Money Laundering

What is Money Laundering?

• “The process used to disguise the source of
money or assets derived from criminal
activity”
• Include:
• Drug trafficking
• Extortion
• Corruption
• Fraud
 What is Money Laundering?

•
Appears to
Illegally originate from
Conversion
obtained money legitimate
source

Drugs / Arms Trafficking

Criminal Activity
Terrorism
Extortion
 Money Laundering
'Any act or attempted act to conceal or
disguise the identity of illegally obtained
proceeds so that they appear to have
originated from legitimate sources'.
In other words, it is the process used by
criminals through which they make
“dirty” money appear “clean”
Sec.3 of PML Act, 2002 defines ‘money
laundering’ as:
“whosoever directly or indirectly attempts to
indulge or knowingly assists or knowingly is
a party or is actually involved in any
process or activity connected with the
proceeds of crime and projecting it as
untainted property shall be guilty of the
offence of money-laundering”
• They try to “launder” the money so that the
source cannot be found.
• International Monetary Fund estimates $900
billion to $2.25 trillion annually worldwide.
• Government of Canada estimates
• the amount in Canada to be in the billions!
 Why do the laundry?
Criminals want to:
• Avoid prosecution
• Increase profits
• Avoid seizure of accumulated wealth
• Appear legitimate
• Tax evasion
They are trying to conceal the origin of the cash
 Money Laundering Process
• PLACEMENT
• LAYERING
• INTEGRATION
 Placement
• Immersion or Soaking
• The physical disposal of bulk cash
proceeds derived from illegal activity
 LAYERING
“Soaping / Scrubbing”
The separation of illicit proceeds from their
source by creating complex layers of
financial transactions
These disguise the audit trail & provide
anonymity
 Integration
“Repatriation / Spin Dry”
Reinjecting laundered proceeds into
economy so that they reenter
financial system as normal business
funds
Provides an apparently legitimate
explanation to criminally derived
wealth
 Money Laundering Risks
What are the risks to banks?
(i) Reputational risk
(ii) Legal risk
(iii) Operational risk (failed internal processes, people
and systems & technology)
(iv) Concentration risk (either side of balance sheet)
All risks are inter-related and together have the
potential of causing serious threat to the survival of
the bank
 Reputational Risk:

• The potential that adverse publicity regarding a

bank’s business practices, whether accurate or not,
will cause a loss of confidence in the integrity of the
institution
• Reputational Risk : a major threat to banks as
confidence of depositors, creditors and general
market place to be maintained
• Banks vulnerable to Reputational Risk as they can
easily become a vehicle for or a victim of customers’
illegal activities
 Operational Risk

• The risk of direct or indirect loss resulting from

inadequate or failed internal processes,
people and systems or from external events
• Weaknesses in implementation of banks’
programmes, ineffective control procedures
and failure to practise due diligence
 Legal Risk

• The possibility that lawsuits, adverse judgements or

contracts that turn out to be unenforceable can
disrupt or adversely affect the operations or
condition of a bank
• Banks may become subject to lawsuits resulting from
the failure to observe mandatory KYC standards or
from the failure to practise due diligence
• Banks can suffer fines, criminal liabilities and special
penalties imposed by supervisors
 Concentration Risk

• Mostly applies on the assets side of the balance

sheet: Information systems to identify credit
concentrations; setting prudential limits to restrict
banks’ exposures to single borrowers or groups of
related borrowers
• On liabilities side: Risk of early and sudden
withdrawal of funds by large depositors- damages to
liquidity
 Penalties imposed on banks
• Jan. 2006 ABM AMRO US$ 80 mio
• Aug. 2005 Arab Bank US$ 24 mio
• Feb. 2005 City National Bank US$750,000
• Jan. 2005 Riggs Bank US$ 41 mio
• Oct. 2004 AmSouth Bank US$ 50 mio
• Sep. 2004 City Bank Japan Licence cancelled
• May. 2004 Riggs Bank US$ 25 mio
 Money Laundering Legislation
• The financial Transactions and Reports
Analysis Centre of Canada (FINTRAC) is the
Canadian agency responsible for initiatives in
this country
• Created in July 2000
• Independent agency
• Arms length from police & other gov’t
agencies
 What does FINTRAC do?
• Collects reports on financial transactions and
analyzes them
• If reasonable grounds exist to suspect the info
would be relevant to investigating or
prosecuting a ML offence it will go to the Law
Enforcement Agency.
• If there are threats to Canada they disclose to
CSIS.
 FINTRAC and Privacy
• Required by Law to protect the personal
information it receives from unauthorized
disclosure
• Criminal penalties for FINTRAC employees
who unlawfully disclose info
 Who must report to FINTRAC?
• Financial entities (banks, credit unions)
• Life insurance cos, broker or agents
• Securities dealers
• Persons engaged in foreign exchange dealings
• Money services businesses
• Accountants & accounting firms
• Real estate brokers
• Casinos
• Individuals – whether a Cdn citizen or not & any entity who is
importing or exporting currency or monetary instruments of
$10,000 or more.
 What must be reported?
• Suspicious activities
• Large cash transactions over $10,000 or more
• International EFTs > or = $10,000
• Cross-border currency or monetary
instruments of or = $10,000
 Deadline to Report
• Deadline for reporting a suspicious transaction
is 30 days after the transaction occurred.
• Deadline for reporting cash transaction of over
$10,000 is 15 calendar
days after the transaction
occurred.
 What if you ignore?
• Failure to report a suspicious transaction or to make a
terrorist property report - up to five years
imprisonment and/or a fine of $2,000,000;
• failure to report a large cash transaction or an
electronic funds transfer - a fine of $500,000 for a first
offence and $1,000,000 for each subsequent offence;
• failure to retain records - up to five years imprisonment
and/or a fine of $500,000; and
• failure to implement a compliance regime - up to five
years imprisonment and/or a fine of $500,000.
 What KYC means?
• Customer?
• One who maintains an account, establishes business
relationship, on who’s behalf account is maintained,
beneficiary of accounts maintained by intermediaries,
and one who carries potential risk through one off
transaction
• Your? Who should know?
• Branch manager, audit officer, monitoring officials, PO
• Know? What you should know?
• True identity and beneficial ownership of the accounts
• Permanent address, registered & administrative address
 What KYC means?
• Making reasonable efforts to determine the true
identity and beneficial ownership of accounts;
• Sources of funds
• Nature of customers’ business
• What constitutes reasonable account activity?
• Who your customer’s customer are?
 Core elements of KYC
• Customer Acceptance Policy
• Customer Identification Procedure- Customer
Profile
• Risk classification of accounts- risk based
approach
• Risk Management
• Ongoing monitoring of account activity
• Reporting of cash and suspicious transactions
 Advantages of KYC norms
• Sound KYC procedures have particular relevance to
the safety and soundness of banks, in that:
1. They help to protect banks’ reputation and the
integrity of banking systems by reducing the
likelyhood of banks becoming a vehicle for or a
victim of financial crime and suffering
consequential reputational damage;
2. They provide an essential part of sound risk
management system (basis for identifying, limiting
and controlling risk exposures in assets & liabilities)
 Measures to deter money laundering
• Board and management oversight of AML risks
• Appointment a senior executive as principal officer
with adequate authority and resources at his
command
• Systems and controls to identify, assess & manage
the money laundering risks
• Make a report to the Board on the operation and
effectiveness of systems and control
• Appropriate documentation of risk management
policies, their application and risk profiles
 Measures to deter money laundering
• Appropriate measures to ensure that ML risks are
taken into account in daily operations, development
of new financial products, establishing new business
relationships and changes in the customer profile
• Screening of employees before hiring and of those
who have access to sensitive information
• Appropriate quality training to staff
• Quick and timely reporting of suspicious transactions
 Summary: Prevention of Money
Laundering
Observing Rules for
Bankers

Compliance with Customer

Money Laundering
Laws due Diligence
Prevention

Identifying
Irregular / Suspicious
Transactions