perceived to have

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a weak regulatory regime, and businesses may be less likely to operate there due to the potential risks
associated with money laundering.

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In a nutshell, money laundering creates operational risk for financial institutions, threatens the stability of
the financial system, and damages the reputation of the country. It is important for countries to have strong

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anti-money laundering policies and effective enforcement mechanisms to mitigate these risks.

Compliance Program and Individual Accountability

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AML/CFT Compliance Programs are designed to prevent, detect, and report money laundering and terrorist financing
activities. These programs typically involve a combination of policies, procedures, systems, and controls that
financial institutions and other regulated entities use to identify and manage the risks associated with money

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laundering and terrorist financing.

Individual accountability is an important aspect of AML/CFT Compliance Programs. Regulators and law enforcement

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agencies expect that individuals within financial institutions will be held accountable for their roles and

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responsibilities in preventing and detecting money laundering and terrorist financing such as Senior Management
regime in the UK. This means that senior managers, compliance officers, and other employees must be
knowledgeable about the risks of money laundering and terrorist financing and must take appropriate measures to
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mitigate those risks.
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The Gates memo is a guidance document issued by the US Department of Justice (DOJ) in 2015. The memo, which is
also known as the "Yates Memo," outlines the DOJ's policy regarding individual accountability for corporate
wrongdoing. The memo states that companies seeking cooperation credit in criminal cases must provide the DOJ
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with all relevant facts regarding individuals responsible for the misconduct, and must identify all individuals involved
in the wrongdoing. In addition, the memo emphasizes that the DOJ will prioritize the prosecution of individuals,
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rather than just the corporations they work for.

The Gates memo has significant implications for AML/CFT Compliance Programs. Financial institutions and their
employees must take individual accountability seriously and ensure that they are taking appropriate steps to
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prevent, detect, and report money laundering and terrorist financing. This includes implementing robust AML/CFT
Compliance Programs that are tailored to the institution's specific risks, providing appropriate training to employees,
and taking appropriate action when potential instances of money laundering or terrorist financing are detected.
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Methods of Money Laundering – Banks and Other Depository Institutions

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Electronic Funds Transfers

An electronic funds transfer (EFT) is a type of financial transaction that involves the exchange of money between
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two or more parties through electronic means such as mobile or internet banking or by visiting a bank and sending
a swift message.
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To initiate an EFT, the sender must provide the necessary banking information, such as the recipient's account
number and routing number. The sender's bank then sends a message to the recipient's bank requesting the transfer
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of funds. Once the transfer is authorized, the funds are deducted from the sender's account and deposited into the
recipient's account. We will learn more about the flow of these transfers through correspondent banking accounts
later in the notes.

While EFTs are convenient and secure, they can also be vulnerable to money laundering. Criminals may use EFTs to
move money from one account to another in order to conceal its origin and make it more difficult to trace (i.e.
layering).

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 2. Large cash transactions: Dealers should be aware of customers who make large cash transactions,
particularly those who attempt to make multiple transactions just below the threshold that triggers
reporting requirements.
3. Use of shell companies: Money launderers may use shell companies to hide the true source of their funds.
Dealers should investigate the ultimate beneficial owners of such companies.
4. Unusual payment methods: Dealers should be suspicious of customers who insist on using unusual
payment methods, such as cryptocurrencies, bearer instruments, or third-party payments.

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5. Lack of documentation: Dealers should require customers to provide documentation to verify their identity

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and the source of their funds. They should be suspicious of customers who are unable or unwilling to
provide such documentation.

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The FATF report, the USA PATRIOT Act, and the EU Directive all require high-value item dealers to adopt

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comprehensive anti-money laundering/counter-terrorism financing (AML/CFT) procedures that involve client due
diligence, transaction monitoring, and reporting of suspicious actions. These safeguards are intended to reduce the
danger of money laundering and terrorist funding in this industry.

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According to the FATF study, dealers in high-value products should do customer due diligence, which includes
validating clients' identities, analyzing the risks associated with them, and monitoring their transactions. The USA

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PATRIOT Act compels dealers to disclose certain high-value transactions to the Financial Crimes Enforcement
Network (FinCEN). The EU Directive requires dealers to do customer due diligence, retain transaction records, and

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report suspicious activity to the appropriate authorities.

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Additionally, the art industry can have also follow the below controls:

1. Make it a requirement for all art merchants to submit their names and addresses. Require that they sign
and date a statement stating that the item was not stolen and that they are allowed to sell it.
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2. Verify the identities and addresses of new vendors and customers. Be cautious of any item with an asking
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price that does not represent its market value.
3. If you suspect that an object has been stolen, contact the Art Loss Register, the world's biggest private
database of stolen art, antiques, and collectibles. The database comprises over 700,000 stolen objects
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reported by law enforcement agencies, insurance, and people.

4. When a consumer requests to pay in cash, evaluate the issue critically. Accepting payments in cash should
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be avoided unless there is a compelling and credible cause.

5. Have awareness of money laundering regulations
6. Hire a senior member in the team to whom other team members escalate any suspicious activities.
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Travel Agencies and Websites

Travel agencies and their online portal or websites can be used by money launderers to move illegal funds across
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borders by purchasing airline tickets, hotel reservations, and other travel-related services. Here are some of the ways
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in which money launderers may use travel agencies and websites:

1. Structuring transactions: Money launderers may use travel agencies and their websites to structure
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transactions below reporting thresholds. For example, they may purchase multiple tickets or make bookings
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under different names or credit cards to avoid detection.

2. Smurfing: Similar to structuring, money launderers may use travel agencies and their websites to smurf
funds by making small transactions over time, which can go unnoticed by law enforcement and financial
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institutions.
3. False invoicing: Money launderers may use travel agencies and their websites to generate false invoices or
receipts, which can be used to justify the movement of illicit funds.
4. Traveling with illicit cash: Money launderers may use travel agencies and their websites to purchase tickets
and travel to destinations where they can transport large sums of cash without detection.
5. Payments made in cash or through third parties: Money launderers may pay for travel services in cash or
through third-party intermediaries to conceal the origin of the funds.

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 Below are some examples of TBML:

1. Over- or under-invoicing: This is the most typical kind of TBML. In order to shift cash across borders,
criminals inflate or deflate the worth of products on invoices. A criminal, for example, may buy things for
$1 million but invoice them for $2 million, then use the extra $1 million to launder money.
2. False description of goods: Criminals employ this strategy to conceal the genuine source of funds by
misrepresenting the nature of the products being transferred. A criminal, for example, can name a shipment

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of illegal substances as "pharmaceuticals" or "food products" to evade detection.
3. Multiple invoicing: Criminals generate several invoices for the same shipment of goods in order to avoid

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detection and shift monies across borders. A criminal, for example, may generate three invoices for the

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same shipment of goods and then use the extra two invoices to launder money.
4. Round-tripping: Criminals utilize this approach to disguise the real origin of cash by moving funds via a

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series of transactions. A criminal, for example, may send monies to an offshore bank account, then use
those funds to purchase products from a front business, then sell the goods back to a linked firm at an
inflated price, giving the illusion of a legitimate transaction while laundering money.

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5. Black market peso exchange (BMPE): In this TBML technique, drug traffickers use black market currency
exchanges to convert drug profits into local currency. This is then used to purchase goods for export, and

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the profits are then sent back to the traffickers in the form of legitimate funds. We will discuss BMPE details
in the next topic.
6. Over and Short Shipping: Over Shipping occurs when the quantity of goods shipped is more than what

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was actually ordered or required. The excess quantity is then sold in the market to generate illicit funds.

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However, Short Shipping, is the opposite where the quantity of goods shipped is less than what was
actually ordered or required. The difference is then compensated by illicit funds obtained through other
means.
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Some examples of red flags for TBML identified by FATF include:
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1. Invoices containing unclear or inadequate descriptions of the items or services being exchanged.
2. Unusual shipping routes, such as commodities being sent through nations that are not typical transit hubs
for similar items.
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3. Payments made from or to jurisdictions with known lax AML/CFT regulations.

4. Transactions involving high-risk products, such as military equipment or dual-use commodities with
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possible military uses.

5. Transactions involving countries at risk or persons, such as those on sanctions lists or with proven ties to
criminal or terrorist organizations.
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6. Invoices with a large price variation from the market rate for the commodities being exchanged.
7. Payments made in cash or via non-traditional payment methods such as cryptocurrencies.

Additionally, FinCen has mentioned about usage of Funnel accounts in TBML.

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FinCEN defines funnel accounts as bank accounts used by money launderers to gather and aggregate illicit gains
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from several sources before moving the cash to a beneficiary account, which often occurs in a foreign country with
inadequate anti-money laundering laws. These accounts are frequently used in trade-based money laundering
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schemes, in which illegal activity earnings are disguised as lawful international commercial transactions. The usage
of funnel accounts helps money launderers to evade becoming aware while also concealing the source of the
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unlawful monies.

For example, a criminal organization purchases a large quantity of high-value goods, such as electronics or luxury
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cars, using illicit funds. They then use these goods to make it appear as if they are conducting legitimate business
activities, by shipping them to a front company located in a foreign country. The front company then sells the goods
to legitimate buyers, receiving payment through a funnel account controlled by the criminal organization. The funds
are then transferred to other accounts or withdrawn as cash, effectively laundering the illicit proceeds.

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 Black Market Peso Exchange
The black market peso exchange (BMPE) is a money laundering method mainly utilized by Colombian drug traffickers
to convert US dollars received from drug sales into Colombian pesos. The technique involves the hiring of peso
brokers to enable the black market conversion of US dollars for Colombian pesos.

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Following is the sequence in which BMPE may occur:

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1. A drug trafficker sells drugs in the United States and collects cash proceeds in U.S. dollars.
2. The drug trafficker then contacts a BMPE broker in a foreign country and provides details of the amount of

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U.S. dollars to be laundered and the currency and amount of pesos needed.

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3. The BMPE broker arranges a trade between a legitimate importer in the foreign country and an exporter in
the United States.
4. The importer purchases goods from the exporter in the United States using the U.S. dollars provided by the

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drug trafficker.
5. The exporter receives payment in U.S. dollars and deposits them in a U.S. bank account.
6. The importer pays the BMPE broker the equivalent amount of pesos that the drug trafficker requested.

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7. The BMPE broker then provides the pesos to the drug trafficker, minus a fee for the service provided.

This way there is no financial transaction occurs and drug trafficker’s convert their dollars into Pesos.

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Wildlife Trafficking

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The unlawful exchange of wild animals, plants, and their products is referred to as wildlife trafficking. This illegal
sector earns billions of dollars each year and is a major threat to biodiversity.
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Typical stages of wildlife trafficking include:
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1. Poaching: Poaching is defined as the illegal killing or capture of wild animals or plants.
2. Smuggling: The illegal movement of wildlife or their products across international borders.
3. Laundering: The process of transforming the revenues of wildlife trafficking into finances that appear
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lawful.
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Money launderers often use wildlife trafficking to conceal the proceeds of their illegal activities. For example, they
may purchase wildlife products, such as ivory or rhino horn, with the proceeds of drug trafficking or other illicit
activities, and then sell them through legitimate channels. By doing so, they can "launder" the proceeds of their
illegal activities and make them appear legitimate.
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To combat wildlife trafficking and its use for money laundering, various industry recommendations have been made.
These include:
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1. Increased international cooperation and coordination to prevent and investigate wildlife trafficking.
2. Strengthening legislations and tuff penalties for those involved in wildlife trafficking and related crimes.
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3. Improved detection and enforcement measures, such as the use of technology and intelligence gathering.
4. Raise public awareness and education on the effects of wildlife trafficking on ecosystems and local
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communities.
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Wildlife trafficking has been identified by the FATF as a significant risk for money laundering and terrorism funding.
FATF highlighted the possible use of this illicit trade as a mechanism for criminals to relocate and hide illicit funds in
its 2018 report on Money Laundering and the Illegal Wildlife Trade. In addition, the research highlights the
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significance of coordination between financial intelligence units and law enforcement agencies in identifying and
disrupting cash flows associated to wildlife trafficking. Furthermore, FATF advises financial institutions and other
relevant stakeholders to be aware of the risks associated with the trade and to put in place appropriate measures
to detect and report suspicious activity.

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 Similarities Terrorist Financing & Money Laundering
Use of financial Terrorist financiers and money launderers both use financial institutions to transfer cash
institutions through the financial system, such as banks and money service organizations.
Need for secrecy To avoid detection, both types of financial crimes rely on secrecy and anonymity.
Use of similar Terrorist financiers and money launderers may utilize strategies to wire transfers, cash
methods deposits, or the purchase of high-value assets to move funds through the financial system.

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Difference between Terrorist Financing and Money Laundering

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Differences Terrorist Financing Money Laundering

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Purpose Terrorist finance is used to assist Money laundering is used to disguise the
terrorist operations such as the real source and ownership of monies

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acquisition of weapons or the planning earned via illegal activities such as drug
and execution of terrorist attacks. trafficking or fraud.

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Criminal intent Terrorist financing involves the use of Money laundering entails the use of
funds to support terrorist activities, monies gained by illicit activity, which is
which is a criminal act. itself a criminal conduct.

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Source of funds Terrorist finance can be legitimate or Money laundering monies are always illicit
illegitimate, and it can come from a and derived from criminal acts such as drug

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variety of sources, including trafficking, fraud, or corruption.
contributions, criminal operations, or

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state sponsors.
Nature of transactions The nature of transactions for terrorist The nature of transactions for money
financing may be legitimate or laundering involves the movement of
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illegitimate, and may involve the transfer funds through the financial system in order
of funds, the provision of goods or to conceal their illicit origins, such as
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services, or the use of legitimate through complex transactions or multiple
businesses to launder money. accounts.
Legal consequences The legal ramifications of terrorist Money laundering can potentially have
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financing can be severe, including serious legal implications, such as jail, fines,
imprisonment, fines, and asset seizure. or asset seizure.
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Detecting Terrorist Financing

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Terrorist financiers frequently utilize sophisticated means to disguise their actions, making it difficult to detect
terrorist financing. However, there are a number of indicators that financial institutions and other businesses can
use to spot potential terrorist financing activity. Here are some real-world examples of how terrorist financing has
been detected:
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1. Unusual transactions: Unusual transactions, such as large or frequent transfers of funds or transactions
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involving high-risk countries or persons, are one of the most typical indicators of terrorist financing. For
example, in 2015, a Western Union agent in Minnesota became suspicious when a customer tried to send
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$1,500 to Somalia, a high-risk country for terrorist financing. The agent notified law enforcement, who
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launched an investigation and ultimately arrested the customer for attempting to provide material
support to a terrorist organization.
2. Use of cash: The use of cash to make transactions is another sign of terrorist financing, as cash
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transactions are more difficult to trace than electronic ones. For example, in 2016, a man was arrested in
New York for attempting to sell weapons to an undercover agent. The man had used cash to purchase the
weapons and had attempted to conceal the source of the funds, raising suspicions of potential terrorist
financing.
3. Suspicious behavior: Suspicious behavior can also be a sign of potential terrorist financing. For example,
in 2017, a man was arrested in Germany after attempting to purchase large quantities of chemicals that
can be used to make explosives. The man had exhibited suspicious behavior, such as asking about the

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 Chapter 2 – International AML / CFT Standards
Financial Action Task Force (FATF)
The Financial Action Task Force (FATF) is an intergovernmental organization that was established in 1989 to combat
money laundering and terrorist financing. The FATF is comprised of 39 member countries and two regional
organizations, and is responsible for setting international standards and promoting effective implementation of AML
and CTF measures.

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1. Setting international standards: One of the main objectives of FATF is to set international standards for

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combating money laundering, terrorist financing, and other related threats to the integrity of the

lti
international financial system. These standards are known as the FATF Recommendations.
2. Monitoring compliance: In addition, the FATF monitors compliance with the FATF Recommendations

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through periodical reviews of countries AML/CFT systems. The assessments are based on a list of 40
recommendations covering topics like as customer due diligence, suspicious transaction reporting, and
asset freeze and seizure.

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3. Providing guidance: The FATF advises and assists countries and organizations in implementing the FATF
Recommendations. This involves creating typologies and best practices to assist governments in better
understanding the risks of money laundering and terrorism funding and adopting effective AML/CFT

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solutions.
4. Facilitating international cooperation: The FATF also works to facilitate international cooperation on

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AML/CFT issues. This includes promoting the exchange of information between countries and encouraging
the establishment of international cooperation networks.

Performing Countries Assessment

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To evaluate a country's AML/CTF system, FATF conducts both “technical compliance” and “effectiveness
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assessments”. Here are some of the reasons why such assessments are needed:
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1. Identify areas of improvements

2. Evaluate the effectiveness of AML/CFT measures
3. Encourage international cooperation
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4. Promote adherence to international standards

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Let’s look into each of the assessments.

Technical Compliance
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A country's degree of compliance with the FATF Recommendations and other international AML/CFT standards is
assessed through a legal compliance assessment. These evaluations examine whether a country has put in place the
legal and regulatory frameworks required to prevent and identify money laundering and terrorist financing.
Technical compliance evaluations are based on a thorough examination of a country's laws, regulations, and other
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anti-money laundering and terrorist financing measures.

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The assessors analyse this information, checking if all the required laws and regulations, as required by the FATF
Recommendations, are in place and provide the 5 possible ratings:
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1. Complaints
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2. Largely compliant
3. Partially compliant
4. Non-compliant
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5. Not applicable

Effectiveness Assessments

Effectiveness assessments measure the operational efficacy of a country's AML/CFT regime. These assessments
examine whether a country's AML/CFT measures are effective in preventing and detecting money laundering and

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 terrorism funding. The effectiveness of a country is determined by examining its performance in critical areas such
as law enforcement, financial regulation, and international collaboration.

Effectiveness assessments is evaluated based on the below 11 immediate outcomes:

1. Criminalizing Money Laundering and Terrorist Financing

2. Implementing Financial Sanctions
3. Confiscating Proceeds of Crime and Terrorist Financing

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4. Freezing and Confiscating Terrorist Assets

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5. Providing International Cooperation in Money Laundering and Terrorist Financing Cases

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6. Providing Adequate Resources and Powers to Law Enforcement and Other Competent Authorities
7. Ensuring the Competence of Authorities

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8. Identifying, Assessing and Understanding Risks
9. Implementing a Risk-Based Approach
10. Applying Preventive Measures for Financial Institutions and Designated Non-Financial Businesses and

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Professions
11. Conducting Effective Investigation and Prosecution

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The 11 immediate outcomes feed into the three intermediate outcomes, which are:

1. Effective implementation: This relates to countries' effective implementation of AML/CFT measures, as

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measured by the 11 Immediate Outcomes. This involves ensuring that countries have in place the essential
legal and regulatory frameworks, as well as that these frameworks are properly applied in practice.
2.

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Disruption of money laundering and terrorist financing: This refers to AML/CFT measures' capacity to
disrupt the flow of illegal funds and prevent money laundering and terrorism financing. This involves making
certain that governments have strong measures in place to detect and investigate suspicious transactions,
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as well as the ability to freeze and confiscate assets associated with these activities.
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3. International cooperation: This refers to countries' ability to collaborate on a global scale to detect and
combat money laundering and terrorist financing. This involves ensuring that countries can exchange
information and intelligence, as well as effectively collaborate in investigations and prosecutions involving
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money laundering and terrorism financing.

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Levels of effectiveness:

1. High level of effectiveness

2. Substantial level of effectiveness
3. Moderate level of effectiveness
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4. Low level of effectiveness

FATF Recommendations
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Although the FATF recommendations are not legally binding, they are widely acknowledged as the
international standard for anti-money laundering and counter-terrorism financing measures. FATF
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members are required to implement the recommendations, while non-members are encouraged to do
so as well.
a
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Grouping of FATF Recommendations:

Group Topic Recommendation

1 AML/CFT Policies and Coordination 1-2
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• Assessing risks and applying a risk-based approach

• National cooperation and coordination
2 Money Laundering and Confiscation 3–4
• Money laundering offenses
• Confiscation and provisional measures
3 Terrorist Financing and Financing of Proliferation 5–8
• Terrorist financing offenses

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 n g
Anti-Money Laundering Act (AMLA) of 2020

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The Anti-Money Laundering Act (AMLA) of 2020 is a United States law that was intended to reinforce the US anti-money laundering (AML) and counter-terrorism funding
(CFT) system. It was enacted as part of the National Defense Authorization Act (NDAA) for Fiscal Year 2021.

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The key points of the AMLA of 2020 are:

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1. Beneficial ownership reporting: The AMLA compels corporations to report their beneficial owners to FinCEN within a year of the law's implementation. This is to
help prevent the use of anonymous shell firms for illegal activity.
2. Modernization of AML laws: The AMLA updates and improves existing anti-money laundering (AML) laws and regulations, such as the Bank Secrecy Act (BSA), the

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USA PATRIOT Act, and the Foreign Account Tax Compliance Act (FATCA).
3. Focus on emerging threats: The AMLA addresses growing concerns such as virtual currencies, trade-based money laundering, and terrorism funding.
4. Enhanced whistleblower protection: The AMLA strengthens protections for whistleblowers who report AML violations, including confidentiality and anti-

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retaliation provisions.

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5. Increased penalties: The AMLA enhances civil and criminal penalties for AML offenses and strengthens law enforcement agencies' power to confiscate and forfeit
assets associated with such violations.

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The Kleptocracy Asset Recovery Rewards Act (KARRA)
The primary purpose of KARRA is to increase the United States government's ability to recover assets stolen by corrupt foreign officials and hidden

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offshore.

KARRA allows the US Department of State to give incentives to those who submit information that leads to the identification, forfeiture, or repatriation of

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stolen assets. The awards can vary from 10% to 20% of the recovered assets' worth and can reach $5 million. This incentive is designed to encourage
whistleblowers to come forward with information about kleptocrats and their assets, which can aid authorities in recovering stolen assets and prosecuting
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individuals implicated in wrongdoing.
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 Chapter 3 – AML / CFT Compliance Programs
Assessing AML / CFT Risk
The first step is to identify legal requirements, and supplement with FATF risk-based controls. Controls should be
strong enough to counter the risks, low risks can be managed with minimal controls while high risk areas need robust
controls. Controls may include verifying the identity of customers (KYC), customer due diligence (CDD), suspicious
activity monitoring and economic sanctions screening.

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Risk based approaches are more:

n
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1. Flexible
2. Effective

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3. Proportionate

The Financial Action Task Force (FATF) recommends that financial institutions consider the following risk factors

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when performing its assessment.

1. Customer risk factors, which include their types of businesses, resident countries, and corporate ownership
structures. Regulators have identified some business as high risks such as banks, casinos, offshore

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corporations, MSBs, virtual currencies exchanges, gatekeepers, dealers in precious metals and used vehicles
etc.

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2. Geographic risk factors, which include whether they do business in high-risk countries known for corruption
or terrorist activity or having weak AML and CFT regulation. Geographic risk can be evaluated by checking

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US Department of State issues an annual International Narcotics Control Strategy Report, Transparency
International publishes a yearly Corruption Perceptions Index, FATF mutual evaluation report.
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3. Products and services risk factors which include the types of transactions performed, their level of
anonymity, private banking relationships, third-party deposits, remote deposit cheque, traveler cheque etc.
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Assessing Risks – AML / CFT Risk Scoring Model

Organisations are required under AML/CFT regulations to evaluate and reduce the likelihood related to money
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laundering and terrorist financing. Organisations may proactively identify and mitigate possible risks by developing
efficient risk assessment methods.
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Not only at the time of onboarding a customer but until the customer maintain a relationship with the organization,
the organization must assess the AML / CFT risk which a customer poses. A risk assessment involves reevaluating
risks and determining when a customer's risk rating should be raised or lowered. Identifying key factors for
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reevaluation is crucial for efficient resource allocation. Additionally, a customer's relationship with the organization
and their actual activity are important factors in determining their risk rating.

1. Establishing a Risk Assessment Framework

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a. Defining the Scope:

i. Identify the organization's size, nature of activities, and geographic reach.
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ii. Determine the relevant legal and regulatory requirements applicable to the
organization.
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b. Understanding the Risk Factors:

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i. Assess the inherent risk factors associated with the organization's industry, products,
services, and customer base.
ii. Consider factors such as high-value transactions, cross-border operations, politically
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exposed persons (PEPs), and complex ownership structures.

2. Identifying AML/CFT Risks
a. Internal Risk Factors:
i. Evaluate the adequacy and effectiveness of internal controls, policies, and procedures
related to AML/CFT.
ii. Identify any weaknesses in customer due diligence (CDD), transaction monitoring, and
reporting mechanisms.

57
 iii. Example: Conduct a review of the organization's KYC procedures to assess whether they
align with regulatory requirements.
b. External Risk Factors:
i. Analyze the jurisdictional risks associated with the organization's operations, including
countries with weak AML/CFT controls.
ii. Evaluate the risks posed by correspondent banking relationships and third-party service
providers.

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iii. Example: Conduct a country risk assessment by considering factors such as corruption

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levels, regulatory enforcement, and international sanctions.
3. Quantifying and Prioritizing Risks

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a. Risk Scoring:

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i. Assign risk scores to identified AML/CFT risks based on their likelihood and potential
impact.
ii. Develop a risk matrix or scoring system tailored to the organization's specific needs.

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iii. Example: Use a scale of 1 to 5 to score risks, with 1 representing low likelihood and
impact, and 5 representing high likelihood and impact.
b. Prioritization:

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i. Rank the identified risks based on their scores to determine the most significant areas of
concern.
ii. Consider allocating more resources to address higher-priority risks.

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iii. Example: Prioritize risks related to high-value cash transactions over risks associated

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with low-value electronic transfers due to the potential for money laundering activities.
4. Mitigating AML/CFT Risks
a. Developing Risk Mitigation Measures:
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i. Design and implement appropriate policies, procedures, and controls to address
identified risks.
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ii. Consider enhanced customer due diligence, transaction monitoring, staff training, and
reporting mechanisms.
iii. Example: Enhance the organization's transaction monitoring system to detect suspicious
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patterns and behaviors effectively.

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b. Monitoring and Reviewing:

i. Establish an ongoing monitoring process to ensure the effectiveness of risk mitigation
measures.
ii. Regularly review and update risk assessments to reflect changes in regulations, business
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operations, or emerging risks.

iii. Example: Conduct periodic independent audits to assess the organization's compliance
with AML/CFT policies and procedures.
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Example of a Risk Scoring Model:

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In this example, we assign a likelihood score (ranging from 1 to 5) and an impact score (ranging from 1 to 5) to
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each identified risk. The overall risk score is calculated by multiplying the likelihood and impact scores. A higher
score indicates a greater level of risk.

For instance, if a risk is assessed as having a likelihood of 3 (medium) and an impact of 2 (medium), the resulting
score would be 6. This scoring approach allows for prioritizing risks based on their overall severity, helping
organizations focus on addressing high-priority risks more effectively.

58
 Chapter 4 - Conducting and Responding to Investigations
Investigations Initiated by the Financial Organisations
Sources of Investigations
An AML/CFT (Anti-Money Laundering/Countering the Financing of Terrorism) or financial crime investigation is a
process that aims to uncover and combat illicit activities related to money laundering and terrorist financing. These

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investigations are carried out by regulatory bodies, law enforcement agencies, or financial institutions. The primary
objectives of these investigations are to identify, prevent, and deter financial crimes that can undermine the integrity

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of the financial system and support illegal activities.

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Common sources are following:

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Source Details
Regulatory Financial organizations often conduct investigations based on regulatory findings
recommendations and and recommendations. These investigations may be ongoing monitoring or one-

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Official findings time reviews to address specific questions or observations. It is crucial to document
these investigations clearly and ensure that all aspects of the findings are addressed
within the time frame provided by the issuing body. Senior management or higher-

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level professionals should be informed of the findings of the regulatory review, the
status of measures to address them, and their final disposition to ensure that the
financial organization appropriately remediates the findings or recommendations.

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Transaction Monitoring Transaction monitoring systems are used by financial institutions to detect

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suspicious activities and transactions that may indicate potential money laundering
or terrorist financing. When such activities are detected, a team of compliance
professionals reviews the generated alerts, assesses the relevance and severity of
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each alert, assigns a risk score, and initiates an investigation if necessary. The
investigation involves collecting additional information, conducting enhanced due
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diligence, documenting findings, and reporting suspicious activity if confirmed. The
specific process may vary depending on the institution's policies, regulatory
requirements, and the complexity of the investigation. The ultimate goal is to detect
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and prevent money laundering and terrorist financing activities by thoroughly

investigating suspicious transactions identified through transaction monitoring
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systems.
Referrals from Customer Financial institutions can initiate investigations based on referrals from customer-
Facing Employees facing employees who identify suspicious activities or behaviors that may indicate
potential money laundering or other financial crimes. The process typically involves
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employee referral, internal reporting, referral evaluation, investigation initiation,

information gathering, enhanced due diligence, documentation and reporting, and
escalation and resolution. Financial institutions should encourage and support a
strong culture of compliance to enhance their ability to detect and prevent financial
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crimes.
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Internal Hotlines Financial institutions establish internal hotlines or reporting mechanisms to provide
a confidential and secure channel for employees and stakeholders to report
concerns related to potential misconduct or financial crimes. The process typically
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involves internal hotline reporting, reporting eligibility, confidentiality and

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anonymity, hotline management, initial evaluation, investigation initiation,

information gathering, documentation and reporting, and follow-up and resolution.
The internal hotline serves as an important mechanism for detecting and
addressing potential misconduct or financial crimes within financial institutions.
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Negative Media Financial institutions use media monitoring tools or services to track and analyze
Information news articles, online publications, social media platforms, and other sources of
public information to identify negative media information that may suggest
potential involvement in illicit activities or raise concerns related to money
laundering, fraud, corruption, or other financial crimes. The identified negative
media information is screened and reviewed by the institution's compliance or AML

68

Receipt of a Governmental
team, and if deemed credible, an investigation is initiated. The investigation
involves information gathering, enhanced due diligence, documentation and
reporting, and escalation and resolution. By proactively monitoring negative media
information, financial institutions can identify potential risks and take necessary
actions to investigate and address any concerns related to financial crimes or
compliance breaches.
Financial institutions may receive a subpoena or search warrant issued by a

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Subpoena or Search government agency or law enforcement authority, which is reviewed by the
Warrant institution's legal and compliance teams to assess the legitimacy and validity of the

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request. Financial institutions have legal obligations to cooperate with government

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authorities and provide the requested information or access as mandated by the
subpoena or search warrant. The institution's legal and compliance teams inform

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relevant stakeholders within the institution about the receipt of the subpoena or
search warrant, and if the subpoena requests specific information, the institution
initiates the process of retrieving and preserving the requested records,

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documents, or data. The institution maintains detailed records of its compliance
efforts, including copies of the subpoena or search warrant, communication with
authorities, actions taken, and any relevant information provided or accessed.

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Subpoena Subpoenas are issued by grand juries that operate under the purview of a court and
empower law enforcement agencies to compel the production of documents and
testimony to investigate suspicious transactions, develop evidence, and put

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together a case for prosecution. When an organization receives a subpoena, it
should ensure its senior management and/or legal counsel reviews the subpoena

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and confirms its legitimacy. If there are no grounds for contesting the subpoena,
the organization should comply with the summons or subpoena on a timely and
complete basis. The financial organization should never notify the customer being
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investigated. To produce documents related to governmental requests, an
organization should appoint an employee with knowledge of the organization’s files
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to take charge of retrieving documents for the organization. If the government asks
the organization to keep certain accounts open, this request should be obtained in
writing under proper letterhead and authority from the government.
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Search Warrant A search warrant is a grant of permission from a court for a law enforcement agency
to search certain designated premises and seize specific categories of items or
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documents. The requesting agency must establish probable cause that evidence of
a crime will be located. When a search warrant is served, it is important that
everyone present remains calm. An organization should call its legal counsel and/or
designated officer in charge of security, risk management, or a similar business
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area, review the warrant to understand its scope, ask for and obtain a copy of the
warrant and affidavit, remain present while the agents make an inventory of all
items they seize and remove from the premises, ask for a copy of law enforcement’s
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inventory of what it has seized, document the names and agency affiliations of the
agents who conduct the search, and store privileged records separately from
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general records.
Orders to restrain or freeze Authorities can issue orders to restrain or freeze accounts or assets in financial
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accounts or assets institutions, indicating a suspicion of illegal activity or the need to preserve assets
pending further investigation or legal proceedings. Financial institutions should
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comply with the order if it is legitimate and in compliance with legal requirements.
The institution's legal and compliance teams should review the document to ensure
its authenticity, validity, and compliance with applicable laws and regulations. The
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relevant internal departments should be notified about the account or asset freeze,
and a dedicated team of investigators should be assigned to conduct a thorough
examination of the frozen accounts or assets. Investigators should collect all
relevant information and documentation related to the frozen accounts or assets,
collaborate with authorities, and document their findings. Financial institutions
should have robust procedures and controls in place to promptly respond to and

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