Transcript Anti-Money Laundering Seminar

Practical AML experience &
Lessons Learnt
Kabul, Afghanistan – 19 April 2006
Money Laundering….
The Global Problem
What is Money Laundering?
1
What is Money Laundering?

Money laundering is the process by which criminals
attempt to hide and disguise the true origin and ownership
of the proceeds of their criminal activities. The term
“Money Laundering” is also used in relation to the
financing of terrorist activity (where the funds may, or may
not, originate from crime).*
* Standard Chartered Bank – Group Definition
2
Criminal Activities
Kidnapping
Drug Trafficking
Bribery / Corruption
Gambling
Counterfeiting and Forgery
Tax Evasion
Robbery
and Fraud
White Collar
Crimes
(including
Insider
Trading and
Securities
offences)
Extortion
Serious Crime or All Crimes?
Prostitution
Organised
Crime
Smuggling
(arms, people, goods)
3
What are the key stages of the Money
Laundering Cycle?

Placement
– of criminal proceeds into the financial system

Layering
– of transactions to confuse the audit trail and distance the original
source of funds (e.g. successive transactions, international
transfers, early termination products, tax haven companies,
genuine businesses).

Integration
– of funds back into the real economy as “clean and respectable
money”
4
What does this mean for Banks?
5
What are the risks for banks?
 Failure to understand and deal with Money
Laundering can lead to:
– Significant regulatory risk
– Significant reputational risk
– Significant litigation risk
– Significant Operational risk
6
The consequences of non-compliance are serious …
Nigerian loot laundered in the City
City banks ‘handled dictator’s fortune’.
This is disappointing says regulator
Sunday Times 17/12/00
Financial Times 9/3/01
The designated president of the
Financial Action Task Force ,
Jochen Sanio, said the agency will
need a bigger budget and tough
powers to impose sanctions on
countries that don't comply with
its rulings
' Everything will be overshadowed
by the task of fighting terrorism'
Financial Times 3 October 2001
7
Regulatory Case Studies
“HSBC fined €2.1 million in Spain”
21st November 2002
 Failure to:
– Identify numbered accounts
– Investigate Suspicious Activity Reports (SAR’s)
– Establish the right internal checks and procedures
8
Regulatory Case Studies
“Western Union fined $8 million under State Regulations and $4
million under Federal Regulations”
2nd December 2002 & 10th March 2003
 Failure to:
–
–
–
–
Report high value cash transactions
Have systems to detect suspicious transactions
Supervise agents
Lodge SAR’s
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Regulatory Case Studies
“Credit Suisse fined Sfr 750k”
2nd December 2002
 Failure to Know Your Customer and check the
origin of funds (Sani Abacha – Nigeria case)
10
Regulatory Case Studies
“FSA fines Royal Bank of Scotland Plc £750,000 for money laundering
control failings”
FSA press release, 17 December 2002

Fine imposed due to failure to obtain or retain sufficient ‘know your
customer’ (‘KYC’) documentation to adequately establish customer
identity in an unacceptable number of new accounts

Bank named, shamed and fined despite:
–
–
–
–
–
–
RBS discovered the problems through its own testing
Bank took an open and constructive approach to FSA’s investigation
No evidence of actual money laundering having taken place
Considerable resources dedicated at an early stage to correct the problem
Group-wide monitoring on compliance now in place
FSA is satisfied the Bank has now adequately dealt with the issue
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Regulatory Case Studies
“FSA fines Abbey National £2.32 million for compliance failures”
FSA Press release 10th December 2003
 Failure to:
– Maintain effective systems & controls
– Know your Customer (no evidence of Id)
– Manage and escalate SAR’s in a timely manner
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Regulatory Case Studies
“FSA fines Bank of Scotland £1.25 million”
FSA Press release 16th January 2004
 Failure to:
– Keep proper Know Your Customer records
(Identification records, system conversion)
13
Regulatory Case Studies
“FSA in Japan suspends Standard Chartered’s custody business for 1 year”
20th February 2004



Being involved in fund remittances for an underground
group.
Failure to Report SAR to FSA
Care to be taken when acting for an Agent or Sub
custodian
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Regulatory Case Studies
“FSA fines Raiffeirsen Zentralbank Osterreich £150k”
20th February 2004
 Failure to update its Anti Money Laundering
manuals.
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Regulatory Case Studies
“Riggs Bank fined $25 million”
13th May 2004
 Failure to:
– implement effective AML program
– Detect or investigate suspicious transactions
– File SAR’s (especially re some Saudi accounts)
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Regulatory Case Studies
“UBS fined $100 million”
10th August 2004
 Illegal transfer of USD currency from Note Depot
to sanctioned countries.
 Subsequent concealment, falsification of records
and returns to the Reserve Bank.
17
Regulatory Case Studies
“Citigroup ordered to close offices in Japan”
17th September 2004
 Closure of Private Banking Offices in 1 Branch
and 3 satellite Offices.
 Failing to prevent suspected Money Laundering
 Poor Know Your Customer records
 Improper trading
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Regulatory Case Studies
“ABN Amro fined USD 80 mn in New York”
January 2006
 Failing to prevent suspected Money Laundering
 implement effective AML program
 Improper trading
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Regulatory Case Studies
“Standard Chartered enters into agreement with US Federal Reserve to improve AML
controls”
13th October 2004

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



Written AML Program
Independent Testing and Audit
Effective Training
SAR’s & KYC
Review historic transactions
Progress Reports
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What is Standard Chartered doing about it?
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Key components of the SCB Group
Policies and Standards

Organisation and Internal Policies

Identify Your Customer

Know Your Customer (Risk Based KYC)

Ongoing Monitoring (outflows as well as inflows)

Record Retention

Reporting Suspicious Activities

Awareness and Training
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Money Laundering Prevention - Organisation
Country CEO
Head of Legal
and Compliance
REGULATOR/ FIU
Country MLRO
Business MLPO
Unit MLPO
Business MLPO
Unit MLPO
Unit MLPO
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Tailored to suit our international business ….
 Consumer Bank Guidance Notes
 Wholesale Bank Guidance Notes
 Country procedures taking into account
– Local regulatory requirements
– Group Standards
– CB & WB Guidance Notes
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CUSTOMER DUE DILIGENCE
Know Your Customer (KYC)






Identity Verification
Address Verification
Nationality
Business/ Profession
Source of Income/ Wealth
Transaction Profile
25
CUSTOMER DUE DILIGENCE
Non-Personal Accounts - Companies/ Trusts



KYC of major share holders/ beneficial owners
KYC of all the directors and controllers of funds
KYC of the trustees/ settlers of trusts
POA holders/ Intermediaries/ Agents

KYC of the Principals as well as agents/ POA holders/
intermediaries
Correspondent Banks

Ensure that the correspondent bank has equivalent ML
prevention procedures
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CUSTOMER DUE DILIGENCE
PEP (Politically Exposed Person)
A person holding post of a high public function in a
foreign country like, heads of state, ministers, senior
officials of judiciary, armed forces, etc.


Senior Management approval for opening account.
Enhanced due diligence on source of funds, source of
wealth
 Periodic Review and monitoring
 FATF Recommends extension of the principle to the
countries of domicile as well.
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2a. Borrowing
Customers
Existing KYC Process
3. Impose Basic KYC
only
Accept
2b. Non-Borrowing
Customers risk profiled
using agreed and easy to
implement filters.
3b. Impose
Enhanced KYC
3. Separate out
Level 3
customers using
agreed filters.
Manage as Level 3 Risk
1. Accept or Reject
business?
• Profitability
• Suitability
• Reputational Risk
• Sanctions
• Suspect/Blacklists
3. Risk
Assessment
Manage as Level 1 Risk
Risk based approach to KYC
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Risk based approach to KYC
Level 3 risk
Level 2 Risk
Level 1 Risk
Enhanced KYC
Account Opening
-Basic KYC Plus
Basic KYC
-Nature of business
-Evidence of Identity
-Origin of funds
-Evidence of address
-Purpose of account
-Type & level of activity
6 Monthly Review
Ongoing Account
Management
-Monitoring of transactions against
customer profile
-KYC Relationship review approved
by Senior management
Monitoring to identify account
activity which requires account to
be reclassified as Level 3.
Monitoring of transactions against
customer profile every 12 months.
Monitor Account Activity which requires
account to be classified as Level 2 or 3.
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Account Monitoring & Suspicious Activity Reporting
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Suspicious Activity

Suspicious Activity will often be one which is inconsistent
with the customer’s known, legitimate business or personal
activities or with the normal business for that type of account
 “The first key to recognition is knowing enough about the
customer’s business to recognise that a transaction, or series
of transactions, is unusual”
 (“..unusual or large transactions with context to the
account, which have no apparent genuine economic or lawful
purpose…”
31
Account Monitoring & Suspicious Activity Reporting

Need to monitor accounts:
– Manual Monitoring
– System monitoring
• Daily reports on thresholds and account recency
• Trend reports

Need to report suspicions:
– External Reporting where laws and regulations require this
(accounts may be frozen)
– Internal Reporting (account closure)
What are the consequences of not reporting?
32
Reporting Suspicions

“Suspicion” is not proof, but neither is it a “flight of
the imagination”

“Believing something to be true, but without proof”.

Some events always suspicious, in absence of
contrary evidence.

Can be a series of events

If unsure report anyway
33
Potential cases of Suspicion

Frequent cash deposit where inconsistent with customer’s known status
and occupation

Frequent use of cash for early loan repayment

Large numbers of electronic transfers into and out of account.

Multiple accounts where no need

Transactions with countries where no business

Excessive request for privacy

Unnecessary use of intermediaries

Receipts/remittances for which source/destination cannot be identified
34
SAR Regulatory Environment

60% of enforcement actions taken over the last 3 years
have been for SAR deficiencies.

Earlier actions related to Cash Transaction Reporting in
USA.

More recent ones have focused on management and
timeliness of SAR’s
35
Challenges in improving SAR numbers

Low staff awareness

Staff training not specific enough about SAR’s

Not disciplining non compliant staff

Fear of losing business

High work volumes and pressures
36
What is SCB doing on Training?

AML Training a part of the staff Induction training.
Compulsory to clear test within first week, bar at 80%

Refresher training every quarter with testing

AML Guidelines broken down into simple fact sheets for
ease of reference
Senior Management commitment to the process is a MUST
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Record keeping

5 years record retention (Group Standards)

Retention is from the date account is closed or
suspicious discovered

Record should be kept centralised and ready to be
provided upon any query in a timely manner
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Questions?
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