Money laundering is an issue that faces many organisations, for example, financial institutions have been subject to legal and regulatory requirements in relation to money laundering for a number of years. The need to understand and manage money laundering and the risks it can present to an organisation has never been greater, not only from a legal perspective but also to protect reputation.
In the aftermath of the terrorist attacks of 11 September 2001, anti-money laundering (AML) efforts have been given much greater attention and support by governments and legislative bodies. Moreover, the public, largely because of its fear of more terrorism, is becoming better educated about money laundering.
Terrorism, as practiced today, is dependent on financing, be it through legitimate or illegal channels. Stemming the flow of money that supports terrorism ties together AML and anti-terrorism legislation, policies and practices. Consequently, lagging AML endeavours have now been energized and enhanced.
The past few years have seen a number of international initiatives in relation to money laundering all of which have resulted in considerable changes and developments to UK and overseas legislation and regulation.
AML legislation has increasingly become an important tool in the fight against crime and in particular organised crime. It has also been recognised that with the development of global financial systems it has become much easier for criminals to move and hide the proceeds of their crimes around the world. The last 20 years have witnessed rapid globalisation and liberalisation of financial markets, business, communication and movement of people and capital on an historic scale. Organised crime groups have been following the same phenomena, becoming more international, and able to carry on their illegal activities far away from the geographic region where they were originally located. This general trend has made them more co-ordinated, more powerful both from a structural and economic point of view, and has generated huge international money laundering operations in order to legitimise proceeds of crime. As a result, countries and law enforcement agencies have been faced with two consequent phenomena. Firstly, the economic powers of such criminal organisations may challenge the economic strength of the weakest states. Secondly, the judicial authorities have been confronted with the difficult task of identifying and prosecuting perpetrators or organisers who often live far away from national boundaries.
This has led to the involvement of international groups such as the Basel Committee on Banking Supervision (Basel) in setting standards and the establishment of the Financial Action Task Force on Money Laundering (FATF) to develop international standards and best practice in the fight against money laundering.
AML Laws in USA
The Currency and Foreign Transactions Reporting Act also known as the Bank Secrecy Act (BSA) is a tool that the US government uses to fight drug trafficking, money laundering and other crimes. The BSA was enacted to prevent banks and other financial service providers from being used as intermediaries for transfer or deposit the money generated from criminal activity.
The USA Patriot Act, originally enacted in 2001 but amended in 2003, established a new precedent in AML efforts. Financial institutions are now required to perform due diligence to the highest possible level. No longer limited to banks and saving associations, the definition of ‘financial institution’ has grown to include a sweeping array of businesses. The Patriot Act expanded upon existing AML laws within the BSA by allowing institutions to share personal information about suspicious customers or activities with each other, as well as with enforcement officials. Intricate and demanding, the Patriot Act now requires institutions to know their customers like never before, and it gives them the authority to do so.
Closely related to the BSA is OFAC (Office of Foreign Asset Control) and its compliance requirement that all institutions search the OFAC Specially Designated National list at account opening and on an ongoing basis. Matches or hits with the OFAC list then require you to either block or reject the transaction. Given the length of the list and the frequency of updates, it is strongly recommended that institutions use an automated system to conduct OFAC searches. The regulators have expressed surprise at the number of institutions still conducting OFAC searches manually and have indicated that an automated process may soon be required.
AML Laws in Asia Pacific
When speaking of Asia Pacific, it is important to note the sheer number of countries in the region, the business styles and the remarkable cultural differences. Having said this, governments across the region are tackling this problem at different paces. The AML laws have been implemented in some form or other in various major Asia Pacific countries. For example:
In Australia, AML laws consists of the Proceeds of Criminal Act, 1987 which makes money laundering for serious offences a crime. The Mutual Assistance in Criminal Matters Act of 1987 allows Australian authorities to assist other countries to identify, freeze, seize and confiscate the proceeds of crime.
Hong Kong –is considereda regional leader in AML law and served as the President of the FATF (Financial Action Task Force). Its AML laws cover drug related and other serious offences.
In Japan in 1999, the Anti-Organised Crime Law expanded the country’s AML legislation to include offences such as extortion, theft, fraud and other serious crimes.
In Singapore, the main focushas historically been the proceeds of drug trafficking. However, recently the range of offences has been extended by the Corruption, Drug trafficking, and Other Serious Crimes Act of 1999.
In India also, the Prevention of Money Laundering Act 2205 became effective from 1 July 2005 which provides statutory basis to Financial Intelligence Unit (FIU) to perform its functions. It criminalises money laundering and requires banks and other financial institutions to report individual transactions valued over $23,000 to the FIU.
However, there are still five countries from the Asia Pacific which feature in the FATF’s black list of non co-operative countries and territories. There is a need for strong communication between banks and regulators. All countries in the region need to improve their terrorist financing regimes to meet international standards, including the establishment of functioning financial intelligence units. Both political will and technical assistance are needed to make this region a more effective partner.
AML Laws in Europe
Financial Action Task Force (FATF)
The FATF was established in 1989 in Paris by the G5 Nations and has provided the lead in setting international standards on money laundering. In June of 2003, the Financial Action Task Force (FATF) revised its Forty Recommendations to provide a new comprehensive framework for combating money laundering and terrorist financing. Section B of the recommendations focuses on measures to be taken by financial institutions and places particular emphasis on the establishment of solid customer due diligence (CDD) and record-keeping systems. While the recommendations do not specifically call for automated compliance systems, it is clear that the CDD and record-keeping expectations necessitate such an approach. The FATF is asking all countries to bring their systems for combating money laundering and terrorist financing into compliance with the new FATF recommendations.
The FATF also publishes a list of countries and territories that have been deemed to be ‘non-cooperative’ (NCCT) in relation to anti-money laundering initiatives. This list changes from time to time and should be reviewed on a regular basis. Countries and territories on this list should be considered as high risk and any business relationships with these countries should be carefully examined and be reviewed by the responsible officer within the organisation.
The Basel Committee
The Basel Committee on Banking Supervision was responsible in 1988 for initiating the concept of ‘know your customer’, often referred to as ‘KYC’ and it has now taken this concept forward with the publication of its document, ‘Customer due diligence’ in 2001. Whilst aimed at financial institutions the document comprehensively deals with the need to undertake adequate and enhanced customer due diligence and the associated risks of not embracing such due diligence.
According to Basel, this document again emphasizes adequate due diligence and states that without this due diligence, banks subject themselves to reputational, operational, and legal risk, which can result in significant financial cost. Due diligence requires knowing your customer through proper identification verification; regularly reviewing your customer base to ensure you understand the nature of the accounts you offer and the risk they pose; and, routinely monitoring account activity including wire transfers to ensure the activity meshes with the customer’s profile. The level of due diligence that is suggested for every customer again emphasizes the need for automation to get the job done.
EU Directives
The European Union (EU) has produced two directives on money laundering and all member states are required to implement the provisions of these directives within their legislation. The provisions of the First EU Directive are based primarily on the FATF Recommendations and apply specifically to financial institutions. The Second EU Directive has extended the provisions of the First Directive, beyond the financial sector to a broader group of businesses that now includes:
- Lawyers and accountants
- Estate agents
- Casinos
- Auctioneers
- Dealers in high value goods.
It is likely that future directives will further extend this list. Business activity falling into the groups defined in the EU First and Second Directives is referred to as ‘regulated activity’.
The UK Legal and Regulatory Framework
- Legislation
The UK has long recognised the problem of money laundering and anti money laundering legislation has been in place for many years. In response to international initiatives and European Union directives the UK legislation has evolved over recent years and is now contained in a number of statutes and regulations. These statutes create a number of criminal offences namely:
- Assisting a money launderer
- ‘Tipping-off’ a person suspected to be involved in money laundering that they are suspected or that they are the subject of a police investigation
- Failing to report a suspicion of money laundering (regulated activity)
- Acquiring, using, possessing criminal property
For organisations involved in ‘regulated activity’ the Money Laundering Regulations 2003, which came into force on 1 June 2003, created a number of AML requirements for organisations to undertake and a failure to comply can result in criminal prosecution.
- Proceeds of Crime Act 2002
Under this act, it is a criminal offence to get involved in any manner whatsoever in any activity which they suspect is facilitating someone else in acquiring, retaining, using or controlling the proceeds of crime. Similarly, it is an offence for anyone who is working in a financial firm not to report any act that they suspect involves the proceeds of crime.
- Financial Services Authority (FSA) Money Laundering Rules
The Financial Services Authority (FSA) has further enhanced this legal framework with the introduction of Money Rules, which are applicable to regulated financial institutions. In relation to regulated financial institutions the Joint Money Laundering Steering Group (JMLSG) has published Guidance Notes on Money Laundering. While the JMLSG Guidance Notes have no legal authority they are very detailed and take into account all existing legislation and regulations providing a practical interpretation of the UK money laundering legislation and an ‘indication of good generic industry practice.’ The Guidance Notes have been developed for the UK financial sector but they do provide comprehensive information on the UK requirements and can be a source of valuable information to organisations other than those in the financial sector.
International Principles and AML Requirements
There are six key anti-money laundering requirements that are specific to ‘regulated activity’. These can provide a useful approach for all organisations to consider when looking at how to manage money laundering risk.
- Appointment of Compliance officer and determine internal controls and procedures
- Client due diligence – (Know Your Customer)
- Reporting of suspicious transactions
- Training and awareness
- Record keeping
- Monitoring
Appointment of compliance officer and determination of internal controls and procedures
It is imperative that senior management focus on AML programmes and are committed towards the same. Banks can include in their organisation structure a new role of compliance officer. The compliance officer should work independently of the business functions and be responsible for all issues pertaining to AML compliance and reporting.
All internal controls, procedures and responsibilities should be fully documented and readily available to all employees. This document should also provide details of the legal responsibilities that may apply.
The FSA Money Laundering Rules require that in the case of regulated financial institutions, the compliance officer should provide the board with an annual report on the state of money laundering compliance within the organisation. This is a useful way to ensure that the Board does look at and consider the issue of money laundering.
Client due diligence – Know your customer
Client due diligence or ‘know your customer’ is the key component of all anti money laundering legislation. It is important to not only understand who your client or customer is, but to also understand why they want to do business with your organisation.
Documentation can range from company formation documents through to passports and identity cards of individuals. Any documentation obtained to support identification should be copied, certified and retained. It is also important to remember that documentation should be updated on a regular basis.
With the increasing use of online business it can be very difficult to establish and verify a client’s identity without any face-to-face contact. Extra care should be taken in this area, particularly when high value transactions are undertaken involving overseas jurisdictions.
Reporting suspicious transactions
All the financial institutions and banks are required to submit Suspicious Activity Report (SAR) to the Economic Crime Branch at the National Criminal Intelligence Services. SARs are fundamental building blocks in the identification of the flows of illegal and illicit money within the UK economy, including money used for financing of terrorism and terrorist groups.
It is a criminal offence for those working within ‘regulated activity’ to fail to report a transaction that is suspected to be related to money laundering. All employees must therefore be encouraged to report suspicions. It is important to have systems in place that can monitor transactions and highlight those which are suspected to be unusual and suspicious.
Training and awareness
A key component in managing the money laundering risk is to ensure that all employees, including senior management, fully understand the money laundering risk and their legal obligations and responsibilities. This can be achieved through regular and focused training and awareness sessions. The FSA Money Laundering Rules require that regulated financial organisations provide training and awareness sessions for their employees at least every two years, and this should include all relevant employees including senior management.
Training should be relevant and the content will need to be adapted for various sectors of employees. It is also important to record all training delivered and to maintain a register of employee attendance. New employees should receive AML training before undertaking their duties.
Training can be delivered using a variety of different approaches. It is important to ensure that the training is relevant, up to date and tailored to an individuals needs. Effective and meaningful employee training is fundamental in managing the money laundering risk within an organisation and it is important that it is delivered in a manner that employees will find interesting and informative.
Record keeping
Regulated organisations are required to maintain records for a period of five years and the general rule is that it must be possible to recover all information regarding a specific transaction. The purpose of this would be to provide the police with information should it later be discovered that a particular transaction is related to money laundering. The information required would be the type of transaction, persons or companies involved, values and quantities, source and destination together with times and dates. Should the police require information it will be by way of a court production order and the information will normally be required within one week.
Information can be stored in any format provided that it can be easily recovered. Client identification information should be retained for the life of the relationship and for five years after the relationship has ceased. A common problem that many organisations face is recovering documentation from off-site storage facilities in a timely manner.
Monitoring
The electronic monitoring of transactions is an issue that is currently receiving a great deal of attention by the financial services industry. More and more transactions are being undertaken electronically, without any human intervention, providing those involved in money laundering with greater opportunities to launder money and to remain undetected. There is recognition by the industry and regulators that the electronic monitoring of transactions can provide some protection in dealing with this risk.
For some organisations a monitoring system can provide an effective means of identifying potential money laundering transactions.
For those involved in ‘regulated activity’ it is highly probable that monitoring solutions will become a requirement in the near future.
Key Trends in AML in Europe
The European Commission has issued a third directive recently to existing EU legislation. The Directive is applicable to the financial sector as well as lawyers, notaries, accountants, real estate agents, casinos, trust and company service providers. Its scope also encompasses all providers of goods, when payments are made in cash in excess of €15,000.
The Directive introduces additional requirements and safeguards for situations of higher risk (e.g. trading with correspondent banks situated outside the EU).
The regulatory expectation of the quality of a bank’s AML compliance program has increased significantly. The regulators are looking much more carefully at the details of the AML compliance programs. There is particular emphasis on the processes in place to detect and report suspicious activity across all of a bank’s lines of business.
The time for doing BSA/AML compliance “on the cheap” has passed. The commitment to provide resources must clearly come from the top of the organization. The resources include personnel and systems, both internal and external. Comprehensive ongoing training must be in place. Banks should investigate what compliance support is available from their system vendors and how such functionality can be used in their compliance program. Banks should also review the number and level of expertise of the personnel assigned to their compliance efforts to determine if they are “resource poor” in this critical area. The establishment of a culture of compliance is critical in establishing a successful program. This can only be created through board of director and senior management buy-in and comprehensive, ongoing training.
Conclusion
The degree of risk that an organisation will face from money laundering is dependant on a number of key factors namely, the products and services provided and the markets in which the business operates. It is the responsibility of senior management to ensure that the risk from money laundering is managed effectively within the organisation through robust controls and procedures and an effective training and awareness policy.
The bottom line is that the regulators are concerned about criminals slipping through the cracks. Manual compliances systems, for a variety of reasons, are proving inadequate. So much so that the regulators are voicing opinions that strongly encourage use of automated AML processes. In fact, the regulators are coming close to equating a lack of automated systems with unsafe and unsound banking practices. Now is the time to seriously consider automating your AML compliance systems