Basics of AML

Table of Contents

1. Introduction to Money Laundering

1. Crime money is not free to use:

Money laundering is the criminal’s way of trying to ensure that, in the end, crime pays. The most common types of criminals who need to launder money are drug traffickers, embezzlers, corrupt politicians and public officials, mobsters, terrorists and con artists. Drug traffickers are in serious need of good laundering systems because they deal almost exclusively in cash, which causes all sorts of logistics problems. Not only does cash draw the attention of law-enforcement officials, but it's also really heavy. In practice, criminals are trying to disguise the origins of money obtained through illegal activities so it looks like it was obtained from legal sources. Otherwise, they can't use the money because it would connect them to the criminal activity, and law-enforcement officials would seize it.

2. Socio Cultural Spectrum of AML:

On the socio-cultural end of the spectrum, successfully laundering money means that criminal activity actually does pay off. This success encourages criminals to continue their illicit schemes because they get to spend the profit with no repercussions. This means more fraud, more corporate embezzling (which means more workers losing their pensions when the corporation collapses), more drugs on the streets, more drug-related crime, law-enforcement resources stretched beyond their means and a general loss of morale on the part of legitimate business people who don't break the law and don't make nearly the profits that the criminals do.

3. Financing of Money Laundering:

Money launderers are not interested in profit generation from their investments but rather in protecting their proceeds. Therefore, they invest their funds in activities that are not necessarily economically beneficial to the country where the funds are located. Furthermore, to the extent that money laundering and financial crime redirect funds from sound investments to low quality investments that hide their proceeds, economic growth can suffer. In some countries, for example, entire industries, such as construction and hotels, have been financed not because of actual demand, but because of the short-term interests of money launderers. When these industries no longer suit the money launderers, they abandon them, causing a collapse of these sectors and immense damage to these economies

4. Economic effects of Money Laundering:

The economic effects are on a broader scale. Developing countries often bear the brunt of modern money laundering because the governments are still in the process of establishing regulations for their newly privatized financial sectors. Other major issues facing the world's economies include errors in economic policy resulting from artificially inflated financial sectors. Massive influxes of dirty cash into particular areas of the economy that are desirable to money launderers create false demand, and officials act on this new demand by adjusting economic policy. When the laundering process reaches a certain point or if law-enforcement officials start to show interest, all of that money that will suddenly disappears without any predictable economic cause and that financial sector falls apart.

While the financial sector is an essential constituent in the financing of the legitimate economy, it can be a low-cost vehicle for criminals wishing to launder their funds. Consequently, the flows of large sums of laundered funds poured in or out of financial institutions might undermine the stability of financial markets. In addition, money laundering may damage the reputation of financial institutions involved in the scheming resulting to a loss in trust and goodwill with stakeholders. In worst case scenarios, money laundering may also result in bank failures and financial crises.

Money laundering diminishes government tax revenue and therefore indirectly harms honest taxpayers. It also makes government tax collection more difficult. This loss of revenue generally means higher tax rates than would normally be the case if the untaxed proceeds of crime were legitimate. It also threatens the efforts of many states to introduce reforms into their economies through privatisation. Furthermore, while privatisation initiatives are often economically beneficial, they can also serve as a vehicle to launder funds. In the past, criminals have been able to purchase marinas, resorts, casinos, and banks to hide their illicit proceeds and further their criminal activities.

There is also a risk posed to the securities markets, notably the derivatives markets. As a result of the degree of complexity of some derivative products, their liquidity and the daily volume of transactions, these markets have the ability to disguise cash flows and hence are extremely attractive to the professional money launderer. However, their activities pose huge risks to these markets. Firstly, the brokers used to execute orders on behalf of money laundering clients may be criminally liable for aiding and abetting money launderers. A worrying situation is the money launderers' skilful manipulation of the futures markets. On local futures exchanges, individuals have colluded to take correspondingly short and long positions so as to clean money debts being paid with dirty money, while profits now being clean money. Secondly, another major risk created is through the use of offshore banks that may wash money using derivative markets. As these banks are foreign, they are not required to abide by the same regulations as those of domestic investors as regards overexposure to uncovered risk; they are able to take on huge risk relative to their institutional size. Should losses result from such positions the debts may not be fully paid as the contracts purchased may be only one step in the course of a complex laundering chain that is untraceable. Thus, potentially huge losses could be incurred by legitimate investors, causing damage to the derivatives markets.

5. Microeconomic effects of money laundering:

One of the most serious microeconomic effects of money laundering is felt in the private sector. Money launderers often use front companies, which co-mingle the proceeds of illicit activity with legitimate funds, to hide the ill-gotten gains. In some cases, front companies are able to offer products at prices below what it costs the manufacturer to produce. Therefore, front companies have a competitive advantage over legitimate firms that draw capital funds from financial markets. This makes it difficult, if not impossible, for legitimate business to compete against front companies with subsidised funding, a situation that can result in the crowding out of private sector business by criminal organisations. The management principles of these criminal enterprises are not consistent with traditional free market principles of legitimate business, which results in further negative macroeconomic effects. Money laundering majorly happens in trade-based transactions hence; Government should put a cap on huge cash transactions as these mostly take place in illegal activities like drug trade and betting deals. There is a need to check the generation of black money in the education sector and through donations to religious institutions and charities, generation of black money through cricket betting, misuse of exemption on Long Term Capital gains tax so on and so forth.

2. Introduction to Terrorist Financing

1. Terrorism a long term fight:

Terrorism has long threatened nation states. However, especially since the attacks on the World Trade Centre in New York on September 11, 2001, terrorism has become a major challenge for all countries in the international arena. While domestic terrorism still accounts for the majority of terrorist incidents, transnational terrorism has become more relevant and is now considered as particularly dangerous. The direct and indirect costs of terrorism, ranging from the loss of human lives and assets to reduced growth and life satisfaction, are substantial, making it advisable to fight terrorism with a variety of means at the same time.

2. Terrorist attacks are of lower cost:

Terrorists want to achieve the biggest possible (political) effect in terms of media attention and destabilization. This, however, can be achieved at rather low cost, so that most terrorist attacks are rather inexpensive. This imposes further challenges for prosecutors as the financial flows they need to detect are usually small. Especially since terrorists are increasingly organized in networks nowadays, anti‐money laundering instruments may fail to yield the desired success, while at the same time interfering with fundamental civil rights in a problematic way. Terrorism may harm the economy directly and indirectly, where the latter effect refers to the reaction of economic agents (e.g., consumers, foreign investors, government) to terrorism.

3. Effects of Terrorism:

Similar to the negative economic consequences of civil war, there exist several channels of transmission from terrorism to the economy, namely destruction, disruption, diversion, dissaving and portfolio substitution. Destruction refers to the direct costs of terrorism. Human and physical capital is destroyed through terrorist attacks, resulting in a reduced economic output. The other effects refer to the indirect consequences of terrorism on the economy that emerge from the response of economic agents. The disruption effect may become manifest in higher transaction costs, as the effectiveness of public institutions is challenged and manipulated by terrorism, or as insecurity in general increases. For instance, given that terrorism creates uncertainty, it may consequently lead to the postponement of long‐term investments and thus reduced economic activity. Diversion occurs when public resources are shifted from output‐enhancing to non‐productive expenditures.

For instance, a government may increase spending on security at the expense of (more productive) spending on education and infrastructure, which may impede future economic development. Dissaving refers to a decline in savings that affects an economy's capital stock. Portfolio substitution means the flight of human, physical and financial capital from a country in the face of conflict.

Terrorism financing can be raised by legitimate sources such as fund-raising activities and business profits, as well as illegitimate sources such as the drug trade and fraud.

4. How Terrorists obtain money?

The fight against terrorism financing requires an understanding of the way terrorist organisations obtain their money as given below:

1. Illegal Activities: Terrorists obtain funds from illegal activities such as drug trafficking, smuggling, kidnapping and extortion. Drug trafficking is particularly lucrative. In Latin America, “Narco-terrorist” obtain much of their money from the drugs trade.

2. Wealthy Sponsors: Terrorists may receive funds from wealthy individual or sponsors which can support their terrorist activities.

3. Charitable and Religious Institutions: Legitimate charitable and religious institutions can be a source of funding for terrorists. They are ideal conduits because they are very lightly regulated and do not need to provide a commercial justification for their activities.

4. Commercial Enterprises: Terrorist organisations may run or own otherwise legitimate commercial enterprises to generate profits and commingle illegal funds. These include jewellery businesses, trading companies, convenience stores, real estate ventures and investment management firms.

5. State Sponsors: A number of rogue nations have been known to provide assistance, financial support and safe harbour to terrorist organisations. A prime example of this was Afghanistan under the Taliban regime.

5. Why Terrorist organisations need money?

Terrorist organisations need money to:

1) Recruit and sustain: Money is needed to recruit, support, train, transport, house, compensate and equip terrorist agents

2) Acquire influence: Money is needed to sustain media campaigns and win political support

3) Build the support base: Money is needed for educational and social programs to win members and create a support base

4) Carry out terrorist activity: Money is required to execute the planning.

Their success in accessing and deploying this money has disastrous results. Terrorist organisations do not require a lot of money to achieve disastrous results.

6. How terrorist usually move money?

terrorist usually move money in the below mentioned ways:

1. Financial Institutions: Often, individual accounts are opened and small withdrawals and deposits of less than reportable thresholds are made in order to avoid the reporting requirements of anti-money laundering and counter-terrorism financing legislation.

2. Alternative Remittance Systems: Unregulated remittance systems such as 'Hawala' and 'Hundi' are extensively used to transfer funds without any documentation.

3. Currency transfers: Cash is smuggled across borders, particularly through land crossings and sea shipments.

4. Trade financing: With the growth of terrorist-owned commercial firms, trade finance is increasingly being used.

5. Theft of personal Id: The theft of personal identity information is a common method used by terrorists and criminals to operate in the legitimate system.

7. September 11 Case facts:

The United States Federal Bureau of Investigation (FBI) uncovered some of the financing techniques used by the '9/11' (September 11, 2001) terrorists. The 9/11 terrorists opened a set of 24 accounts at a bank in the United States using false identities, social security numbers and documents. About US$325,000 was deposited into such accounts from benefactors in different countries. The terrorists also used debit cards issued by foreign banks to finance their activities in the United States.

3. Stages of Money Laundering

I. Placement

In the initial - placement - stage of money laundering, the launderer introduces “dirty” illegal money into the financial system. This might be done by breaking up large amounts of cash into less conspicuous smaller sums that are then deposited directly into a bank account, or by purchasing a series of monetary instruments (cheques, money orders, etc.) that are then collected and deposited into accounts at another location.

Examples of Placement:

1) Smurfing:

Smurfing is a common placement technique. Cash from illegal sources is divided between 'deposit specialists' or 'smurfs' who make multiple deposits into multiple accounts (often using various aliases) at any number of financial institutions. In this way, money enters the financial system and is then available for layering. Suspicion is often avoided as it is difficult to detect any connection between the smurfs, deposits and accounts. Smurfing is a common placement technique. Cash from illegal sources is divided between 'deposit specialists' or 'smurfs' who make multiple deposits into multiple accounts (often using various aliases) at any number of financial institutions. In this way, money enters the financial system and is then available for layering. Suspicion is often avoided as it is difficult to detect any connection between the smurfs, deposits and accounts.

2) Structuring:

Structuring involves splitting transactions into separate amounts under the reportable threshold levels (10000$ for US) to avoid the transaction reporting requirements. Many money launderers rely on this placement technique because numerous deposits can be made without triggering the cash reporting requirements.

However, it can backfire if an attentive financial institution notices a pattern of deposits just under the reportable threshold. This can lead to reporting such activity to FIU under the suspicious activity provisions of these instruments. Structuring is a criminal offence itself, as well as an indicator of other potentially illegal activity.

3) Alternative Remittance:

‘Alternative remittance’ refers to funds transfer services usually provided within ethnic community groups and known by names particular to each culture. Generally, such services accept cash, cheques or monetary instruments in one location and pay an equivalent amount to a beneficiary in another location. In some communities this form of money transfer is commonly known as hawala, hundi, chuyen tien, yok song geum, or pera padala. These are mostly person-to-person transfer systems that involve minimal documentation, if any.

Alternative remittance is also known as underground or parallel banking. There are large networks of these systems in operation around the world. The larger networks are prevalent in South East Asia, Latin America, North America and the Middle East. Alternative remittance systems predate the mainstream banking system and have been used in China and India for centuries. After the terrorist attacks of 11 September 2001, these systems have come under intense scrutiny as avenues for the transfer of money by terrorist groups.

These services are used to transfer both legal and illegal money. In many countries, the Western-style banking systems are under developed. Alternative remittance services have been called upon to ordinary people, workers, travellers and immigrants to transfer legal funds to their families and business counterparts. However, these alternative systems can also be used by tax evaders, terrorists, money launderers and other criminals.

4) Bulk Movement:

Bulk movement involves the physical transportation and smuggling of cash and monetary instruments, such as money orders and cheques. Often money launderers use their cash to purchase less bulky items such as diamonds, gold or even collector's stamps and other expensive goods. The criterion is that the items must be of high value and small, making them physically easy to smuggle as well as relatively easy to reconvert into cash at the point of destination.

Bulk shipments of illegally obtained funds (or goods acquired with the funds) are smuggled across borders concealed in private vehicles, commercial trucks and air and maritime cargo. They may also be carried by couriers travelling on commercial airlines, trains and buses. Further, they can also be sent through parcel delivery and express mail services. The simplest bulk movement method is to smuggle the cash out of one country into another country that does not have currency regulations or where the regulations are not enforced. Note that, like alternative remittance, bulk shipment is the first step in placing the money. Once the funds or assets have been successfully transported, they still need to be placed into the financial system.

5) Gambling:

Gambling is used to launder money by inserting illegal money into gaming machines. The money inserted can be cashed out and treated as proceeds from gambling. Funds that appear to be winnings can easily be used to justify unusual spikes in income. This income can then be deposited into a legitimate bank account.

Other types of gambling techniques include:

1. Claiming gaming machine prizes/payouts whilst not being the legitimate prize-winner (that is, not the player who has accumulated the subject credits or turnover)

2. Exchanging cash for or purchased gaming prizes/payouts from legitimate prize winners Exchanging cash for prize-winning cheques. This may be coordinated by ‘spotters’ who look for winners. They target problem gamblers who may want their winnings straight away and are willing to receive 95% of the face value of the ticket

3. Exchanging cash for prize-winning gaming machine tickets

4. Negotiating cash loans to other members/patrons for the purposes of gambling

6) Insurance Purchase:

Illegal money is used to buy insurance policies and instruments, which can be 'cashed in' at a later date. The end result is that the illegal funds have been legitimised by being ‘washed’ through a legitimate insurance business.

‘Single premium’ insurance products can be particularly vulnerable. They involve a single payment 'up-front' and the ability to immediately purchase a fully paid instrument. To a money launderer, these products are attractive because they:

• Involve a one-time payment

• Have a cash surrender value

• May be transferable

Insurance is sold through many channels. Any of these channels may be tapped by money launderers to place illegal funds.

II. Layering

After the funds have entered the financial system, the second – layering – stage takes place. In this phase, the launderer engages in a series (also called layers) of conversions or movements of the funds to distance them from their source. The funds might be channelled through the purchase and sales of investment instruments, or the launderer might simply wire the funds through a series of accounts at various banks across the globe. In some instances, the launderer might disguise the transfers as payments for goods or services, thus giving them a legitimate appearance. Let us look at some of the techniques as given below:

1) Electronic Funds Transfers:

The use of electronic funds transfers is a common layering technique. Typically, layers are created by moving money through electronic funds transfers into and out of domestic and offshore bank accounts of fictitious individuals and shell companies. Given the large number of electronic funds transfers daily and the sometimes, limited information disclosed about each transfer, it is often difficult for authorities to distinguish between clean and dirty money.

2) Offshore Banks:

Offshore banks are banks that allow for the establishment of accounts from non-resident individuals and corporations. A number of countries have well-developed offshore banking sectors. In some cases, these banking sectors follow loose anti-money laundering regulations.

Offshore banks are popular with money launderers (for layering funds), tax evaders and corrupt officials. Money launderers also like to keep funds in offshore banks because their fixed term deposit accounts provide interest income. Some offshore centres combine loose anti-money laundering procedures with strict bank secrecy rules. Criminals can easily maintain and transfer funds from banks in these centres because details of client activities are generally denied to third parties, including most law enforcement agencies. The financial centres that host offshore banks can be very large and help facilitate many illegitimate cross-border financings.

3) Shell Corporations:

Sophisticated money launderers use a complex maze of shell corporations in different countries. Most money transfers take place through these shell corporations. At times, money is transferred through numbered accounts rather than through named accounts. To further avoid unwanted attention; money launderers build the transaction history of the shell corporation so that it looks as if it has been in business for a long time. In many countries (particularly offshore banking centres), the reporting and record-keeping requirements for corporations are quite minimal, which makes it easy to disguise ownership of the corporation.

In a number of countries, ownership in corporations can be represented by 'bearer shares'. In these corporations, the holder of the bearer share certificate is regarded as the owner of the shares. This makes it easy to disguise and transfer ownership.

4) Trusts:

Trusts can act as layering tools because they enable the creation of false paper trails and transactions. Trusts are principally governed by a deed of trust drawn up by the person who establishes the trust. Trusts are more complex to use than corporations, but they are less regulated. The private nature of trusts makes them attractive to money launderers. Secrecy and anonymity rules help conceal the identity of the true owner or beneficiary of trust assets. Also, the presence of a corporate trustee provides an appearance of legitimacy. In addition, offshore trusts may contain a 'flee clause'. This clause allows the trustee to shift the controlling jurisdiction of the trust if it is in danger because of war, civil unrest or, more likely, the activities of law enforcement officers or litigious investors and consumers. Typically, trusts are used in combination with corporations in money laundering schemes. Trusts are used less frequently than corporations because of their complexity and their disuse in business transactions.

5) Walking Accounts:

A walking account is an account for which the account holder has provided standing instructions that all funds be transferred immediately on receipt to one or more other accounts. By setting up a series of walking accounts, criminals can automatically create several layers as soon as any funds transfer occurs.

Money launderers use this layering technique because it is extremely difficult to detect and money moves very fast through accounts across the world. Due to these reasons, walking accounts create substantial investigation hurdles for regulators.

6) Intermediaries:

Money launderers like to use intermediaries because they lend credibility and decrease suspicion. In addition, these professionals generally have confidentiality obligations to their clients so the risk of money launderers getting caught is low. Many countries have realised that criminals are increasingly using non-financial professionals as intermediaries. To counter these activities, many countries have included non-financial professionals in new anti-money laundering legislation.

III. Integration

Having successfully processed the criminal profits through the first two phases the launderer then moves them to the third stage – integration – in which the now-“clean” funds re-enter the legitimate economy. The launderer might choose to invest the funds into real estate, luxury assets, or business ventures.

1) Credit and Debit Cards:

Credit and debit cards are efficient ways for money launderers to integrate illegal money into the financial system. By maintaining an account in an offshore jurisdiction through which payments are made, the criminals limit the financial trail that leads to their country of residence. Credit and debit cards are efficient ways for money launderers to integrate illegal money into the financial system. By maintaining an account in an offshore jurisdiction through which payments are made, the criminals limit the financial trail that leads to their country of residence. In recent years, authorities have grown more attuned to the use of offshore credit cards as a money laundering technique. As a result, certain offshore jurisdictions now enable regulators to obtain from banks all records of transactions made by their credit card clients.

2) Consultants:

Consultancy arrangements can cover a wide range of non-quantifiable services and are often used to integrate illegal funds into the legitimate financial system. The use of consultants in money laundering schemes is quite common. The consultant might not even exist. For example, the criminal could actually be the consultant. In this case, the criminal is channelling money back to him/herself. This money is declared as income from services performed and can be used as legitimate funds. In many cases, the criminal will employ an actual consultant (e.g., accountant, lawyer or investment manager) to do some legitimate work. This could involve purchasing assets. Often, the criminal transfers funds to the consultant's client account from where the consultant makes payments on behalf of the criminal.

3) Corporate Financing:

Corporate financing offers a flexible way to transfer money between companies. This technique is often used in sophisticated money laundering schemes. Corporate financing is typically combined with a number of other techniques, including the use of offshore banks, consultants, complex financial arrangements, electronic funds transfers, shell corporations and actual businesses. This allows money launderers to integrate very large amounts of money into the legitimate financial system. Money launderers may also take a tax deduction on interest payments made by them in corporate financings. From appearances alone, such transactions are identical to legitimate corporate finance transactions. Financial service professionals serving legitimate businesses need to look closely to find peculiarities in their dealings, such as:

  • Large loans by unknown entities

  • Financing that appears inconsistent with the underlying business

  • Unexplained write-offs of debts.

4) Asset Sales and Purchases:

To integrate illegal funds into a legitimate financial system, money launderers often resort to actual or fictitious sales and purchases of assets. This technique can be used directly by the criminal or in combination with shell corporations, corporate financing and other sophisticated methods. The end result is that the criminal can treat the earnings from the transaction as legitimate profits from the sale of the assets. Around the world, real estate sales and purchases are a favoured method of integrating illegal money.

5) Business Recycling:

Business recycling is a common integration technique in which illegal funds are mixed with cash flow from a seemingly legitimate business. Legitimate businesses that also serve as conduits for money laundering are referred to as 'front businesses’. Cash-intensive retail businesses are some of the most traditional methods of laundering money. This technique combines the different stages of the money laundering process.

4. Transaction Monitoring

1. Transactions Monitoring and Controlling Money Laundering:

Banks can effectively control and reduce their risk only if they have an understanding of the normal and reasonable activity of the customer so that they have the means of identifying transactions that fall outside the regular pattern of activity.

However, the extent of monitoring will also, depend on the risk sensitivity of the account.

Banks should pay special attention to all complex, unusually large transactions and all unusual patterns which have no apparent economic or visible lawful purpose. Banks may prescribe threshold limits for a particular category of accounts and pay particular attention to the transactions which exceed these limits. Transactions that involve large amounts of cash inconsistent with the normal and expected activity of the customer should particularly attract the attention of the bank. Very high account turnover inconsistent with the size of the balance maintained may indicate that funds are being 'washed' through the account. High-risk accounts have to be subjected to intensified monitoring.

Every bank should set key indicators for such accounts, taking note of the background of the customer, such as the country of origin, sources of funds, the type of transactions involved and other risk factors. Banks should identify suspicious transactions and file Suspicious Transaction Reports through MLRO with the respective country’s Financial Intelligence Unit.

2. Two elements of Transaction Monitoring:

1. Pre-Transaction Monitoring:

Pre-transaction monitoring is carried out while the actual transaction is happening, and mainly applies to situations of face-to-face contact between the customer and the bank employee. For example, when a customer visits a bank to exchange a quantity of banknotes in certain denominations or foreign currency, or to make a cash deposit. Another example is trade finance, in which a bank is expected to carry out a specific proposed transaction. Banks should have a pre-transaction monitoring process in place, with appropriate measures to detect unusual transactions when or preferably before they are conducted. Pre-transaction monitoring is, either as an automated or a manual process, can effectively contribute to the detection of unusual transactions as it is in this stage that actual customer contact takes place. As such, the front office has a substantial responsibility in detecting unusual transactions such as money laundering and terrorist financing. This is relevant when a clear profile of expected transactions is drawn up at the start of the customer relationship for monitoring purposes. This will allow the institution to detect unusual proposed transactions even before they are affected, and notify them to FIU without delay.

2. Post-Transaction Monitoring:

Customer due diligence is part of the transaction monitoring process. Customer due diligence provides banks with knowledge of its customers, including the purpose and intended nature of the business relationship with the customer. This knowledge enables the bank to conduct risk-based assessments to ascertain whether the transactions carried out have unusual patterns that could indicate money laundering or terrorist financing. The bank must tailor its transaction monitoring to the type of customer, the type of services provided and the risk profile of the customer or customer segment. This means monitoring can have a different set-up for the various customer segments and products to which the bank provides its services.

Step 1: Risk Identification:

The first step in the transaction monitoring process is risk identification. During the identification process a bank must systematically analyses the money laundering and terrorist financing risks that particular customers, products, distribution channels or transactions pose. The bank then documents the results of this analysis in the TRANSACTION MONITORING Risk analysis Sheet. The Risk identified is applied to policy, business processes and procedures relating to transaction monitoring. When identifying and analyzing risks, a bank must classify its customers in various risk categories, such as high, medium and low, based on the money laundering and terrorist finance risks attached to the business relationship with the customer. To determine the customer’s risk profile, a bank should prepare a transaction profile based on expected transactions or expected use of the customer’s (or customer group’s) account. By preparing a transaction profile in this way a bank can sufficiently monitor transactions conducted throughout the duration of the relationship to ensure they are consistent with its knowledge of the customer and their risk profile. By identifying the expected transaction behaviour of their customer, a bank can assess whether the transactions the customer carries out are consistent with its knowledge of the customer.

Step 2: Detection of patterns and transactions:

For the second step, detecting the unusual transaction patterns and transactions that may indicate money laundering or terrorist financing, a bank must have a transaction monitoring system in place. Before making use of such a system the bank should ensure that all data are fully and correctly included in the transaction monitoring process. This can be data concerning the customer, the services and the transactions. If there are large numbers of transactions then it is appropriate to have an automated transaction monitoring system in place to be able to safeguard the effectiveness, consistency and processing time of the monitoring. The system must at least include pre-defined business rules: detection rules in the form of scenarios and threshold values. In addition to this, more advanced systems may also be needed, and in applicable cases may be essential, depending on the nature and the size of the transactions and the nature of the institution in question. So, for example, a highly advanced system would be less necessary for a bank with a limited number of simple transactions. It may also be the case that a bank considers the use of a highly advanced system, which makes use of artificial intelligence (AI) for example, to be essential. In any case, the responsibility for effectively detecting unusual transactions remains with the bank. A bank must have a good understanding of its systems, and should not just rely on the algorithms provided by external suppliers. When opting for an AI-based system, it may therefore be advisable to involve staff with relevant expertise.

The trigger activities that are usually the output from surveillance systems in banks are:

1. Change in Behaviour:

Change in behaviour is simply the change in volume or frequency or attempt to structure funds, or velocity or speed with which inward and outward remittances happens in a bank account. To make it simple, Surveillance system finds anomalies, such as an abnormally high volume or value of transactions or patterns of transactions falling out of threshold levels or large transactions just below the threshold levels.

2. Recurring Large Transactions:

Surveillance system finding the following anomalies under this heading are:

1. Huge value transactions incoming into an account which is way beyond the normal transactions level of the customer.

2. Huge volume of transactions incoming into an account which is way beyond the normal transactions level of the customer when aggregated.

3. Sudden huge transaction going out of account.

3. Transactions to, or incoming from a high-risk jurisdiction:

High-risk jurisdictions have significant strategic deficiencies in their regimes to counter money laundering, terrorist financing, and financing of proliferation. Surveillance systems usually are fed with the list of such countries. Any transaction happening to or from such high-risk countries are triggered as suspicious transactions.

4. Pattern of funds transactions:

The surveillance systems will trigger the following under this heading.

a) Substantial increases in cash deposits without apparent cause.

b) Regular Transfers to unknown third party or parties.

c) Regular receipt of funds from unknown third party or parties.

5. Rapid movement of funds:

The surveillance systems will trigger the following under this heading.

1. Rapid movement of funds between accounts.

2. Rapid movement of funds to or from third parties.

6. Sequentially numbered checks:

The surveillance systems will trigger alert for any transactions of monetary instruments such as checks or drafts with sequential number.

7. Structuring:

The surveillance systems will trigger any probable structuring such as daily transactions below thresholds levels, Frequent ATM deposits at night, considerable transactions above threshold for the customer type defined by the bank.

8. Large Credit Card Transactions:

The surveillance systems will trigger alert any large credit card transactions frequently.

9. Un related third party transfers:

The surveillance systems will trigger alert any unrelated third party transfers outside the hierarchy structure known to the bank.

10. Pattern of originator beneficiary in correspondent banking relationship:

The surveillance systems will trigger alert for regular transfers by the same originator to the same beneficiary frequently.

Step 3: Data Analysis:

A bank should analyze its transaction data using its transaction monitoring system and relevant intelligent software. The system generates alerts on the basis of business rules. An alert is a signal that indicates a potentially unusual transaction. Any alerts are investigated. The findings of this investigation must be adequately and clearly recorded. When the findings of the investigation reveal that the transaction is unusual, the bank must notify this to FIU without delay. A bank must have sufficiently described and documented the considerations and decision-making process as to whether or not to report a transaction. When a bank fails to meet its notification duty – even if this is not deliberate – it constitutes an economic offence.

Step 4: Assessment, Measures and Documentation:

The bank must then assess the consequences of the notification to FIU and a possible feedback report from FIU for the customer’s risk profile and determine whether any additional control measures have to be taken. The final part of the transaction monitoring process is to ensure all the details of the process are properly recorded. In this connection, the bank keeps the data relating to the notification of the unusual transaction and records them in readily accessible form for five years after the notification was made, allowing the transaction to be reconstructed.

3. Levels of reporting alerts:

All the alerts generated by the surveillance systems are not suspicious hence, those alerts which do not qualify for suspicion are required to be determined as “False Positive” and closed with well written judgment for the closure. Mostly, banks and financial institutions have three levels of officers who decide on, “True Positive” which needs to be escalated and “False Positive” which needs to be closed with proper closure comments of why suspicion is deemed to be false. Let us learn the levels as given below.

These levels might not be consistent across banks and financial institutions, but more or less are same.

1. Level I:

The team will receive all the alerts generated in their queue. The team leader assigns the alerts the team of transaction monitoring officers. The transaction monitoring officers check internal records, KYC records and other publicly available sources to determine whether the alerts are true or false positive. The sanctions related alerts are generally assigned to senior level officers who have been sufficiently trained and are accredited to make decisions on true or false positives. Their decisions of all deemed true positive hits directly flow to Level III which have officers’ experts in sanctions.

2. Level II:

The team of Level II officers in today’s banking scenarios are onshore or employees at head office who have sufficient experience in deciding whether or not to report the suspicion. They also have additional tools such as access to Lexis Nexis or Bankers almanac or Bloomberg terminals or other higher ranged tools to decide. Once the suspicion is confirmed as true positive, a draft is prepared and sent to MLRO for final decision.

3. Level III:

The team of Level III are sanctions specialists and look only into sanctions related alerts. Since they require higher attention, usually true positive hits ascertained by Level III team are seen by MLRO on priority.

MLRO’s based on draft “suspicions activity report” thoroughly investigate the case and decide whether or not to report further to FIU.

5. Politically Exposed Persons

1. About Politically Exposed Person:

PEPs have used banks as conduits for their illegal activities, including corruption, bribery, and money laundering. However, not all PEPs present the same level of risk. This risk will vary depending on numerous factors, including the PEP's geographic location, industry, or sector, position, and level or nature of influence or authority. Risk may also vary depending on factors such as the purpose of the account, the actual or anticipated activity, products and services used, and size or complexity of the account relationship.

As a result of these factors, some PEPs may be lower risk and some may be higher risk for foreign corruption or money laundering. Banks that conduct business with dishonest PEPs face substantial reputational risk, additional regulatory scrutiny, and possible supervisory action. Banks should take all reasonable steps to ensure that they do not knowingly or unwittingly assist in hiding or moving the proceeds of corruption by PEP's or, their families, and their associates. Because the risks presented by PEPs will vary by customer, product/service, country, and industry, identifying, monitoring, and designing ML/TF controls for these accounts and transactions should be risk-based.

2. Definition:

There is no single, globally agreed definition of PEP. However, a basic element of the PEP definition is that PEP is a natural person.

A politically exposed person or (PEP) is defined by the Financial Action Task Force as an individual who is or has been entrusted with a prominent public function.

Examples of PEP are individuals who hold positions such as, Heads of State or of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials etc.

Relationships with PEPs may represent increased risks due to the possibility that individuals holding such positions may misuse their power and influence for personal gain or advantage, or for the personal gain or advantage of close family members and close associates. Such individuals may also use their families or close associates to conceal funds or assets that have been misappropriated as a result of abuse of their official position or resulting from bribery and corruption.

You may note that any corporate which has PEP as ultimate beneficial owner holding more than 10%, such corporate is termed as PEP corporate. Here, the corporate status is PEP because of the presence of PEP individual.

3. Different types of PEP’s:

1. Foreign PEPs: Individuals who are or have been entrusted with prominent public functions by a foreign country.

2. Domestic PEPs: Individuals who are or have been entrusted domestically with prominent public functions.

3. International Organisation PEPs: Persons who are or have been entrusted with a prominent function by an international organisation such as World Bank UN, refers to members of senior management or individuals who have been entrusted with equivalent functions, that is directors, deputy directors and members of the board or equivalent functions.

4. Family Members of PEP: Family members are individuals who are related to a PEP either directly or through marriage or similar (civil) forms of partnership.

5. Close Associates of PEP: Persons who are closely connected to a PEP, either socially or professionally.

Involvement of PEP who himself/herself might open an account or has been identified during CDD of a business profile to be either the owner or key controller of the customer, the whole profile needs to be set as high risk and enhanced due diligence is required to be performed for such profiles. Certain banks also insist on PEP forms which have several questions for determining the risk levels of profile due to involvement of PEP.

4. Relevant factors while assessing a PEP are as given below.

1. An individual’s seniority, prominence or importance in holding a prominent public position.

2. The nature of the relevant country’s political and legal system and its vulnerability to corruption as per various publicly available, independent indices, such as Transparency International index.

3. The official responsibilities of the individual’s function,

4. The nature of the title, such as honorary or salaried political function.

5. The level of authority the individual has over governmental activities and over other officials.

6. Whether the function affords the individual access to significant government assets and funds, or the ability to direct the awards of government tenders or contracts.

7. Whether the individual has links to an industry that is particularly prone to corruption.

8. Number of years the individual was out of office. Usually, any individual out of office for more than 10 years is not categorized as PEP.

9. Many state-owned entities and public sector bodies will have PEPs in controlling positions within the organization. Here, these individuals however, should not be categorized as PEP’s as they are PEP's due to their positions and rare chances of such individuals will transfer corruption risk to that organization. A small caution of note, if these PEP’s are directors in some other organization which is being on boarded, a full PEP analysis is required.

5. How to do a PEP Analysis?

The questions and the way its asked can differ from bank to bank.

1. What is the position of the PEP and in which country the position is held?

2. How many years has the PEP been in office?

3. Is the PEP presently in the office or not?

4. Is the PEP, PEP due to the position held by such individual in the organization?

5. Since how many months and or years the PEP has been out of Office?

6. Is the individual, a close relative or blood relative of a PEP?

7. Is the individual, has only business relations with the associated PEP?

8. Is the individual, has much of the say in political circle and has friends or relations with Multiple PEP’s?

9. What is the nature and intended purpose of the relationship or account that a PEP wishes to have with the bank?

10. What is the source of funds to open an account?

11. How the individual who is a PEP has earned the Wealth or in short what is the source of wealth?

12. What are the anticipated levels of PEP individual’s account activity?

13. Is the PEP individual identified with Negative News or Adverse Media?

14. Is the individual still politically connected even if they have left office?

7. Regulations, Regulators and Banks

The most common objectives of bank regulations across the world is:

1. To protect the Depositors in the bank.

2. To reduce the banking failures including that of "Too Big to Fail"

3. To avoid misuse of banks by employees or outsiders for Money Laundering, Terrorist Financing or Fraud.

4. To ensure banks have sufficient internal controls to reduce the risk of banks being used for criminal purposes.

5. To protect banking confidentiality

6. To ensure all customers are fairly treated.

7. To direct credit to only those who are worth it.

8. Ensuring each bank is ethical and are aware of their corporate social responsibility.

7.1. Dodd Frank

1. About Dodd-Frank:

Dodd-Frank Wall Street Reform and Consumer Protection Act or simply Dodd-Frank Act was passed during the Obama administration on 21st July 2010 as a response to the financial crisis of 2008.

The act was named after sponsors Senator Christopher J. Dodd and congressman Barney Frank.

The act contains numerous provisions, spelled out over roughly 2,300 pages, that were to be implemented over a period of several years.

2. The aim of Dodd-frank act:

  • To promote the financial stability of the United States by improving accountability and transparency in the financial system.

  • To end too big to fail.

  • To protect the American taxpayer by ending bailouts.

  • To protect consumers from abusive financial services practices, and for other purposes.

3. Titles of Dodd:

Title I:

Under Title I the following were established

1. Financial Stability Oversight Council:

The Financial Stability Oversight Council serves as the federal “systemic risk regulator, “.

Meaning that the agency is tasked with identifying and resolving issues with the nation's financial systems that threaten the entire financial system of the nation as a whole, such as widespread bank closures.

The council has the authority to collect information from its member agencies, regulatory agencies, and the Federal Insurance Office.

In order to identify potential threats to financial stability, the council monitors the financial services marketplace as well as domestic and international financial regulations.

The Financial Stability Oversight Council can also advise and make recommendations to Congress and member agencies for the purpose of enhancing the “integrity, efficiency, competitiveness, and stability of the U.S. financial markets.

2. The Office of Financial Research:

It is an independent bureau within the United States Department of the Treasury.

It helps to promote financial stability by looking across the financial system to measure and analyse risks, perform essential research, and collect and standardize financial data.

The Dodd-Frank Act of 2010 established the Office of Financial Research, principally to support the Financial Stability Oversight Council and its member agencies.

3. Additional Board of Governors Authority for Certain Nonbank Financial Companies and Bank Holding Companies:

The Board of Governors shall establish prudential standards for nonbank financial companies supervised by the Board of Governors and bank holding companies that shall include

1. risk-based capital requirements and leverage limits.

2. liquidity requirements

3. overall risk management requirements

4. resolution plan and credit exposure report requirements; and

5. concentration limits.

Title II:

Title II, the Orderly Liquidation Authority or OLA of the Dodd-Frank Act, provides a process to quickly and efficiently liquidate a large, complex Non-Banking Financial Institution which is systemically important financial institution or SIFI, that is close to failing.

The secretary of treasury based on several factors decides whether an OLA should be invoked or not and submits a report within 180 days to the President.

In order to invoke the OLA, the FDIC also needs the agreement of the Federal Reserve Board of Governors (by a 2/3 majority).

Once invoked, The FDIC is given certain powers as receiver, and a three-to-five-year time frame in which to finish the liquidation process.

The FDIC needs access to cash to operate these firms while they go through resolution.

Title II of Dodd-Frank created a new fund, the Orderly Liquidation Authority, to be funded by complex, large institutions and non-bank SIFIs.

Unlike the Deposit insurance fund which is pre-funded, OLA is funded only after a failure.

The Treasury lends the FDIC money to resolve the institution.

If there is a net cost, the FDIC then recovers the money spent by imposing a fee on surviving large, complex financial institutions.

Title III:

Title III streamlines the supervision of depository institutions and their holding companies by abolishing the Office of Thrift Supervision and transferring its regulatory and rulemaking authority to the Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, and Board of Governors of the Federal Reserve System.

Title III also reforms federal deposit insurance.

Title IV:

Title IV clarifies the registration and record-keeping requirements of advisers to most private funds (hedge funds and private equity funds) to provide the Securities and Exchange Committee and the Federal Deposit Insurance Corporation with information necessary to evaluate systemic risk of these private funds.

Title V:

Title V of the Dodd-Frank Act establishes a Federal Insurance Office within the Department of the Treasury to promote national coordination in the insurance sector.

The Office has authority over all lines of insurance, except health insurance, most long term care insurance and crop insurance.

The Federal Insurance Office is authorized to gather information, enter into information sharing agreements with state insurance regulators, analyze and disseminate data, and issue reports on the insurance industry.

Title VI:

Title VI provides for heightened regulation of bank holding companies, savings and loan holding companies, and depository institutions to ensure that these institutions do not threaten the United States' financial stability.

Title VI requires the Federal Reserve to consider whether a proposed acquisition of a bank, a merger, or consolidation would result in greater or more concentrated risks to the stability of the United States banking or financial system.

Title VI, says a banking entity shall not engage in proprietary trading; or acquire or retain any equity, partnership, or other ownership interest in or sponsor a hedge fund or a private equity fund.

Title VI requires financial holding companies to remain well capitalized and well managed.

Title VI, says an insured State bank may engage in a derivative transaction, only if the law with respect to lending limits of the State in which the insured State bank is chartered takes into consideration credit exposure to derivative transactions.

Title VI, says an insured depository institution may not purchase an asset from, or sell an asset to, an executive officer, director, or principal shareholder of the insured depository institution, or any related interest of such person if the transaction represents more than 10 percent of the capital stock and surplus of the insured depository institution.

Title VII:

Title VII of Dodd-Frank Act addresses the gap in U.S. financial regulation of OTC swaps by providing a comprehensive framework for the regulation of the OTC swaps markets.

Title VII says, it shall be unlawful for any person to act as a security-based swap dealer unless the person is registered as a security-based swap dealer with the Securities and Exchange Commission.

The Dodd-Frank Act divides regulatory authority over swap agreements between the CFTC and SEC. The SEC has regulatory authority over “security-based swaps,” which are defined as swaps based on a single security or loan or a narrow-based group or index of securities or events relating to a single issuer or issuers of securities in a narrow-based security index. The CFTC has primary regulatory authority over all other swaps, such as energy and agricultural swaps. The CFTC and SEC share authority over “mixed swaps,” which are security-based swaps that also have a commodity component.

Title VIII:

Title VIII of the Dodd-Frank Act provides a new framework for assessing the systemic risk associated with financial institutions and financial market utilities involved in clearing activities for financial transactions. The Title grants authority to the Board of Governors of the Federal Reserve System, U.S. Commodities Futures Trading Commission, Securities & Exchange Commission, and Federal Deposit Insurance Corporation to work together to promulgate rules and standards of operation, enforce those rules, and generally help manage the systemic risk of these clearing entities and other financial market utilities.

Title IX:

Title IX of the Dodd-Frank Act contains Increasing Investor Protection, Increasing Regulatory Enforcement and Remedies, Improvements to the Regulation of Credit Rating Agencies, Improvements to the Asset-Backed Securitization Process, Accountability and Executive Compensation, Improvements to the Management of the Securities and Exchange Commission, Strengthening Corporate Governance, Municipal Securities and other matters.

Title X:

Title X of this Act creates a new Bureau of Consumer Financial Protection within the Federal Reserve Board as a new supervisor for certain financial firms and as a rule-maker and enforcer against unfair, deceptive, abusive, or otherwise prohibited practices relating to most consumer financial products or services.

Title XI:

Title XI addresses changes to the Federal Reserve System. First, the Title allows greater supervision of the Federal Reserve's operations by allowing the Comptroller General of the United States to audit the Federal Reserve Board, banks and credit facilities.

Title XII:

Title XII authorizes the Secretary of the United States Department of the Treasury to create multi-year grant programs designed to encourage Title XII’s targeted group, low-to-moderate income individuals, to utilize mainstream financial products and services. Title XII also authorizes participating institutions to issue small-dollar loans to targeted individuals and provide them with the financial counselling necessary to conduct transactions and manage their accounts.

Title XIII:

Title XIII, commonly known as the “Pay It Back Act”, amends the Emergency Economic Stabilization Act of 2008 by decreasing the Secretary of the Treasury's authority to purchase distressed assets under the Troubled Asset Relief Program or (“TARP”) from $700 billion to $475 billion.

Title XIV:

Title XIV amends the Truth in Lending Act to establish a duty of care for all mortgage originators, which would require them to be properly qualified. , registered and licensed as needed, and to comply with any regulations designed by the Federal Reserve Board to monitor their operations.

Title XV:

Title XV contains seven miscellaneous provisions. Title XV restricts the ability of the United States' Executive Director at the International Monetary Fund to approve loans to foreign countries that are unlikely to be repaid in full.

Title XVI:

Title XVI prevents investors holding swaps from experiencing increased volatility in taxable capital gains and losses.

7.2. European Market Infrastructure Regulation (EMIR)

1. About EMIR:

The European Market Infrastructure Regulation or simply EMIR is a European Union regulation number 648 of the year 2012 introduced on 04 July 2012 and date of entry into force was 16 August 2012.

2. EMIR Regulation lays down the following:

1. Clearing and bilateral risk-management requirements for over-the-counter derivative contracts.

2. Reporting requirements for derivative contracts. And,

3. Uniform requirements for the performance of activities of central counterparties and trade repositories.

Meaning, entities that qualify for EMIR must report every derivative contract they enter into, to a trade repository. They must implement risk management standards according to EMIR, including margining related to their bilateral OTC derivatives and their operational processes. EMIR also covers trades that are not cleared by a central counterparty, meaning, irrespective where the counterparties trade whether in the European Economic Area or elsewhere, they must file reports wherever they enter into derivatives transactions.

3. Some of the important definitions:

1. OTC Derivatives:

OTC derivatives are derivatives which are not executed on a regulated market or on a third-country market considered equivalent to a regulated market.

2. Trade Repository:

A Trade Repository is an entity that centrally collects and maintains the records of over-the-counter or OTC derivatives.

3. A non-financial counterparty:

A non-financial counterparty is an undertaking established in the European Union other than the entities referred to below:

a) Investment Firm.

b) Credit Institution.

c) Insurance Undertaking or Reinsurance Undertaking.

d) UCITS and, where relevant, its Management Company.

e) Institution for Occupational Retirement Provision (IORP).

f) Alternative Investment Fund.

4. Central Counter-party:

A Central Counterparty or Central Clearing Counterparty or in short CCP, are intermediaries who help counterparties which are part of a derivative trade to clear and settles derivate transactions. The CCP’s are generally banks who collects enough money from each buyer and seller to cover potential losses in case agreement is not followed by any of the counterparty.

5. Trading Venue:

A trading venue is either a Regulated Market, or a Multilateral Trading Facility, or a Organised Trading Facility.

4. Salient features of EMIR:

1. The legal persons who are in the scope of EMIR are.

a) Over the counter derivatives.

b) Central clearing counterparties.

c) Trade repositories.

d) Non-financial counterparties and

e) Trading Venue.

2. OTC derivative contracts that are intragroup transactions shall not be subject to the clearing obligation.

3. The OTC derivative contracts that are subject to the clearing obligation shall be cleared in a CCP and listed in the register of trade repositories.

4. Where a competent authority of a member state, authorizes a CCP to clear a class of OTC derivatives, it shall immediately notify ESMA of that authorization.

5. The ESMA shall draft regulatory technical standards or RTS taking into consideration the following criteria:

a) the expected volume of the relevant class of OTC derivatives;

b) whether more than one CCP already clear the same class of OTC derivatives;

c) the ability of the relevant CCPs to handle the expected volume and to manage the risk arising from the clearing of the relevant class of OTC derivatives;

d) the type and number of counterparties active, and expected to be active within the market for the relevant class of OTC derivatives;

e) the period of time a counterparty subject to the clearing obligation needs in order to put in place arrangements to clear its OTC derivative contracts through a CCP;

f) the risk management and the legal and operational capacity of the range of counterparties that are active in the market for the relevant class of OTC derivatives.

6. ESMA maintain and keep up to date a public register in order to identify the classes of OTC derivatives subject to the clearing obligation. The register shall include:

a) The classes of OTC derivatives that are subject to the clearing obligation.

b) The CCPs that are authorised or recognised for the purpose of the clearing obligation.

7. A CCP that has been authorised to clear OTC derivative contracts shall accept clearing such contracts on a non-discriminatory and transparent basis, regardless of the trading venue.

8. A trading venue shall provide trade feeds on a non-discriminatory and transparent basis to any CCP that has been authorised to clear OTC derivative contracts traded on that trading venue upon request by the CCP.

9. Counterparties and CCPs shall ensure that the details of any derivative contract they have concluded and of any modification or termination of the contract are reported to a trade repository no later than the working day following the conclusion, modification or termination of the contract.

10. Where a non-financial counterparty takes positions in OTC derivative contracts and those positions exceed the clearing threshold, that non-financial counterparty shall immediately notify ESMA and the competent authority.

11. Financial counterparties and non-financial counterparties that enter into an OTC derivative contract not cleared by a CCP, shall ensure, exercising due diligence, that appropriate procedures and arrangements are in place to measure, monitor and mitigate operational risk and counterparty credit risk.

12. Member States shall lay down the rules on penalties applicable to infringements or violations.

13. A CCP shall have a permanent and available initial capital of at least EUR 7.5 million to be authorised.

14. Within 30 calendar days of the submission of a complete application, the CCP’s competent authority shall establish, manage and chair a college to facilitate the exercise of the tasks of that CCP. And, within four months of the submission of a complete application by the CCP, the CCP’s competent authority shall conduct a risk assessment of the CCP and submit a report to the college.

15. The CCP’s competent authority shall withdraw authorisation where the CCP:

a) has not made use of the authorisation within 12 months, or has provided no services or performed no activity for the preceding six months.

b) has obtained authorisation by making false statements or by any other irregular means;

c) is no longer in compliance with the conditions under which authorisation was granted.

d) has seriously and systematically infringed any of the requirements laid down in this Regulation.

16. The competent authorities shall review the arrangements, strategies, processes and mechanisms implemented by CCPs to comply with this Regulation and evaluate the risks to which CCPs are, or might be, exposed. The competent authorities shall regularly, and at least annually, inform the college of the results of the review and evaluation.

17. Each Member State shall designate the competent authority responsible for carrying out the duties resulting from this Regulation for the authorisation and supervision of CCPs established in its territory and shall inform the European Commission and ESMA thereof.

18. Competent authorities shall cooperate closely with each other, with ESMA and, if necessary, with the European System of Central Banks or ESCB.

19. The CCP’s competent authority or any other authority shall inform ESMA, the college, the relevant members of the ESCB and other relevant authorities without undue delay of any emergency situation relating to a CCP.

20. A CCP established in a third country may provide clearing services to clearing members or trading venues established in the Union only where that CCP is recognised by ESMA.

21. A CCP shall have robust governance arrangements, which include a clear organisational structure with well-defined, transparent and consistent lines of responsibility.

22. The senior management of a CCP shall be of sufficiently good repute and shall have sufficient experience so as to ensure the sound and prudent management of the CCP.

23. A CCP shall establish a risk committee, which shall be composed of representatives of its clearing members, independent members of the board and representatives of its clients.

24. A CCP shall maintain, for a period of at least 10 years, all the records on the services and activity provided so as to enable the competent authority to monitor the CCP’s compliance with this Regulation.

25. The competent authority shall not authorise a CCP unless it has been informed of the identities of the shareholders or members, whether direct or indirect, natural or legal persons, that have qualifying holdings and of the amounts of those holdings.

26. A CCP shall notify its competent authority of any changes to its management

27. A CCP shall maintain and operate effective written organisational and administrative arrangements to identify and manage any potential conflicts of interest between itself, including its managers, employees, or any person with direct or indirect control or close links, and its clearing members or their clients known to the CCP.

28. A CCP shall establish, implement and maintain an adequate business continuity policy and disaster recovery plan

29. Where a CCP outsources operational functions, services or activities, it shall remain fully responsible for discharging all of its obligations under this Regulation

30. A CCP and its clearing members shall publicly disclose the prices and fees associated with the services provided.

31. A CCP shall keep separate records and accounts that shall enable it, at any time and without delay, to distinguish in accounts with the CCP the assets and positions held for the account of one clearing member from the assets and positions held for the account of any other clearing member and from its own assets.

32. A CCP shall measure and assess its liquidity and credit exposures to each clearing member

33. A CCP shall impose, call and collect margins to limit its credit exposures from its clearing members

34. To limit its credit exposures to its clearing members further, a CCP shall maintain a pre-funded default fund to cover losses that exceed the losses to be covered by margin requirements.

35. A CCP shall at all times have access to adequate liquidity to perform its services and activities.

36. A CCP shall accept highly liquid collateral with minimal credit and market risk to cover its initial and ongoing exposure to its clearing members.

37. A CCP shall invest its financial resources only in cash or in highly liquid financial instruments with minimal market and credit risk

38. A CCP shall have detailed procedures in place to be followed where a clearing member does not comply with the participation requirements of the CCP

39. A CCP shall, where practical and available, use central bank money to settle its transactions.

40. A CCP may enter into an interoperability arrangement with another CCP. CCPs that enter into an interoperability arrangement shall put in place adequate policies, procedures and systems to effectively identify, monitor and manage the risks arising from the arrangement so that they can meet their obligations in a timely manner.

41. A trade repository shall submit an application for registration to ESMA.

42. If a trade repository which is applying for registration is an entity which is authorised or registered by a competent authority in the Member State where it is established, ESMA shall, without undue delay, notify and consult that competent authority prior to the registration of the trade repository.

43. ESMA shall, within 40 working days from the notification, examine the application for registration based on the compliance of the trade repository and shall adopt a fully reasoned registration decision or decision refusing registration.

44. ESMA may by simple request or by decision require trade repositories to provide all information that is necessary in order to carry out its duties under this Regulation.

45. Where, ESMA finds that a trade repository has, intentionally or negligently, committed one of the infringements, it shall adopt a decision imposing a fine.

7.3. MIFID

I. Introduction:

MIFID was intended to replace the Investment Services Directive or (ISD). The directive created a single market for investment services and activities, which improves the competitiveness in European Union markets. MIFID was introduced to the European Union as a directive on 21 April 2004.

One of the objectives of this Directive is to protect investors. In order to protect investors, they should be classified as per their awareness of the financial markets and risks they can take. MIFID introduces two main categories of client (retail clients and professional clients), and a separate and distinct third category for a limited range of business (eligible counterparties). Different levels of regulatory protection attach to each category and hence to clients within each category.

Retail clients are afforded the most regulatory protection. Professional clients are considered to be more experienced, knowledgeable and sophisticated and able to assess their own risk and are afforded fewer regulatory protections. Eligible Counterparties are investment firms, credit institutions, insurance companies, UCITS and their management companies, other regulated financial institutions and in certain cases, other undertakings. MIFID provides a ‘light-touch’ regulatory regime when investment firms bring about or enter into transactions with ECPs. Let us understand each of the categorization in detail as given below.

1. Retail and Professional Clients.

Professional clients are considered to possess the experience, knowledge and expertise to make their own investment decisions and assess the risks inherent in their decisions. MIFID recognises certain persons as having these qualifications and automatically classifies them as professional clients. These persay professional clients are:

1. Entities which are required to be authorised or regulated to operate in the financial markets:

credit institutions;

investment firms;

other authorised or regulated financial institutions;

insurance companies;

collective investment schemes and their management companies;

pension funds and their management companies;

commodity and commodity derivative dealers;

locals;

other institutional investors.

2. Large undertakings meeting two of the following size requirements on a company basis:

balance sheet total of €20m,

net turnover of €40m,

own funds of €2m.

3. National and regional governments, public bodies that manage public debt, central banks and international and supranational institutions.

4. Other institutional investors whose main activity is to invest in financial instruments, including entities dedicated to the securitisation of assets or other financing transactions.

Any clients not falling within this list are, by default, retail clients.

2. Eligible counterparties or ECPs:

ECPs are considered to be the most sophisticated investor or capital market participant. Article 24 of MIFID permits those investment firms authorised to execute orders on behalf of clients and or to deal on own account and or receive and transmit orders, to bring about or enter into transactions with ECPs without complying with certain of the conduct of business obligations in MIFID. The list of entities automatically recognized as ECPs (persay eligible counterparties) are:

investment firms;

credit institutions;

insurance companies;

UCITS and their management companies;

pension funds and their management companies;

other financial institutions authorized and regulated under Community legislation or the national law of a Member State;

undertakings exempted from the application of MIFID under Article 2(1)(k) or (l);

national governments and their corresponding offices, including public bodies that deal with public debt;

central banks and supranational institutions.

3. Meanings of few terms which will help better understand the MIFID Regulations:

1. A Systematic Internaliser (“SI”) is an investment firm which is a counterparty dealing with its proprietary capital.

2. Professional client is a client who possesses the experience, knowledge and expertise to make its own investment decisions and properly assess the risks that it incurs.

3. Competent Authorities are required to enforce the wide-ranging obligations laid down in this Directive. Usually, they are the regulators in the member states.

4. "Investment firm" means any legal person whose regular occupation or business is the provision of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis.

5. Ancillary services mean.

(1) Safekeeping and administration of financial instruments for the account of clients, including custodianship and related services such as cash/collateral management;

(2) Granting credits or loans to an investor to allow him to carry out a transaction in one or more financial instruments, where the firm granting the credit or loan is involved in the transaction;

(3) Advice to undertakings on capital structure, industrial strategy and related matters and advice and services relating to mergers and the purchase of undertakings;

(4) Foreign exchange services where these are connected to the provision of investment services;

(5) Investment research and financial analysis or other forms of general recommendation relating to transactions in financial instruments;

(6) Services related to underwriting.

6. "Market maker" means a person who holds himself out on the financial markets on a continuous basis as being willing to deal on own account by buying and selling financial instruments against his proprietary capital at prices defined by him.

7. Market operator" means a person or persons who manages and/or operates the business of a regulated market. The market operator may be the regulated market itself.

8. "Multilateral trading facility or (MTF)" means a multilateral system, operated by an investment firm or a market operator, which brings together multiple third-party buying and selling interests in financial instruments.

4. The salient features of MIFID:

1. Each Member State shall require that the performance of investment services or activities as a regular occupation or business on a professional basis be subject to prior authorisation granted by the home Member State competent authority. Authorisation shall in no case be granted solely for the provision of ancillary services.

2. Member States shall establish a register of all investment firms. This register shall be publicly accessible and shall contain information on the services and/or activities for which the investment firm is authorised.

3. The investment firm shall provide all information, including a programme of operations setting out inter alia the types of business envisaged and the organisational structure, necessary to enable the competent authority to satisfy itself. An applicant shall be informed, within six months of the submission of a complete application, whether or not authorisation has been granted.

4. The competent authority may withdraw the authorisation issued to an investment firm where such an investment firm:

(a) does not make use of the authorisation within 12 months, or has provided no investment services or performed no investment activity for the preceding six months.

(b) has obtained the authorisation by making false statements or by any other irregular means.

5. Member States shall require the persons who effectively direct the business of an investment firm to be of sufficiently good repute and sufficiently experienced as to ensure the sound and prudent management of the investment firm.

6. The competent authorities shall not authorise the performance of investment services or activities by an investment firm until they have been informed of the identities of the shareholders or members, whether direct or indirect, natural or legal persons, that have qualifying holdings and the amounts of those holdings.

7. The competent authority shall verify that any entity seeking authorisation as an investment firm meets its obligations on investor-compensation schemes.

8. Member States shall ensure that the competent authorities do not grant authorisation unless the investment firm has sufficient initial capital.

9. An investment firm shall establish adequate policies and procedures sufficient to ensure compliance of the firm including its managers, employees and tied agents with its obligations as well as appropriate rules governing personal transactions by such persons.

10. Member States shall require that investment firms or market operators operating an MTF, establish transparent and non-discretionary rules and procedures for fair and orderly trading and establish objective criteria for the efficient execution of orders.

11. Member States shall ensure that the competent authorities monitor the activities of investment firms so as to assess compliance with the operating conditions.

12. Member States shall require investment firms to take all reasonable steps to identify conflicts of interest between themselves, including their managers, employees and tied agents, or any person directly or indirectly linked to them by control and their clients or between one client and another that arise in the course of providing any investment and ancillary services, or combinations thereof.

13. Member States shall require that, when providing investment services and/or, where appropriate, ancillary services to clients, an investment firm act honestly, fairly and professionally. All information, including

a) marketing communications, addressed by the investment firm to clients or potential clients shall be fair, clear and not misleading.

b) Appropriate information shall be provided in a comprehensible form to clients or potential clients about the investment firm and its services, financial instruments and proposed investment strategies.

c) Appropriate guidance on and warnings of the risks associated with investments in those instruments or in respect of particular investment strategies, information on execution venues, and costs and associated charges.

14. When providing investment advice or portfolio management the investment firm shall obtain the necessary information regarding the client's or potential client's knowledge and experience in the investment field relevant to the specific type of product or service, his financial situation and his investment objectives so as to enable the firm to recommend to the client or potential client the investment services and financial instruments that are suitable for him.

15. Member States shall ensure that investment firms, when providing investment services, ask the client or potential client to provide information regarding his knowledge and experience in the investment field relevant to the specific type of product or service offered or demanded so as to enable

the investment firm to assess whether the investment service or product envisaged is appropriate for the client.

16. The client must receive from the investment firm adequate reports on the service provided to its clients. These reports shall include, where applicable, the costs associated with the transactions and services undertaken on behalf of the client.

17. Member States shall require that investment firms take all reasonable steps to obtain, when executing orders, the best possible result for their clients taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order. Nevertheless, whenever there is a specific instruction from the client the investment firm shall execute the order following the specific instruction.

18. Member States shall require that where an investment firm decides to appoint a tied agent it remains fully and unconditionally responsible for any action or omission on the part of the tied agent when acting on behalf of the firm.

19. Member States shall require that investment firms authorised to execute orders on behalf of clients implement procedures and arrangements which provide for the prompt, fair and expeditious execution of client orders, relative to other client orders or the trading interests of the investment firm.

20. Member States shall ensure that investment firms authorised to execute orders on behalf of clients and/or to deal on own account and/or to receive and transmit orders, may bring about or enter into transactions with “eligible counterparties” without being obliged to comply with the following.

1. Article 19 where an investment firm is required to reasonably make the client understand the nature and risks of the investment service and of the specific type of financial instrument that is being offered.

2. Article 21 where an investment firm is required to provide information on the different venues where the investment firm executes its client orders and the factors affecting the choice of execution venue.

3. Article 22 of (1) where investment firms are required to execute order fast and as per the client orders in accordance with the time of their reception by the investment firm.

21. Member States shall recognise as eligible counterparties for the purposes of MIFID as investment firms, credit institutions, insurance companies, UCITS and their management companies, pension funds and their management companies, other financial institutions authorised or regulated under Community legislation or the national law of a Member State, national governments and their corresponding offices including public bodies that deal with public debt, central banks and supranational organisations.

22. Member States shall ensure that appropriate measures are in place to enable the competent authority to monitor the activities of investment firms to ensure that they act honestly, fairly and professionally and in a manner which promotes the integrity of the market and to restraint insider dealing and market manipulation.

23 Member States shall require that investment firms and market operators operating an MTF establish and maintain effective arrangements and procedures, relevant to the MTF.

24. Systematic internalisers shall make public their quotes on a regular and continuous basis during normal trading hours. They shall be entitled to update their quotes at any time. They shall also be allowed, under exceptional market conditions, to withdraw their quotes.

25. Member States shall, at least, require investment firms which, either on own account or on behalf of clients, conclude transactions in shares admitted to trading on a regulated market outside a regulated market or MTF, to make public the volume and price of those transactions and the time at which they were concluded. This information shall be made public as close to real-time as possible, on a reasonable commercial basis, and in a manner which is easily accessible to other market participants.

26. Member States shall, at least, require that investment firms and market operators operating an MTF make public current bid and offer prices and the depth of trading interests at these prices which are advertised through their systems in respect of shares admitted to trading on a regulated market.

27. Member States shall ensure that any investment firm authorised and supervised by the competent authorities of another Member State, may freely perform investment services and/or activities as well as ancillary services within their territories, provided that such services and activities are covered by its authorisation.

28. Member States shall not prevent investment firms and market operators operating an MTF from entering into appropriate arrangements with a central counterparty or clearing house and a settlement system of another Member State with a view to providing for the clearing and/or settlement of some or all trades concluded by market participants under their systems.

29. Member States shall require the persons who effectively direct the business and the operations of the regulated market to be of sufficiently good repute and sufficiently experienced as to ensure the sound and prudent management and operation of the regulated market.

30. Member States shall require the regulated market:

a) to have arrangements to identify clearly and manage the potential adverse consequences.

b) to be adequately equipped to manage the risks to which it is exposed.

c) to have arrangements for the sound management of the technical operations of the system, including the establishment of effective contingency arrangements to cope with risks of systems disruptions;

d) to have transparent and non-discretionary rules and procedures that provide for fair and orderly trading and establish objective criteria for the efficient execution of orders;

e) to have effective arrangements to facilitate the efficient and timely finalisation of the transactions executed under its systems;

f) to have available, at the time of authorisation and on an ongoing basis, sufficient financial resources to facilitate its orderly functioning.

31. Member States shall require that regulated markets have clear and transparent rules regarding the admission of financial instruments to trading and require the operator of the regulated market to communicate, on a regular basis, the list of the members and participants of the regulated market to the competent authority of the regulated market.

32. Member States shall, at least, require regulated markets to make public current bid and offer prices and the depth of trading interests at those prices which are advertised through their systems for shares admitted to trading.

33. Member States shall, at least, require regulated markets to make public the price, volume and time of the transactions executed in respect of shares admitted to trading. Member States shall require details of all such transactions to be made public, on a reasonable commercial basis and as close to real time as possible.

34. The European Commission shall publish a list of the competent authorities in the Official Journal of the European Union at least once a year and update it continuously on its website.

35. Member States shall require that competent authorities exchange any information which is essential or relevant to the exercise of their functions and duties.

36. Competent authorities shall be given all supervisory and investigatory powers that are necessary for the exercise of their functions.

37. Member States shall determine the sanctions to be applied for failure to cooperate in an investigation.

38. Member States shall ensure that any decision taken under laws, regulations or administrative provisions adopted in accordance with this Directive is properly reasoned and is subject to the right to apply to the courts.

39. Member States shall encourage the setting-up of efficient and effective complaints and redress procedures for the out-of-court settlement of consumer disputes concerning the provision of investment and ancillary services provided by investment firms, using existing bodies where appropriate.

40. Member States shall ensure that any legal person authorised and responsible for carrying out the statutory audits of accounting documents in an investment firm, shall have a duty to report promptly to the competent authorities any fact or decision concerning that undertaking of which that person has become aware while carrying out that task and which is liable to:

a) Constitute a material breach of the laws, regulations or administrative provisions which lay down the conditions governing authorisation or which specifically govern pursuit of the activities of investment firms;

b) Affect the continuous functioning of the investment firm;

c) Lead to refusal to certify the accounts or to the expression of reservations.

7.4. MIFID II

1. MIFID II Directive applies to:

1. Investment firms

2. Market operators,

3. Data reporting services providers, and

4. Third-country firms providing investment services or performing investment activities through the establishment of a branch in the European Union.

2. This Directive shall not apply to:

1. Insurance undertakings

2. Persons providing investment services exclusively for their parent undertakings

3. Persons dealing on own account in financial instruments other than commodity derivatives or emission allowances or derivatives thereof and not providing any other investment services or performing any other investment activities in financial instruments other than commodity derivatives or emission allowances or derivatives thereof unless such persons:

4. Market makers;

5. Deal on own account when executing client orders;

6. Collective investment undertakings and pension funds

7. Central Securities Deposits that are regulated.

8. The members of the European System of Central Banks and other national bodies performing similar functions in the Union.

3. Understanding some of the definitions:

1. Investment Firm:

Investment Firm means any legal person whose regular occupation or business is the provision of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis.

2. Investment services and activities:

1. Reception and transmission of orders in relation to one or more financial instruments; (2) Execution of orders on behalf of clients;

2. Dealing on own account;

3. Portfolio management;

4. Investment advice;

5. Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis;

6. Placing of financial instruments without a firm commitment basis;

7. Operation of a Multilateral trading facility;

8. Operation of an Organised trading facility.

3. Ancillary services means the following:

1. Safekeeping and administration of financial instruments for the account of clients, including custodianship and related services such as cash/collateral management.

2. Granting credits or loans to an investor to allow him to carry out a transaction in one or more financial instruments, where the firm granting the credit or loan is involved in the transaction.

3. Advice to undertakings on capital structure, industrial strategy and related matters and advice and services relating to mergers and the purchase of undertakings.

4. Foreign exchange services where these are connected to the provision of investment services;

5. Investment research and financial analysis or other forms of general recommendation relating to transactions in financial instruments;

6. Services related to underwriting.

4. Financial instruments means:

1. Transferable securities;

2. Money-market instruments;

3. Units in collective investment undertakings;

4. Options, futures, swaps, forward rate agreements and any other such derivative contracts relating to securities, currencies, interest rates, emission allowances or contracts relating to commodities.

5. ‘investment advice’ means the provision of personal recommendations to a client, either upon its request or at the initiative of the investment firm, in respect of one or more transactions relating to financial instruments;

6. Market makers are typically large banks or financial institutions who help to ensure there's enough liquidity in the markets, meaning there's enough volume of trading so trades can be done seamlessly.

7. A multilateral trading facility or (MTF) is a term for a trading system that facilitates the exchange of financial instruments between multiple parties. Example, Chi-X Europe, Liquidnet Europe, Currenex MTF, and UBS MTF.

8. ‘organised trading facility’ or ‘OTF’ means a multilateral system which is not a regulated market or an MTF and in which multiple third-party buying and selling interests in bonds, structured finance products, emission allowances or derivatives are able to interact in the system in a way that results in a contract.

9. ‘trading venue’ means a regulated market, an MTF or an OTF.

10. ‘third-country firm’ means a firm that would be a credit institution providing investment services or performing investment activities or an investment firm if its head office or registered office were located within the European Union.

4. Salient features of MiFID II:

1. Member States shall authorise any market operator to operate an MTF or an OTF, subject to the prior verification of their compliance by the home Member State competent authority.

2. Member States shall register all investment firms. The register shall be publicly accessible and shall contain information on the services or activities for which the investment firm is authorised. It shall be updated on a regular basis. Every authorisation shall be notified to European Securities and Markets Authority or E.S.M.A and E.S.M.A shall establish a list of all investment firms in the Union.

3. The home Member State shall ensure that the authorisation specifies the investment services or activities which the investment firm is authorised to provide. The authorisation may cover one or more of the ancillary services. However, authorisation shall in no case be granted solely for the provision of ancillary services.

4. The competent authority may withdraw the authorisation issued to an investment firm where such an investment firm:

a) does not make use of the authorisation within 12 months, or performed no investment activity for the preceding six months.

b) has obtained the authorisation by making false statements or by any other irregular means.

5. Member States shall ensure that the management body of an investment firm defines, oversees and is accountable for the implementation of the governance arrangements that ensure effective and prudent management of the investment firm including the segregation of duties in the investment firm and the prevention of conflicts of interest, and in a manner that promotes the integrity of the market and the interest of clients.

6. The competent authorities shall not authorise the provision of investment services or performance of investment activities by an investment firm until they have been informed of the identities of the shareholders or members, whether direct or indirect, natural or legal persons, that have qualifying holdings and the amounts of those holdings.

7. Member States shall ensure that the competent authorities do not grant authorisation unless the investment firm has sufficient initial capital.

8. An investment firm shall establish adequate policies and procedures sufficient to ensure compliance of the firm including its managers, employees and tied agents with its obligations under this Directive as well as appropriate rules governing personal transactions by such persons.

9. An investment firm shall arrange for records to be kept of all services, activities and transactions undertaken by it which shall be sufficient to enable the competent authority to fulfil its supervisory tasks.

10. An investment firm shall, when holding financial instruments belonging to clients, make adequate arrangements so as to safeguard the ownership rights of clients, especially in the event of the investment firm’s insolvency, and to prevent the use of a client’s financial instruments on own account except with the client’s express consent.

11. An investment firm that engages in algorithmic trading shall have in place effective systems and risk controls suitable to the business it operates to ensure that its trading systems are resilient and have sufficient capacity, are subject to appropriate trading thresholds and limits and prevent the sending of erroneous orders or the systems otherwise functioning in a way that may create or contribute to a disorderly market.

12. Member States shall require that investment firms and market operators operating an MTF or an OTF establish transparent rules regarding the criteria for determining the financial instruments that can be traded under its systems.

13. Member States shall require that investment firms and market operators operating an MTF, shall establish and implement non-discretionary rules for the execution of orders in the system.

14. Member States shall require that an investment firm and a market operator operating an OTF establishes arrangements preventing the execution of client orders in an OTF against the proprietary capital of the investment firm or market operator operating the OTF or from any entity that is part of the same group or legal person as the investment firm or market operator.

15. Member States shall ensure that the competent authorities monitor the activities of investment firms so as to assess compliance with the operating conditions provided for in this Directive.

16. Member States shall require that, when providing investment services or, where appropriate, ancillary services to clients, an investment firm act honestly, fairly and professionally in accordance with the best interests of its clients

17. Member States shall require investment firms to ensure and demonstrate to competent authorities on request that natural persons giving investment advice or information about financial instruments, investment services or ancillary services to clients on behalf of the investment firm possess the necessary knowledge and competence to fulfil their obligations. Member States shall publish the criteria to be used for assessing such knowledge and competence.

18. Member States shall ensure that investment firms, when providing investment services, ask the client or potential client to provide information regarding that person’s knowledge and experience in the investment field relevant to the specific type of product or service offered or demanded so as to enable the investment firm to assess whether the investment service or product envisaged is appropriate for the client.

19. The investment firm shall establish a record that includes the document or documents agreed between the investment firm and the client that set out the rights and obligations of the parties, and the other terms on which the investment firm will provide services to the client. The rights and duties of the parties to the contract may be incorporated by reference to other documents or legal texts.

20. Member States shall allow an investment firm receiving an instruction to provide investment or ancillary services on behalf of a client through the medium of another investment firm to rely on client information transmitted by the latter investment firm. The investment firm which mediates the instructions will remain responsible for the completeness and accuracy of the information transmitted.

21. Member States shall require that investment firms take all sufficient steps to obtain, when executing orders, the best possible result for their clients taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order.

22. Member States shall require that investment firms authorised to execute orders on behalf of clients implement procedures and arrangements which provide for the prompt, fair and expeditious execution of client orders, relative to other client orders or the trading interests of the investment firm.

23. Member States shall allow an investment firm to appoint tied agents for the purposes of promoting the services of the investment firm, soliciting business or receiving orders from clients or potential clients and transmitting them, placing financial instruments and providing advice in respect of such financial instruments and services offered by that investment firm. Tied agents shall be registered in the public register in the Member State where they are established.

24. Member States shall require that investment firms from other Member States which are authorised to execute client orders or to deal on own account have the right of membership or have access to regulated markets established in their territory.

7.5. Bank Secrecy Act

1. Introduction:

The Financial Record-keeping and Reporting of Currency and Foreign Transactions Act of 1970 is referred to as the Bank Secrecy Act or BSA. The purpose of the BSA is to require United States financial institutions to maintain appropriate records and file certain reports involving currency transactions and a financial institution’s customer relationships.

A currency transaction is any transaction involving the physical transfer of currency from one person to another and covers deposits, withdrawals, exchanges, or transfers of currency or other payments. U.S. financial institutions must file a Currency Transaction Report or CTR which is, Financial Crimes Enforcement Network (Fincen) Form 104, for each currency transaction over $10,000.

Currency is defined as currency and coin of the U.S. or any other country as long as it is customarily accepted as money in the country of issue. Multiple currency transactions shall be treated as a single transaction if the financial institution has knowledge that the transactions are by, or on behalf of, any person and result in either cash in or cash out totalling more than $10,000 during any one business day. All CTR’s must be filed to the IRS.

Transactions at all branches of a financial institution should be aggregated when determining reportable multiple transactions. A Suspicious Activity Report is filed by a reporting financial institution if it suspects or has reasonable grounds to suspect that funds are the proceeds of a criminal activity, or are related to terrorist financing. All SAR’s must be filed with Fincen.

Currency Transaction Reports and Suspicious Activity Reports are the primary means used by banks to satisfy the requirements of the BSA. The recordkeeping regulations include the requirement that a financial institution’s records be sufficient to enable transactions and activity in customer accounts to be reconstructed if necessary. In doing so, a paper and audit trail is maintained. These records and reports have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings.

2. Titles of BSA:

The BSA consists of two parts namely, Title 1 Financial Recordkeeping and, Title 2 Reports of Currency and Foreign Transactions.

  1. Title 1: It authorizes the Secretary of the Department of the Treasury to issue regulations, which require insured financial institutions to maintain certain records.

  2. Title 2: Title 2 is directed the Treasury to prescribe regulations governing the reporting of certain transactions by and through financial institutions in excess of $10,000 into, out of, and within the U.S.

The Treasury’s implementing regulations under the BSA, were originally intended to aid investigations into an array of criminal activities, from income tax evasion to money laundering. In recent years, the reports and records prescribed by the BSA have also been utilized as tools for investigating individuals suspected of engaging in illegal drug, and terrorist financing activities. Law enforcement agencies have found CTRs to be extremely valuable in tracking the huge amounts of cash generated by individuals and entities for illicit purposes.

SAR’s, used by financial institutions to report identified or suspected illicit or unusual activities, are likewise extremely valuable to law enforcement agencies. Several acts and regulations expanding and strengthening the scope and enforcement of the BSA, anti-money laundering (AML) measures, and counter-terrorist financing measures have been signed into law and issued, respectively, over the past several decades.

Example includes Money Laundering Control Act of 1986, Annuzio-Wylie Anti-Money Laundering Act of 1992, and The USA PATRIOT Act.

3. Exemptions:

Certain “persons” who routinely use currency may be eligible for exemption from CTR filings such as.

  • A bank to the extent of its domestic operations;

  • A Federal, State, or local government agency or department;

  • Any entity exercising governmental authority within the U.S. (U.S. includes District of Columbia, Territories, and Indian tribal lands);

  • Any listed entity other than a bank whose common stock or analogous equity interests are listed on the New York, American, or NASDAQ stock exchanges (with some exceptions);

  • Any U.S. domestic subsidiary (other than a bank) of any “listed entity” that is organized under U.S. law and at least 51 percent of the subsidiary’s common stock is owned by the listed entity.

  • A “payroll customer,” includes any other person not covered under the “exempt person” definition that operates a firm that regularly withdraws more than $10,000 in order to pay its U.S. Employees in currency.

7.6. Regulators in United States

The Securities and Exchange Commission (SEC) is responsible for regulating the securities markets at United States and thereby protecting the investors. Securities Exchange Act of 1934 created the Securities and Exchange Commission. The Act empowers the SEC with broad authority over all aspects of the securities industry. This includes the power to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies as well as the nation's securities self-regulatory organizations (SROs). The various securities exchanges, such as the New York Stock Exchange, the NASDAQ Stock Market, and the Chicago Board of Options are SROs.

The Financial Industry Regulatory Authority (FINRA) is also an SRO. The Act also identifies and prohibits certain types of conduct in the markets and provides the Commission with disciplinary powers over regulated entities and persons associated with them. The Act also empowers the SEC to require periodic reporting of information by companies with publicly traded securities.

Other Regulators: A bank's primary federal regulator could be the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board, or the Office of the Comptroller of the Currency. The National Futures Association (NFA) is a self-regulatory organization that regulates the U.S. derivatives industry Derivatives Market. The National Association of Insurance Commissioners (NAIC) is the U.S. standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories.

7.7. Regulators in Singapore

MAS regulate financial institutions in the banking, capital markets, insurance and payments sectors. Meaning:

1. MAS regulate and supervise over 150 deposit-taking institutions in Singapore, including full banks, wholesale banks, merchant banks and finance companies.

2. MAS take responsibility for regulation and licensing for capital markets entities, including fund managers, REIT managers, corporate finance advisers, trustees, dealers, credit rating agencies and financial advisers.

3. MAS regulate licensed insurers, authorised reinsurers, approved Marine, Aviation and Transit (MAT) insurers, or foreign insurers.

4. MAS take responsibility for licensing, designation, regulations and guidance for payment service providers and payment systems in Singapore.

Further, The Accounting and Corporate Regulatory Authority (ACRA) is the regulator of business registration, financial reporting, public accountants and corporate service providers; it also facilitates enterprise.

7.8. Regulators in Hong Kong

1. Securities and Futures Commission:

a. Regulates and authorises publicly offered investment products and their offering documents eg unlisted investment products and listed exchange-traded funds (ETFs) and real-estate investment trusts (REITs) offered to the public in Hong Kong.

b. Licenses and supervises intermediaries eg brokers, investment advisers and fund houses.

c. Directly regulates takeovers and mergers of listed companies

d. Oversees market operator i.e., Hong Kong Exchanges and Clearing Limited which regulates listed companies and listed structured products.

2. Hong Kong Monetary Authority:

a. Regulates and supervises banks and deposit-taking companies

b. Regulates intermediaries i.e. banks and bank staff who are registered with the SFC for carrying on businesses in securities and futures.

3. Mandatory Provident Fund Schemes Authority:

a. Regulates and supervises MPF schemes / trustees

b. Acts as the registrar of the ORSO schemes

c. Registers MPF intermediaries who are regulated by the HKMA, IA and SFC for carrying on business in banking, insurance and securities respectively.\

4. Insurance Authority:

a. Authorises and supervises insurance companies

b. Regulates intermediaries i.e., insurance agents and brokers through overseeing self regulatory organisations.

7.8. Regulators in Australia

Responsibility for the regulation and supervision of the Australian financial system is vested in four separate agencies:

1. The Australian Prudential Regulation Authority (APRA):

APRA is an independent statutory authority that supervises institutions across banking, insurance and superannuation.

2. The Australian Securities and Investments Commission (ASIC):

ASIC is Australia's integrated corporate, markets, financial services and consumer credit regulator.

3. The Reserve Bank of Australia (RBA):

The Reserve Bank has a role both in mitigating the risk of financial disturbances with potentially systemic consequences, and in responding in the event that a financial system disturbance does occur.

4. The Australian Treasury:

Treasury provides sound economic analysis and authoritative policy advice on issues such as: the economy, budget, taxation, financial sector, foreign investment, structural policy, superannuation, small business, housing affordability and international economic policy.

7.9. Regulators in UK

1. The Prudential Regulation Authority (“PRA”):

The PRA is the prudential regulator of around 1,500 banks, building societies, credit unions, insurers and major investment firms. As a prudential regulator, it has a general objective to promote the safety and soundness of the firms it regulates.

2. Financial Conduct Authority (“FCA”):

FCA regulates the conduct of around 51,000 businesses. They are the prudential supervisor for 49,000 firms and they set specific standards for around 18,000 firms.

a. Role of FCA in Banks:

The FCA supervises banks to:

a. Ensure they treat customers fairly

b. Encourage innovation and healthy competition

c. Help the FCA to identify potential risks early so they can take action to reduce the risks

b. Role of FCA in Mutual societies:

There are more than 10,000 mutual societies in the United Kingdom.The FCA are responsible for:

a. Registering new mutual societies.

b. Keeping public records.

c. Receiving annual returns.

c. Role of FCA in Financial advisers:

FCA ensure independent financial advisers (IFAs) are legally obliged to follow Retail Distribution Review (RDR) rules. In order to be classed as an IFA, a business must:

a. Offer a broad range of retail investment products.

b. Give consumers unbiased and unrestricted advice based on comprehensive and fair market analysis.

3. Bank of England:

Regulate UK banks and other financial firms, produce banknotes (cash) and oversee many of the other payment systems (eg with a debit or credit card).

4. Financial Policy Committee (FPC):

The Bank of England’s Financial Policy Committee (FPC) identifies, monitors and takes action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system.

7.10. Regulators in Canada

1. Office of the Superintendent of Financial Institutions (OSFI):

  • OSFI supervises and regulates federally registered banks and insurers, trust and loan companies, as well as private pension plans subject to federal oversight.

2. Bank of Canada:

The Bank’s four main areas of responsibility are:

  1. Monetary policy: The Bank influences the supply of money circulating in the economy, using its monetary policy framework to keep inflation low and stable.

  2. Financial system: The Bank promotes safe, sound and efficient financial systems, within Canada and internationally, and conducts transactions in financial markets in support of these objectives.

  3. Currency: The Bank designs, issues and distributes Canada’s bank notes.

  4. Funds management: The Bank is the "fiscal agent" for the Government of Canada, managing its public debt programs and foreign exchange reserves.

3. Canada Deposit Insurance Corporation:

  1. Provide insurance against the loss of part or all of deposits;

  2. Promote and otherwise contribute to the stability of the financial system in Canada;

  3. Act for the benefit of depositors while minimizing loss.

7.11. Regulators in India

1. The Reserve Bank of India:

The Reserve Bank of India performs the following functions:

1. Monetary Authority:

  • Formulates, implements and monitors the monetary policy.

  • maintain price stability while keeping in mind the objective of growth.

2. Regulator and supervisor of the financial system:

  • Prescribes broad parameters of banking operations within which the country's banking and financial system functions.

  • maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public.

3. Manager of Foreign Exchange:

  • Manages the Foreign Exchange Management Act, 1999.

  • Facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

4. Issuer of currency:

  • Issues and exchanges or destroys currency and coins not fit for circulation.

  • Gives the public adequate quantity of supplies of currency notes and coins and in good quality.

5. Developmental role:

  • Performs a wide range of promotional functions to support national objectives.

6. Regulator and Supervisor of Payment and Settlement Systems:

  • Introduces and upgrades safe and efficient modes of payment systems in the country to meet the requirements of the public at large.

  • Maintain public confidence in payment and settlement system

7. Related Functions:

  • Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker.

  • Banker to banks: maintains banking accounts of all scheduled banks.

2. Securities and Exchange Board of India (SEBI):

  • SEBI protects the interests of investors in securities.

  • Promote the development of securities market.

  • Regulate the securities market

3. Insurance Regulatory and Development Authority of India (IRDAI):

  • IRDAI is responsible for overall supervision and development of the Insurance sector in India.

8. International bodies in AML/CTF

There are countless organizations trying to get a handle on the problem of Money Laundering and Terrorist Financing. In the United States, the Department of Justice, the State Department, the Federal Bureau of Investigation, the Internal Revenue Service and the Drug Enforcement Agency all have divisions investigating money laundering and the underlying financial structures that make it work. State and local police also investigate cases that fall under their jurisdiction. Because global financial systems play a major role in most high-level laundering schemes, the international community is fighting money laundering through various means, including the Financial Action Task Force on Money Laundering . The United Nations, the World Bank and the International Monetary Fund also have anti-money-laundering divisions.

Let us check on some of the major contributors and their roles on AML/CTF as given below:

8.1. Financial Action Task Force

1. Introduction:

The Financial Action Task Force (FATF) is an inter-governmental body established in 1989 by the Ministers of its Member jurisdictions. The mandate of the FATF is to set standards and to promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and the financing of proliferation, and other related threats to the integrity of the international financial system. The FATF identifies jurisdictions with strategic deficiencies in their frameworks to combat money laundering and the financing of terrorism and proliferation. In collaboration with other international stakeholders, the FATF also works to identify national-level vulnerabilities with the aim of protecting the international financial system from misuse. The 40 FATF Recommendations set out a comprehensive and consistent framework of measures which countries should implement in order to combat money laundering and terrorist financing, as well as the financing of proliferation of weapons of mass destruction. Countries have diverse legal, administrative and operational frameworks and different financial systems, and so cannot all take identical measures to counter these threats. The FATF Recommendations, therefore, set an international standard, which countries should implement through measures adapted to their particular circumstances. The FATF Recommendations set out the essential measures that countries should have in place to:

  • Identify the risks, and develop policies and domestic coordination

  • Pursue money laundering, terrorist financing and the financing of proliferation

  • Apply preventive measures for the financial sector and other designated sectors

  • Establish powers and responsibilities for the competent authorities (e.g., investigative, law enforcement and supervisory authorities) and other institutional measures

  • Enhance the transparency and availability of beneficial ownership information of legal persons and arrangements; and

  • Facilitate international cooperation.

8.1.1. FATF 40 Recommendations

2. FATF Forty Recommendations:

The original FATF Forty Recommendations were drawn up in 1990 as an initiative to combat the misuse of financial systems by persons laundering drug money. In 1996 the Recommendations were revised for the first time to reflect evolving money laundering trends and techniques, and to broaden their scope well beyond drug-money laundering. In October 2001 the FATF expanded its mandate to deal with the issue of the funding of terrorist acts and terrorist organisations, and took the important step of creating the Eight (later expanded to Nine) Special Recommendations on Terrorist Financing. The FATF Recommendations were revised a second time in 2003, and these, together with the Special Recommendations, have been endorsed by over 180 countries, and are universally recognised as the international standard for anti-money laundering and countering the financing of terrorism (AML/CFT).

The forty recommendations are as given below. The contents have been shortened for easy understanding.

A – AML/CFT POLICIES AND COORDINATION

1. Assessing risks & applying a risk-based approach:

Countries should identify, assess, and understand the money laundering and terrorist financing risks for the country, and should take action, including designating an authority or mechanism to coordinate actions to assess risks, and apply resources, aimed at ensuring the risks are mitigated effectively.

2. National cooperation and coordination:

Countries should ensure that policy-makers, the financial intelligence unit (FIU), law enforcement authorities, supervisors and other relevant competent authorities, at the policymaking and operational levels, have effective mechanisms in place which enable them to cooperate, and, where appropriate, coordinate domestically with each other concerning the development and implementation of policies and activities to combat money laundering.

B – MONEY LAUNDERING AND CONFISCATION

3. Money laundering offence:

Countries should criminalise money laundering. Countries should apply the crime of money laundering to all serious offences, with a view to including the widest range of predicate offences.

4. Confiscation and provisional measures:

Countries should adopt measures to freeze or seize and confiscate the following:

  1. Property laundered

  2. Proceeds from, or instrumentalities used in or intended for use in money laundering or predicate offences

  3. Property that is the proceeds of, or used in, or intended or allocated for use in, the financing of terrorism, terrorist acts or terrorist organisations

  4. Property of corresponding value.

C – TERRORIST FINANCING AND FINANCING OF PROLIFERATION

5. Terrorist financing offence:

Countries should criminalise terrorist financing on the basis of the Terrorist Financing Convention.

6. Targeted financial sanctions related to terrorism & terrorist financing:

Countries should implement targeted financial sanctions regimes to comply with United Nations Security Council resolutions.

7. Targeted financial sanctions related to proliferation:

Countries should implement targeted financial sanctions to comply with United Nations Security Council resolutions relating to the prevention, suppression and disruption of proliferation of weapons of mass destruction and its financing.

8. Non-profit organisations:

Countries should review the adequacy of laws and regulations that relate to entities that can be abused for the financing of terrorism. Non-profit organisations are particularly vulnerable, and countries should ensure that they cannot be misused.

D – PREVENTIVE MEASURES

9. Financial Institution Secrecy Laws:

Countries should ensure that financial institution secrecy laws do not inhibit implementation of the FATF recommendations.

10. Customer Due Diligence:

Financial institutions should be prohibited from keeping anonymous accounts or accounts in obviously fictitious names. Financial institutions should be required to undertake customer due diligence (CDD) measures.

11. Record Keeping:

Financial institutions should be required to maintain, for at least five years, all necessary records on transactions, both domestic and international, to enable them to comply swiftly with information requests from the competent authorities.

12. Politically Exposed Persons:

Financial institutions should be required to take reasonable measures to determine whether a customer or beneficial owner is a domestic PEP or a person who is or has been entrusted with a prominent function by an international organisation.

13. Correspondent Banking:

Financial institutions should be prohibited from entering into, or continuing, a correspondent banking relationship with shell banks. Financial institutions should be required to satisfy themselves that respondent institutions do not permit their accounts to be used by shell banks.

14. Money or value transfer services:

Countries should take measures to ensure that natural or legal persons that provide money or value transfer services (MVTS) are licensed or registered, and subject to effective systems for monitoring and ensuring compliance with the relevant measures called for in the FATF Recommendations.

15. New technologies:

Countries and financial institutions should identify and assess the money laundering or terrorist financing risks that may arise in relation to (a) the development of new products and new business practices, including new delivery mechanisms, and (b) the use of new or developing technologies for both new and pre-existing products.

16. Wire transfers:

Countries should ensure that financial institutions include required and accurate originator information, and required beneficiary information, on wire transfers and related messages, and that the information remains with the wire transfer or related message throughout the payment chain.

17. Reliance on third parties’ requirements will be made available from the third party upon request without delay:

The financial institution should satisfy itself that the third party is regulated, supervised or monitored for, and has measures in place for compliance with, CDD and record-keeping requirements.

18. Internal controls and foreign branches and subsidiaries:

Financial groups should be required to implement groupwide programmes against money laundering and terrorist financing, including policies and procedures for sharing information within the group for AML/CFT purposes.

19. Higher-risk countries:

Financial institutions should be required to apply enhanced due diligence measures to business relationships and transactions with natural and legal persons, and financial institutions, from countries for which this is called for by the FATF.

20. Reporting of suspicious transactions:

If a financial institution suspects or has reasonable grounds to suspect that funds are the proceeds of a criminal activity, or are related to terrorist financing, it should be required, by law, to report promptly its suspicions to the financial intelligence unit (FIU).

21. Tipping-off and confidentiality:

Financial institutions, their directors, officers and employees should be: (a) protected by law from criminal and civil liability for breach of any restriction on disclosure of information imposed by contract or by any legislative, regulatory or administrative provision, if they report their suspicions in good faith to the FIU, even if they did not know precisely what the underlying criminal activity was, and regardless of whether illegal activity actually occurred; and (b) prohibited by law from disclosing (“tipping-off”) the fact that a suspicious transaction report (STR) or related information is being filed with the FIU.

22. Designated non-financial Businesses and Professions (DNFBPs) Customer due diligence:

The customer due diligence and record-keeping requirements should apply to designated non-financial businesses and professions (DNFBPs) in the following situations:

a) Casinos.

b) Real estate agents.

c) Dealers in precious metals and dealers in precious stones.

d) Lawyers, notaries, other independent legal professionals and accountants.

e) Trust and company service providers.

23. DNFBPs: Other measures:

The requirements set out in Recommendations 18 to 21 apply to all designated non-financial businesses and professions.

E – TRANSPARENCY AND BENEFICIAL OWNERSHIP OF LEGAL PERSONS AND ARRANGEMENTS

24. Transparency and beneficial ownership of legal persons:

Countries should take measures to prevent the misuse of legal persons for money laundering or terrorist financing. Countries should ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities.

25. Transparency and beneficial ownership of legal arrangements:

Countries should take measures to prevent the misuse of legal arrangements for money laundering or terrorist financing.

F – POWERS AND RESPONSIBILITIES OF COMPETENT AUTHORITIES AND OTHER INSTITUTIONAL MEASURES

26. Regulation and supervision of financial institutions:

Countries should ensure that financial institutions are subject to adequate regulation and supervision and are effectively implementing the FATF Recommendations.

27. Powers of supervisors:

Supervisors should have adequate powers to supervise or monitor, and ensure compliance by, financial institutions with requirements to combat money laundering and terrorist financing, including the authority to conduct inspections.

28. Regulation and supervision of DNFBPs:

Designated non-financial businesses and professions should be subject to regulatory and supervisory measures.

29. Financial intelligence units:

Countries should establish a financial intelligence unit (FIU) that serves as a national centre for the receipt and analysis of:

a) suspicious transaction reports; and,

b) other information relevant to money laundering, associated predicate offences and terrorist financing, and for the dissemination of the results of that analysis.

30. Responsibilities of law enforcement and investigative authorities:

Countries should ensure that designated law enforcement authorities have responsibility for money laundering and terrorist financing investigations within the framework of national AML/CFT policies.

31. Powers of law enforcement and investigative authorities:

When conducting investigations of money laundering, associated predicate offences and terrorist financing, competent authorities should be able to obtain access to all necessary documents and information for use in those investigations, and in prosecutions and related actions.

32. Cash couriers:

Countries should have measures in place to detect the physical cross-border transportation of currency and bearer negotiable instruments, including through a declaration system and/or disclosure system.

33. Statistics:

Countries should maintain comprehensive statistics on matters relevant to the effectiveness and efficiency of their AML/CFT systems.

34. Guidance and feedback:

The competent authorities, supervisors and SRBs (Self-Regulatory Body) should establish guidelines, and provide feedback, which will assist financial institutions and designated non-financial businesses and professions in applying national measures to combat money laundering and terrorist financing, and, in particular, in detecting and reporting suspicious transactions.

35. Sanctions:

Countries should ensure that there is a range of effective, proportionate and dissuasive sanctions, whether criminal, civil or administrative, available to deal with natural or legal persons covered by Recommendations 6, and 8 to 23 that fail to comply with AML/CFT requirements.

G – INTERNATIONAL COOPERATION

36. International instruments:

Countries should take immediate steps to become party to and implement fully the Vienna Convention, 1988; the Palermo Convention, 2000; the United Nations Convention against Corruption, 2003; and the Terrorist Financing Convention, 1999.

37. Mutual legal assistance:

Countries should rapidly, constructively and effectively provide the widest possible range of mutual legal assistance in relation to money laundering, associated predicate offences and terrorist financing investigations, prosecutions and related proceedings.

38. Mutual legal assistance (freezing and confiscation):

Countries should ensure that they have the authority to take expeditious action in response to requests by foreign countries to identify, freeze, seize and confiscate property laundered.

39. Extradition:

Countries should constructively and effectively execute extradition requests in relation to money laundering and terrorist financing, without undue delay.

40. Other forms of international cooperation:

Countries should ensure that their competent authorities can rapidly, constructively and effectively provide the widest range of international cooperation in relation to money laundering, associated predicate offences and terrorist financing.

8.1.2. FATF Mutual Evaluations

FATF mutual evaluations are in-depth country reports analysing the implementation and effectiveness of measures to combat money laundering and terrorist financing. Mutual evaluations are peer reviews, where members from different countries assess another country. A mutual evaluation report provides an in-depth description and analysis of a country’s system for preventing criminal abuse of the financial system as well as focused recommendations to the country to further strengthen its system.

Mutual evaluations are strict and a country is only deemed compliant if it can prove this to the other members. In other words, the onus is on the assessed country to demonstrate that it has an effective framework to protect the financial system from abuse.

Mutual Evaluations have two basic components, effectiveness and technical compliance.

a. The main component of a mutual evaluation is effectiveness. This is the focus of the on-site visit to the assessed country. During this visit, the assessment team will require evidence that demonstrates that the assessed country’s measures are working and deliver the right results. What is expected from a country differs, depending on the money laundering / terrorist financing and other risks it is exposed to. To ensure consistent and fair assessments, the FATF has developed an elaborate assessment methodology.

b. The assessment of technical compliance is part of each mutual evaluation. The assessed country must provide information on the laws, regulations and any other legal instruments it has in place to combat money laundering and the financing of terrorism and proliferation. This used to be the main focus of FATF, and FATF still requires the legal framework to be in place. But experience has shown that having the laws in the books is not enough, the main focus is now on effectiveness.

8.2. The United Nations

The United Nations (UN) was the first international organization to undertake significant action to fight money laundering on a truly world-wide basis. The UN is important in this regard for several reasons. First, it is the international organization with the broadest range of membership. Founded in October of 1945, there are currently 191 member states of the UN from throughout the world. Second, the UN actively operates a program to fight money laundering; the Global Programme against Money Laundering which is headquartered in Vienna, Austria, and is part of the UN Office of Drugs and Crime.

Third, and perhaps most importantly, the UN has the ability to adopt international treaties or conventions that have the effect of law in a country once that country has signed, ratified and implemented the convention, depending upon the country’s constitution and legal structure. In certain cases, the UN Security Council has the authority to bind a country through a Security Council Resolution regardless of other action.

1. The Vienna Convention:

As a result of growing concern with increased international drug trafficking and the tremendous amounts of related money entering the banking system, the UN, through the United Nations Drug Control Program (UNDCP) initiated an international agreement to combat drug trafficking and the money laundering resulting from it. In 1988, this effort resulted in the adoption of the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (1988) (Vienna Convention). The Vienna Convention, named for the city in which it was signed, and 166 countries are party to the convention and deals primarily with provisions to fight the illicit drug trade and related law enforcement issues. Although it does not use the term money laundering, the convention defines the concept and calls upon countries to criminalize the activity. The Vienna Convention is limited, however, to drug trafficking as predicate offenses and does not address the preventive aspects of money laundering. The convention came into force on November 11, 1990.

2. The Palermo Convention:

In order to expand the effort to fight international organized crime, the UN adopted The International Convention against Transnational Organized Crime (2000) (Palermo Convention). This convention, also named for the city in which it was signed, contains a broad range of provisions to fight organized crime and commits countries that ratify this convention to implement its provisions through passage of domestic laws. With respect to money laundering, the Palermo Convention specifically obligates each ratifying country to:

  • Criminalize money laundering and include all serious crimes as predicate offenses of money laundering, whether committed in or outside of the country, and permit the required criminal knowledge or intent to be inferred from objective facts.

  • Establish regulatory regimes to deter and detect all forms of money laundering, including customer identification, record-keeping and reporting of suspicious transactions.

  • Authorize the cooperation and exchange of information among administrative, regulatory, law enforcement and other authorities, both domestically and internationally, and consider the establishment of a financial intelligence unit to collect, analyze and disseminate information and,

  • Promote international cooperation.

According to the UN, this convention is not yet in force; it has been signed by 147 countries and ratified by 32 countries. Forty countries need to ratify this convention before it can enter into force. The Palermo Convention is important because its AML provisions adopt the same approach previously adopted by the Financial Action Task Force on Money Laundering in its Forty Recommendations.

3. International Convention for the Suppression of the Financing of Terrorism:

The financing of terrorism was an international concern prior to the attacks on the United States of September 11, 2001. In response to this concern, the UN adopted the International Convention for the Suppression of the Financing of Terrorism (1999). This convention came into force on April 10, 2002, and 132 countries have signed the convention and 76 countries have ratified it. This convention requires ratifying states to criminalize terrorism, terrorist organizations and terrorist acts. Under the convention, it is unlawful for any person to provide or collect funds with the

  1. intent that the funds be used for, or

  2. knowledge that the funds be used to, carry out any of the acts of terrorism defined in the other specified conventions that are annexed to this convention.

4. Security Council Resolution 1373:

Unlike an international convention, which requires ratification and implementation by the UN member country to have the effect of law within that country, a Security Council Resolution passed in response to a threat to international peace and security under Chapter VII of the UN Charter, is binding upon all UN member countries. On September 28, 2001, the UN Security Council adopted Resolution 1373, which obligates countries to criminalize actions to finance terrorism. It further obligates countries to:

1. Deny all forms of support for terrorist groups.

2. Suppress the provision of safe haven or support for terrorist, including freeing funds or assets of persons, organizations or entities involved in terrorist acts

3. Prohibit active or passive assistance to terrorists and

4. Cooperate with other countries in criminal investigations and sharing information about planned terrorist acts.

5. Global Programme against Money Laundering:

The UN Global Programme against Money Laundering (GPML) is within the UN Office of Drugs and Crime (ODC). The GPML is a research and assistance project with the goal of increasing the effectiveness of international action against money laundering by offering technical expertise, training and advice to member countries upon request. It focuses its efforts in the following areas:

  • Raise the awareness level among key persons in UN member states.

  • Help create legal frameworks with the support of model legislation for both common and civil law countries.

  • Develop institutional capacity, in particular with the creation of financial intelligence units.

  • International Standard.

  • Provide training for legal, judicial, law enforcement regulators and the private financial sectors; Promote a regional approach to addressing problems; develop and maintain strategic relationships with other organizations; and,

  • Maintain a database of information and undertake analysis of relevant information.

Thus, the GPML is a resource for information, expertise and technical assistance in establishing or improving a country’s AML infrastructure.

6. The Counter-Terrorism Committee:

As noted above, on September 28, 2001, the UN Security Council adopted a resolution (Resolution 1373) in direct response to the events of September 11, 2001. That resolution obligated all member countries to take specific actions to combat terrorism. The resolution, which is binding upon all member countries, also established the Counter Terrorism Committee (CTC) to monitor the performance of the member countries in building a global capacity against terrorism.

The CTC, which is comprised of the 15 members of the Security Council, is not a law enforcement agency, nor is it a sanctions committee, nor does it prosecute or condemn individual countries. Rather, the Committee seeks to establish a dialogue between the Security Council and member countries on how to achieve the objectives of Resolution 1373. Resolution 1373 calls upon all countries to submit a report to the CTC on the steps taken to implement the resolution’s measures and report regularly on progress. In this regard, the CTC has asked each country to perform a self-assessment of its existing legislation and mechanism to combat terrorism in relation to the requirements of Resolution 1373. The CTC identifies the areas where a country needs to strengthen its statutory base and infrastructure, and facilitate assistance for countries, although the CTC does not, itself, provide direct assistance.

The CTC maintains a website with a directory for countries seeking help in improving their counter-terrorism infrastructures. It contains copies of model legislation and other helpful information.

8.3. International Association of Insurance Supervisors

The International Association of Insurance Supervisors (IAIS), established in 1994, is an organization of insurance supervisors from more than 100 different countries and jurisdictions.51

Its primary objectives are to:

  • Promote cooperation among insurance regulators

  • Set international standard for insurance supervision

  • Provide training to members, and

  • Coordinate work with regulators in the other financial sectors and international financial institutions.

In addition to member regulators, the IAIS has more than 60 observer members, representing industry associations, professional associations, insurance and reinsurance companies, consultants and international financial institutions. While the IAIS covers a wide range of topics including virtually all areas of insurance supervision, it specifically deals with money laundering in one of its papers. In January 2002, the association issued Guidance Paper No. 5, Anti-Money Laundering Guidance Notes for Insurance Supervisors and Insurance Entities (AML Guidance Notes). It is a comprehensive discussion on money laundering in the context of the insurance industry. Like other international documents of its type, the AML Guidance Notes are intended to be implemented by individual countries taking into account the particular insurance companies involved, the products offered within the country, and the country’s own financial system, economy, constitution and legal system. The AML Guidance Notes contain four principles for insurance entities:

Comply with anti-money laundering laws

Have “know your customer” procedures

Cooperate with all law enforcement authorities, and

Have internal AML policies, procedures and training programs for employees.


8.4. Bank of International Settlement

The Basel Committee on Banking Supervision (BCBS) is the primary global standard setter for the prudential regulation of banks and provides a forum for regular cooperation on banking supervisory matters. Basel Committee time to time releases AML/CFT guidelines on supervisory cooperation. E.g., updated version of its guidelines on Sound management of risks related to money laundering and financing of terrorism, with guides on the interaction and cooperation between prudential and anti-money laundering and combatting the financing of terrorism (AML/CFT) supervisors. These guidelines are intended to enhance the effectiveness of supervision of banks' money laundering and financing of terrorism (FT) risk management, consistent with and complementary to the goals and objectives of the standards issued by the Financial Action Task Force (FATF) and principles and guidelines published by the Basel Committee.

8.5. European Union Anti Money Laundering Directive-1

1. Introduction:

The European Union introduced its first anti-money laundering Directives on 10th June 1991. The first AML Directive adopted criminalization of drugs trafficking from 1988 United nations UN Convention. It adopted the definition of Money laundering and prohibited member states from being indulged in Money Laundering. The first AML Directive also talks about the initial customer due diligence and transaction monitoring requirements.

2. Salient Features of first AMLD:

1. Money laundering is prohibited among the member states.

2. Member States shall ensure that credit and financial institutions require identification of their customers, by means of supporting evidence when entering into business relations, particularly when opening an account or savings accounts, or when offering safe custody facilities.

3. The identification requirement shall also apply for any transaction with customers, involving a sum amounting to European Currency Unit 15000 or more, whether the transaction is carried out in a single operation or in several operations which seem to be linked.

4. For insurance policies if the periodic premium amount or amounts to be paid in any given year exceed the EUR 1000 threshold, identification shall be required. However, identification requirement is not compulsory for insurance policies in respect of pension schemes, taken out by virtue of a contract of employment or the insured's occupation, provided that such policies contain no surrender clause and may not be used as collateral for a loan.

5. All casino customers shall be identified if they purchase or sell gambling chips with a value of EUR 1000 or more. Casinos in the member states, wherever there is suspicion of money laundering, even where the amount of the transaction is lower than the threshold laid down, should carry out identification.

6. For Non face to face customer account opening, the financial institutions take additional measures of identification. Such measures shall ensure that the customers’ identity is established, for example, by requiring additional documentary evidence, or supplementary measures to verify or certify the documents supplied, or confirmatory certification by an institution, or by requiring that the first payment of the operations is carried out through an account opened in the customer’s name with a credit institution.

7. Member States shall ensure that the any financial institutions directors and employees cooperate fully with the authorities responsible for combating money laundering.

8. For notaries and independent legal professionals, Member States may designate an appropriate self-regulatory body of the profession concerned.

9. Member States shall ensure that the financial institutions and persons subject to this Directive refrain from carrying out transactions which they know or suspect to be related to money laundering until they have appraised the concerned money laundering authorities.

10. Member States shall ensure that supervisory bodies empowered by law or regulation to oversee the stock, foreign exchange and financial derivatives markets, inform the authorities responsible for combating money laundering if they discover facts that could constitute evidence of money laundering.

11. Member States shall ensure that the financial institutions and persons subject to this Directive, establish adequate procedures of internal control and communication in order to forestall and prevent operations related to money laundering, and take appropriate measures so that their employees are aware of the provisions contained in this Directive.

12. Member States shall ensure that the financial institutions and persons subject to this Directive, have access to up-to-date information on the practices of money launderers and on indications leading to the recognition of suspicious transactions.

8.6. European Union Anti Money Laundering Directive-2

1. Introduction:

The second AML directives of European Union were introduced on 04 December 2001.The directives provided clear definitions of credit institutions and Financial Institutions. The competent authorities for scope of examinations were increased to other firms.

2. Salient features of second AML directives:

1. The first AML directives has definition of credit institution limited to credit institutions having their head offices “outside” the Community. The definition slightly modified and said, credit institutions having their head offices “inside or outside” the Community.

2. The financial institutions definition included new firms such as currency exchange offices or bureaux de change, money transmission or remittance offices, investment firm, collective investment undertaking marketing its units or shares in its definition.

3. Under the criminal activities, the following were additionally added in second AML Directives:

A serious fraud, Corruption and an offence which may generate substantial proceeds and which is punishable by a severe sentence of imprisonment in accordance with the penal law of the Member State.

4. The supervision by competent authority in first AML Directives was restricted to credit or financial institutions. However, the definition expanded to the following institutions.

a) Legal or natural persons acting in the exercise of their professional activities of auditors, external accountants and tax advisors,

b) Real estate agents,

c) Notaries and other independent legal professionals according to their participation,

d) Dealers in high-value goods, such as precious stones or metals, or works of art, auctioneers, whenever payment is made in cash, and in an amount of EUR 15000 or more;

e) Casinos.

5. The transactions threshold for reporting money laundering was changed from European Union Currency unit to EURO currency.

6. In the case of identification, a copy or the references of the evidence required, for a period of at least five years after the relationship with their customer has ended.

7. Credit and financial institutions are replaced by institutions in the second directive and their directors and employees shall not disclose to the customer concerned nor to other third persons that information has been transmitted to the competent authorities that a money laundering investigation is being carried out.

8.7. European Union Anti Money Laundering Directive-3

1. Introduction:

The third AML directives of European union was introduced on 26 October 2005.The third AML directives was based on elements of FATF’s revised 40 Recommendations.

The directives newly initiated the elements of “Knowledge”, “intention” and “purpose” in Money laundering. The definition of Terrorist financing was introduced during third directives.

Trust or company service providers were newly included in the directives.

2. Salient features of third AML directives:

1. In the definition of Financial Institution, the two of the below have been added.

a) An insurance intermediary when they act in respect of life insurance and other investment related services.

b) Branches whose head offices are inside or outside the Community.

2. Definition of Beneficial owners included which is,

‘beneficial owner’ means a natural person or persons who ultimately owns or controls the customer and or the natural person on whose behalf a transaction or activity is being conducted.

3. The ‘trust and company service providers’ has been defined in this directive as any natural or legal person which by way of business provides any of the following services to third parties:

One, forming companies or other legal persons;

Two, acting as or arranging for another person to act as a director or secretary of a company, a partner of a partnership, or a similar position in relation to other legal persons;

Three, providing a registered office, business address, correspondence or administrative address and other related services for a company, a partnership or any other legal person or arrangement.

Fourth, acting as or arranging for another person to act as a trustee of an express trust or a similar legal arrangement;

Fifth, acting as or arranging for another person to act as a nominee shareholder for another person other than a company listed on a regulated market that is subject to disclosure requirements in conformity with Community legislation or subject to equivalent international standards;

4. ‘Politically Exposed Persons’ has been defined in this directive as natural persons who are or have been entrusted with prominent public functions and immediate family members, or persons known to be close associates, of such persons

5. ‘business relationship’ has been defined as a business, professional or commercial relationship which is connected with the professional activities of the institutions and persons.

6. Shell Bank as defined in this directive means a credit institution, or an institution engaged in equivalent activities, incorporated in a jurisdiction in which it has no physical presence, involving meaningful mind and management, and which is unaffiliated with a regulated financial group.

7. Member States shall prohibit their credit and financial institutions from keeping anonymous accounts or anonymous passbooks.

8. The institutions and persons covered by this Directive shall apply customer due diligence measures in the following cases:

  1. When establishing a business relationship.

  2. When carrying out occasional transactions amounting to EUR 15000 or more, whether the transaction is carried out in a single operation or in several operations which appear to be linked.

  3. When there is a suspicion of money laundering or terrorist financing, regardless of any derogation, exemption or threshold;

  4. When there are doubts about the veracity or adequacy of previously obtained customer identification data.

9. Member States shall require that the verification of the identity of the customer and the beneficial owner takes place before the establishment of a business relationship or the carrying-out of the transaction.

10. Member States shall require that institutions and persons covered by this Directive apply the customer due diligence procedures not only to all new customers but also at appropriate times to existing customers on a risk-sensitive basis.

11. In the first Money Laundering Directive, all casino customers be identified and their identity be verified if they purchase or exchange gambling chips with a value of EUR 1000 has been increased to EUR 2000 in this directive. This directive also has added, that the Casinos subject to State supervision shall be deemed in any event to have satisfied the customer due diligence requirements if they register, identify and verify the identity of their customers immediately on or before entry, regardless of the amount of gambling chips purchased.

12. A customer due diligence for life insurance, the following has been added.

1. Customer due diligence is not required for single premium which is no more than EUR 2500.

2. A pension, superannuation or similar scheme that provides retirement benefits to employees.

13. Member States shall prohibit the institutions and persons covered by this Directive from applying simplified due diligence to credit and financial institutions or listed companies from the third country.

14. Member States shall require the institutions and persons covered by this Directive to apply, on a risk-sensitive basis, enhanced customer due diligence measures, in situations which by their nature can present a higher risk of money laundering or terrorist financing.

15. Each Member State shall establish a FIU in order effectively to combat money laundering and terrorist financing.

16. Member States shall require that their credit and financial institutions have systems in place that enable them to respond fully and rapidly to enquiries from the FIU.

17. Member States shall provide that currency exchange offices and trust and company service providers shall be licensed or registered and casinos be licensed in order to operate their business legally.

18. Member States to lay down effective, proportionate and dissuasive penalties in national law for failure to curb Money Laundering and terrorist financing.

8.8. European Union Anti Money Laundering Directive-4

1. Introduction:

The European Parliament and the council passed the Fourth Anti-Money-Laundering Directive on May 20, 2015. It was aimed at preventing the use of the financial system for the purposes of money laundering or terrorist financing.

Fourth Anti-Money-Laundering Directive was about a fair international tax system and more effective international action against money laundering.

2. Salient features of third AML directives:

1. The application of directives have been amended from real estate agents to simply estate agents and casinos have been expanded to providers of gambling services.

2. Circumstances that the Third Money Laundering Directive automatically categorized as low risk such as when a customer was another institution, a listed company or a national authority will in in this directive be considered as only one of the risk factors.

3. In the case of legal entities, such as foundations, and legal arrangements, such as trusts, which administer and distribute funds, the beneficial owner model has been slightly modified and the directive says it shall at least include:

a) Where the future beneficiaries have already been determined, the natural persons who is the beneficiary of 25 % or more of the property of a legal arrangement or entity;

b) Where the individuals that benefit from the legal arrangement or entity have yet to be determined, the class of persons in whose main interest the legal arrangement or entity is set up or operates;

c) The natural persons who exercise control over 25 % or more of the property of a legal arrangement or entity;

4. PEP definition has been modified in this directive.

As per fourth directive, ‘politically exposed person’ means a natural person who is or who has been entrusted with prominent public functions and includes the following:

a) Heads of State, heads of government, ministers and deputy or assistant ministers;

b) Members of parliament or of similar legislative bodies;

c) Members of the governing bodies of political parties;

d) Members of supreme courts, of constitutional courts or of other high-level judicial bodies, the decisions of which are not subject to further appeal, except in exceptional circumstances;

e) members of courts of auditors or of the boards of central banks;

f) ambassadors, chargés d'affaires and high-ranking officers in the armed forces;

g) members of the administrative, management or supervisory bodies of State-owned enterprises;

h) directors, deputy directors and members of the board or equivalent function of an international organisation.

Family members includes the following:

a) the spouse, or a person considered to be equivalent to a spouse, of a politically exposed person;

b) the children and their spouses, or persons considered to be equivalent to a spouse, of a politically exposed person;

c) the parents of a politically exposed person;

‘Persons known to be close associates’ means:

a) Natural persons who are known to have joint beneficial ownership of legal entities or legal arrangements, or any other close business relations, with a politically exposed person;

b) Natural persons who have sole beneficial ownership of a legal entity or legal arrangement which is known to have been set up for the de facto benefit of a politically exposed person.

5. The below new definitions has been added in this directive.

1. ‘Senior Management’ means an officer or employee with sufficient knowledge of the institution's money laundering and terrorist financing risk exposure and sufficient seniority to take

decisions affecting its risk exposure, and need not, in all cases, be a member of the board of directors;

2. ‘Gambling Services’ means a service which involves wagering a stake with monetary value in games of chance, including those with an element of skill such as lotteries, casino games, poker games and betting transactions that are provided at a physical location, or by any means at a distance, by electronic means or any other technology for facilitating communication, and at the individual request of a recipient of services

3. ‘Group’ means a group of undertakings which consists of a parent undertaking, its subsidiaries, and the entities in which the parent undertaking or its subsidiaries hold a participation, as well as undertakings linked to each other by a relationship.

6. Risk Assessment has been introduced in this directive. The Member States shall ensure that obliged entities take appropriate steps to identify and assess the risks of money laundering and terrorist financing, taking into account risk factors including those relating to their customers, countries or geographic areas, products, services, transactions or delivery channels. Those steps shall be proportionate to the nature and size of the obliged entities.

7. The Member States shall ensure identification of third-country jurisdictions which have strategic deficiencies in their national AML or CFT regimes.

8. The fourth directive has modified the customer due diligence measures to be taken for persons trading in goods, when carrying out occasional transactions in cash amounting from EUR 15000 to EUR 10000 or more, whether the transaction is carried out in a single operation or in several operations which appear to be linked.

9. ‘Tax Crimes’ relating to direct and indirect taxes are included in the broad definition of ‘criminal activity’ in this Directive.

10. The Commission set up by European Union shall conduct an assessment of the risks of money laundering and terrorist financing affecting the internal market and relating to cross-border activities. The Commission shall update its report every two years, or more frequently if appropriate.

11. As per the new directive Member States shall require obliged entities that are part of a group to implement group-wide policies and procedures, including data protection policies and policies and procedures for sharing information within the group for AML or CFT purposes. Those policies and procedures shall be implemented effectively at the level of branches and majority-owned subsidiaries in Member States and third countries.

12. Obtaining approvals have been changed slightly changed: Obtaining approval from senior management for establishing business relationships does not need to imply, in all cases, obtaining approval from the board of directors. It should be possible for such approval to be granted by someone with sufficient knowledge of the institution's money laundering and terrorist financing risk exposure and of sufficient seniority to take decisions affecting its risk exposure.

8.9. European Union Anti Money Laundering Directive-5

1. Introduction:

The Fifth AML Directive was a response to the terrorist attacks across the European Union and the offshore leaks investigated in the Panama papers. The fifth directive was introduced on 30 May 2018.

2. Salient features of fifth AML Directives:

1. Till Fourth directives only auditors, external accountants and tax advisors were in scope for European Union Directive. In the fifth directive scope has been furthered to any person who undertakes directly or indirectly material aid, assistance or advice on tax matters as principal business or professional activity.

2. Till Fourth directives only estate agents were in scope for European Union Directive. The scope in fifth directive has been furthered to Estate Agents including intermediaries in relation to transactions for which the monthly rent amounts to EUR 10000 or more.

3. The new players have been added in the scope of fifth directive who are.

a) Providers engaged in exchange services between virtual currencies and fiat currencies.

b) Custodian wallet providers;

c) Persons trading or acting as intermediaries in the trade of works of art, including when this is carried out by art galleries and auction houses, where the value of the transaction or a series of linked transactions amounts to EUR 10000 or more.

d) Persons storing, trading or acting as intermediaries in the trade of works of art when this is carried out by free ports, where the value of the transaction or a series of linked transactions amounts to EUR 10000 or more.

4. In the existing Criminal activities, terrorist offences, offences related to a terrorist group and offences related to terrorist activities have been additionally added in fifth directive.

5. In identifying beneficial owner of a trust, apart from the settlor; the trustee(s) and the protector, the following have been added in fifth directive.

a) The beneficiaries or where the individuals benefiting from the legal arrangement or entity have yet to be determined, the class of persons in whose main interest the legal arrangement or entity is set up or operates;

b) Any other natural person exercising ultimate control over the trust by means of direct or indirect ownership or by other means.

6. The fifth AML directives has slightly modified the risk elements as given under:

a) The risks associated with each relevant sector should take into account the estimates of the monetary volumes of money laundering provided by Eurostat for each of those sectors.

b) Risk of transactions between Member States and third countries.

7. The commission’s report on AML or CFT Reports shall be made public at the latest six months after having been made available to Member States, except for the elements of the reports which contain classified information.

8. The newly added terms in fifth AML directive with regards to the risk assessment is that, Member States shall make the results of their risk assessments, including their updates, available to the Commission, the E.S.As and the other Member States.

9. The commission shall identify high-risk third countries, taking into account strategic deficiencies such as the extent of criminalization of money laundering and terrorist financing, measures relating to Customer due diligence, requirements relating to record-keeping and requirements to report suspicious transactions.

10. In case, Member States still maintain anonymous accounts, anonymous passbooks or anonymous safe-deposit boxes, under fifth directive are required that the owners and beneficiaries of existing anonymous accounts, anonymous passbooks or anonymous safe-deposit boxes be subject to customer due diligence measures.

11. Where the beneficial owner identified is the senior managing official, obliged entities shall take the necessary reasonable measures to verify the identity of the natural person who holds the position of senior managing official.

12. Whenever, entering into a new business relationship with a corporate or other legal entity, or a trust or a legal arrangement having a structure or functions similar to trusts which are subject to the registration of beneficial ownership information, the obliged entities shall collect proof of registration or an excerpt of the register.

13. Member States shall require that obliged entities apply the customer due diligence measures not only to all new customers but also at appropriate times to existing customers on a risk-sensitive basis, or when the relevant circumstances of a customer change, or when the obliged entity has any legal duty in the course of the relevant calendar year to contact the customer for the purpose of reviewing any relevant information relating to the beneficial owner(s).

14. Member States shall require obliged entities to examine, as far as reasonably possible, the background and purpose of all transactions that fulfil at least one of the following conditions:

(i) they are complex transactions;

(ii) they are unusually large transactions;

(iii) they are conducted in an unusual pattern;

(iv) they do not have an apparent economic or lawful purpose.

15. Member States shall require obliged entities to apply the following enhanced customer due diligence measures:

a) obtaining additional information on the customer and on the beneficial owner(s);

b) obtaining additional information on the intended nature of the business relationship;

c) obtaining information on the source of funds and source of wealth of the customer and of the beneficial owner(s);

d) obtaining information on the reasons for the intended or performed transactions;

e) obtaining the approval of senior management for establishing or continuing the business relationship;

f) conducting enhanced monitoring of the business relationship by increasing the number and timing of controls applied, and selecting patterns of transactions that need further examination.

16. Member States shall require obliged entities to apply, where applicable, one or more additional mitigating measures to persons and legal entities carrying out transactions involving high-risk third countries.

17. Each Member State shall issue and keep up to date a list indicating the exact functions which, according to national laws, regulations and administrative provisions, qualify as prominent public functions

18. Member States shall ensure that corporate and other legal entities incorporated within their territory are required to obtain beneficial owners of corporate or other legal entities, including through shares, voting rights, ownership interest, bearer shareholdings or control via other means.

19. Member States shall ensure that the information on the beneficial ownership is accessible in all cases to:

a) competent authorities and FIUs, without any restriction;

b) obliged entities, within the framework of customer due diligence in accordance with Chapter II;

c) any member of the general public.

20. Member States shall ensure that competent authorities and FIUs have timely and unrestricted access to all information held in the central register without alerting the entity concerned.

21. Member States shall require that the beneficial ownership information of express trusts and similar legal arrangements shall be held in a central beneficial ownership register set up by the Member State where the trustee of the trust or person holding an equivalent position in a similar legal arrangement is established or resides.

22. Member States shall ensure that competent authorities and F.I.Us are able to provide the information referred to in paragraphs 1 and 3 to the competent authorities and to the F.I.Us of other Member States in a timely manner and free of charge.

23. Member States shall put in place centralized automated mechanisms, such as central registries or central electronic data retrieval systems, which allow the identification, in a timely manner, of any natural or legal persons holding or controlling payment accounts and bank accounts identified by IBAN.

24. Member States shall ensure that individuals, including employees and representatives of the obliged entity who report suspicions of money laundering or terrorist financing internally or to the F.I.U, are legally protected from being exposed to threats, retaliatory or hostile action, and in particular from adverse or discriminatory employment actions.

25. Member States shall ensure that policy makers, the FIUs, supervisors and other competent authorities involved in AML or CFT, as well as tax authorities and law enforcement authorities when acting within the scope of this Directive, have effective mechanisms to enable them to cooperate and coordinate domestically.

26. Member States shall ensure that FIUs exchange, spontaneously or upon request, any information that may be relevant for the processing or analysis of information by the F.I.U related to money laundering or terrorist financing.

27. Member States shall ensure that FIUs designate at least one contact person or point to be responsible for receiving requests for information from FIUs in other Member States.

28. Member States shall require that all persons working for or who have worked for competent authorities supervising credit and financial institutions for compliance with this Directive and auditors or experts acting on behalf of such competent authorities shall be bound by the obligation of professional secrecy.

29. The Commission shall be assisted by the Committee on the Prevention of Money Laundering and Terrorist Financing.

30. The following is a non-exhaustive list of factors and types of evidence of potentially higher risk added in the Fifth Directives:

(1) Customer risk factors:

a) The business relationship is conducted in unusual circumstances;

b) Customers that are resident in geographical areas of higher risk as set out in point (3);

c) Legal persons or arrangements that are personal asset-holding vehicles;

d) Companies that have nominee shareholders or shares in bearer form;

e) Businesses that are cash-intensive;

f) The ownership structure of the company appears unusual or excessively complex given the nature of the company's business;

(2) Product, service, transaction or delivery channel risk factors:

a) private banking;

b) products or transactions that might favour anonymity;

c) non-face-to-face business relationships or transactions, without certain safeguards, such as electronic signatures;

d) payment received from unknown or unassociated third parties;

e) new products and new business practices, including new delivery mechanism, and the use of new or developing technologies for both new and pre-existing products;

(3) Geographical risk factors:

a) countries identified by credible sources, such as mutual evaluations, detailed assessment reports or published follow-up reports, as not having effective AML or CFT systems;

b) countries identified by credible sources as having significant levels of corruption or other criminal activity;

c) countries subject to sanctions, embargos or similar measures issued by, for example, the Union or the United Nations;

d) countries providing funding or support for terrorist activities, or that have designated terrorist organizations operating within their country.

8.10. European Union Anti Money Laundering Directive-6

1. Introduction:

The 6AMLD advances in what is already established in 5AMLD and implies an important and decisive development in certain areas of the law.

2. Salient features of Sixth AML Directives:

1. AMLD 6 Directive aims to combat money laundering by means of criminal law, enabling more efficient and swifter cross-border cooperation between competent authorities.

2. The definition of criminal activities which constitute predicate offences for money laundering should be sufficiently uniform in all Member States. Criminal Activities include the following:

Participation in an organized criminal group and racketeering, terrorism, trafficking in human beings and migrant smuggling, sexual exploitation, illicit trafficking in narcotic drugs and psychotropic substances, illicit arms trafficking, illicit trafficking in stolen goods and other goods, corruption, fraud, counterfeiting of currency, counterfeiting and piracy of products, environmental crime, murder, grievous bodily injury, kidnapping, illegal restraint and hostage-taking, robbery or theft, smuggling, tax crimes relating to direct and indirect taxes, extortion, forgery, piracy, insider trading and market manipulation and cybercrime.

3. The use of virtual currencies presents new risks and challenges from the perspective of combating money laundering. Member States should ensure that those risks are addressed appropriately.

4. Due to the impact of money laundering offences committed by public office holders on the public sphere and on the integrity of public institutions, Member States should be able to consider including more severe penalties for public office holders in their national frameworks in accordance with their legal traditions.

5. In criminal proceedings regarding money laundering, Member States should assist each other in the widest possible way and ensure that information is exchanged in an effective and timely manner in accordance with national law and the existing Union legal framework.

6. Member States should ensure that certain types of money laundering activities are also punishable when committed

by the perpetrator of the criminal activity that generated the property (‘self-laundering’).

7. A conviction should be possible without it being necessary to establish precisely which criminal activity generated the property, or for there to be a prior or simultaneous conviction for that criminal activity, while taking into account all relevant circumstances and evidence.

8. This Directive aims to criminalise money laundering when it is committed intentionally and with the knowledge

that the property was derived from criminal activity.

9. In order to deter money laundering throughout the Union, Member States should ensure that it is punishable by a maximum term of imprisonment of at least four years.

10. While there is no obligation to increase sentences, Member States should ensure that the judge or the court is able to take the aggravating circumstances set out in this Directive into account when sentencing offenders.

11. The freezing and confiscation of the instrumentalities and proceeds of crime remove the financial incentives which drive crime.

13. Given the mobility of perpetrators and proceeds stemming from criminal activities, as well as the complex cross border investigations required to combat money laundering, all Member States should establish their jurisdiction in order to enable the competent authorities to investigate and prosecute such activities.

14. This Directive respects the principles recognized by Article 2 of the Treaty on European Union or (TEU), respects fundamental rights and freedoms and observes the principles recognized, in particular, by the Charter of Fundamental Rights of the European Union.

8.11. FATF Styled Regional Bodies

Financial Action Task Force on Money Laundering (FATF) regional groups or FATF-Style Regional Bodies (FSRBs) are very important in the promotion and implementation of anti-money laundering (AML) and combating the financing of terrorism (CFT) standards within their respective regions. FSRBs are to their regions what FATF is to the world.

They are modelled after FATF and, like FATF, have AML and CFT efforts as their sole objectives. They encourage implementation and enforcement of FATF’s The Forty Recommendations on Money Laundering (The Forty Recommendations) and the eight Special Recommendations on Terrorist Financing (Special Recommendations). They, also administer mutual evaluations of their members, which are intended to identify weaknesses so that the member may take remedial action. Finally, the FSRBs provide information to their members about trends, techniques and other developments for money laundering in their Typology Reports, which are usually produced on an annual basis. The FSRBs are voluntary and cooperative organizations. Membership is open to any country or jurisdiction within the given geographic region that is willing to abide by the rules and objectives of the organization. Some members of FATF are also members of the FSRBs. In addition to voting members, non-voting observer status is available to jurisdictions and organizations that wish to participate in the activities of the organization. The FSRBs are:

  1. Asia/Pacific Groups on Money Laundering (APG).

  2. Caribbean Financial Action Task Force (CFATF).

  3. Council of Europe–MONEYVAL.

  4. Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG).

  5. Financial Action Task Force on Money Laundering in South America (GAFISUD).

Certain FSRBs have issued their own conventions or instruments on AML. For example, in 1990, CFATF issued its “Aruba Recommendations,” which are 19 recommendations that address money laundering from the Caribbean regional perspective and which complement The Forty Recommendations. Further, in 1992, a Ministerial meeting produced the “Kingston Declaration,” which affirmed their respective governments’ commitment to implementing international AML standards. Similarly, the Council of Europe, in 1990, adopted its “Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime” (the Strasbourg Convention). These are important instruments in the implementation of AML standards for their respective regions.

8.12. CICAD

The Organization of American States or (OAS) is the regional body for security and diplomacy in the Western Hemisphere. All 35 countries of the Americas have ratified the OAS charter. In 1986, the OAS created the Inter-American Drug Abuse Control Commission (known by its Spanish acronym CICAD) to confront the growing problem of drug-trafficking in the hemisphere. By 1994, the Heads of State and Government of the Western Hemisphere endorsed the role of CICAD to include regional AML efforts.

CICAD, is the consultative and advisory body of the OAS on the drug issue. It serves as a forum for OAS member states to discuss and find solutions to the drug problem, and provides them technical assistance to increase their capacity to counter the drug problem. Since its establishment in 1986, CICAD and its Executive Secretariat have responded to the ever-changing challenges of drug control, expanding its efforts to promote regional cooperation and coordination with and among its member states. The OAS' Hemispheric Drug Strategy, adopted in 2010, approaches the world drug problem as a complex, dynamic, and multi-causal phenomenon, requiring a comprehensive, balanced and multidisciplinary approach. The Strategy acknowledges drug dependence as a disease that should be addressed as a public health matter, and calls for countries to maintain an appropriate balance between demand reduction and supply reduction activities. The Hemispheric Plan of Action on Drugs (2016 to 2020), a guide for the implementation of the Strategy, sets priority actions for OAS member states, placing individuals at the core of drug policies and including a cross-cutting perspective on human rights, gender, and development, with a focus on evidence-based drug policies. Through its annual programming and wide range of national and regional projects in the Hemisphere, CICAD assists member states in strengthening their drug policies by conducting in-depth research and evaluation regarding drug-related issues and emerging trends, and by providing effective technical assistance and specialized training focused on capacity building. CICAD works closely with partners such as the United Nations Office on Drugs and Crime, the International Narcotics Control Board, the Pan American Health Organization, the Caribbean Community (CARICOM), the European Monitoring Centre for Drugs and Drug Addiction, and the Regional Security System. CICAD also maintains strong ties with civil society, including the participation of civil society in all CICAD regular sessions.

8.13. Egmont Group

Recognizing the importance of international cooperation in the fight against money laundering and financing of terrorism, a group of Financial Intelligence Units (FIUs) met at the Egmont Arenberg Palace in Brussels, Belgium, and decided to establish an informal network of FIUs for the stimulation of international co-operation. Now known as the Egmont Group of Financial Intelligence Units, Egmont Group FIUs meet regularly to find ways to promote the development of FIUs and to cooperate, especially in the areas of information exchange, training and the sharing of expertise.

The Egmont Group has evolved over the years and is currently (2015) comprised of 151 member FIUs. The 2012 FATF Recommendations expect that FIUs apply for membership with the Egmont Group, therefore, the Egmont network of FIUs is expected to grow even further in the coming years.

After over 15 successful years of the Egmont Group, and with the publication of the revised FATF 40 Recommendations in 2012, it was necessary to amend the governing documents of the organization. The Charter Review Project team has produced a complimentary set of documents, which are interlinked and reference relevant FATF Recommendations. The revised Egmont Charter (2013), Egmont Principles for Information Exchange and Operational Guidance for FIUs provide the foundation for the future work of the Egmont Group and contribute to greater international cooperation and information exchange between FIUs.

The goal of the Egmont Group is to provide a forum for FIUs around the world to improve cooperation in the fight against money laundering and the financing of terrorism and to foster the implementation of domestic programs in this field. This support includes:

  • Expanding and systematizing international cooperation in the reciprocal exchange of information;

  • Increasing the effectiveness of FIUs by offering training and promoting personnel exchanges to improve the expertise and capabilities of personnel employed by FIUs;

  • Fostering better and secure communication among FIUs through the application of technology, such as the Egmont Secure Web (ESW);

  • Fostering increased coordination and support among the operational divisions of member FIUs;

  • Promoting the operational autonomy of FIUs; and

  • Promoting the establishment of FIUs in conjunction with jurisdictions with an AML/CFT program in place, or in areas with a program in the early stages of development.

8.14. Wolfsberg Group

The Wolfsberg Group is an association of thirteen global banks which aims to develop frameworks and guidance for the management of financial crime risks, particularly with respect to Know Your Customer, Anti-Money Laundering and Counter Terrorist Financing policies.

The Group came together in 2000, at the Château Wolfsberg in north-eastern Switzerland, in the company of representatives from Transparency International, including Stanley Morris, and Professor Mark Pieth of the University of Basel, to work on drafting anti-money laundering guidelines for Private Banking. The Wolfsberg Anti-Money Laundering Principles for Private Banking were subsequently published in October 2000, revised in May 2002 and again most recently in June 2012.

The Group then published a Statement on the Financing of Terrorism in January 2002, and also released the Wolfsberg Anti-Money Laundering Principles for Correspondent Banking in November 2002 and the Wolfsberg Statement on Monitoring Screening and Searching in September 2003. In 2004, the Wolfsberg Group focused on the development of a due diligence model for financial institutions, in co-operation with Banker's Almanac, thereby fulfilling one of the recommendations made in the Correspondent Banking Principles. More information is available by clicking on the "Due Diligence Repository" link above.

During 2005 and early 2006, the Wolfsberg Group of banks actively worked on four separate papers, all of which aim to provide guidance with regard to a number of areas of banking activity where standards had yet to be fully articulated by lawmakers or regulators. It was hoped that these papers would provide general assistance to industry participants and regulatory bodies when shaping their own policies and guidance, as well as making a valuable contribution to the fight against money laundering. The papers were all published in June 2006, and consisted of two sets of guidance: Guidance on a Risk Based Approach for Managing Money Laundering Risks and AML Guidance for Mutual Funds and Other Pooled Investment Vehicles. Also published were FAQs on AML issues in the Context of Investment and Commercial Banking and FAQs on Correspondent Banking, which complement the other sets of FAQs available on the site: on Beneficial Ownership, Politically Exposed Persons and Intermediaries.

In early 2007, the Wolfsberg Group issued its Statement against Corruption, in close association with Transparency International and the Basel Institute on Governance. It describes the role of the Wolfsberg Group and financial institutions more generally in support of international efforts to combat corruption. The Statement against Corruption identifies some of the measures financial institutions may consider in order to prevent corruption in their own operations and protect themselves against the misuse of their operations in relation to corruption. Shortly thereafter, the Wolfsberg Group and The Clearing House Association LLC issued a statement endorsing measures to enhance the transparency of international wire transfers to promote the effectiveness of global anti-money laundering and anti-terrorist financing programmes.

In 2008, the Group decided to refresh its 2003 FAQs on PEPs, followed by a reissued Statement on Monitoring, Screening & Searching in 2009. 2009 also saw the publication of the first Trade Finance Principles and Guidance on Credit/Charge Card Issuing and Merchant Acquiring Activities. The Trade Finance Principles were expanded upon in 2011 and the Wolfsberg Group also replaced its 2007 Wolfsberg Statement against Corruption with a revised, expanded and renamed version of the paper: Wolfsberg Anti-Corruption Guidance. This Guidance takes into account a number of recent developments and gives tailored advice to international financial institutions in support of their efforts to develop appropriate Anti-Corruption programmes, to combat and mitigate bribery risks associated with clients or transactions and also to prevent internal bribery.

Most recently, focus has expanded to the emergence of new payment methods and the Group published Guidance on Prepaid & Stored Value Cards, which considers the money laundering risks and mitigants of physical Prepaid and Stored Value Card Issuing and Merchant Acquiring Activities, and supplements the Wolfsberg Group Guidance on Credit/Charge Card Issuing and Merchant Acquiring Activities of 2009. The Wolfsberg Anti-Money Laundering Questionnaire has been designed to provide an overview of a financial institution’s anti-money laundering policies and practices. The Questionnaire requires an explanation when a “No” response is chosen (this does not imply that a “No” response is incorrect) and allows for an explanation when a “Yes” response is chosen. A copy of the Questionnaire can be downloaded from the Due Diligence Registry page on our website, www.wolfsberg-principles.com.

Institutions may use the Questionnaire as part of their AML programme’s due diligence requirements for a particular Correspondent, however, institutions are responsible for ensuring their AML programmes are designed to meet regulatory requirements/expectations and internal risk management standards, thereby determining the exact manner in which the Questionnaires are utilised in their AML programmes.

8.15. IMF-World Bank

The World Bank and International Monetary Fund developed a unique Reference Guide to Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) in an effort to provide practical steps for countries implementing an AML/CFT regime in accordance with international standards. It explains the basic elements required to build an effective AML/CFT legal and institutional framework and summarizes the role of the World Bank and the International Monetary Fund in fighting money laundering and terrorist financing.

The primary objective of this joint Bank-Fund project is to ensure that the information contained in the Reference Guide is useful and easily accessible by developing countries that are working to establish and strengthen their policies against money laundering and the financing of terrorism. Additionally, this Guide is intended to contribute to global understanding of the devastating consequences of money laundering and terrorist financing on development growth, and political stability and to expand the international dialogue on crafting practical solutions to implement effective AML/CFT regimes.

8.16. USA Patriot Act

Title III of the USA Patriot Act, titled "International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001," is intended to facilitate the prevention, detection and prosecution of international money laundering and the financing of terrorism. It primarily amends portions of the Money Laundering Control Act of 1986 (MLCA) and the Bank Secrecy Act of 1970 (BSA). It was divided into three subtitles, with the first dealing primarily with strengthening banking rules against money laundering, especially on the international stage.

The second attempts to improve communication between law enforcement agencies and financial institutions, as well as expanding record keeping and reporting requirements. The third subtitle deals with currency smuggling and counterfeiting, including quadrupling the maximum penalty for counterfeiting foreign currency. The first subtitle tightened the record keeping requirements for financial institutions, making them record the aggregate amounts of transactions processed from areas of the world where money laundering is a concern to the U.S. government.

It also made institutions put into place reasonable steps to identify beneficial owners of bank accounts and those who are authorized to use or route funds through payable-through accounts. The U.S. Treasury was charged with formulating regulations intended to foster information sharing between financial institutions to prevent money-laundering. The second annotation made a number of modifications to the BSA in an attempt to make it harder for money launderers to operate and easier for law enforcement and regulatory agencies to police money laundering operations. One amendment made to the BSA was to allow the designated officer or agency who receives suspicious activity reports to notify U.S. intelligence agencies.

A number of amendments were made to address issues related to record keeping and financial reporting. One measure was a new requirement that anyone who does business file a report for any coin and foreign currency receipts that are over US$10,000 and made it illegal to structure transactions in a manner that evades the BSA's reporting requirements. To make it easier for authorities to regulate and investigate anti-money laundering operations Money Services Businesses (MSBs)—those who operate informal value transfer systems outside of the mainstream financial system—were included in the definition of a financial institution. The third subtitle deals with currency crimes.

Largely because of the effectiveness of the BSA, money launders had been avoiding traditional financial institutions to launder money and were using cash-based businesses to avoid them. A new effort was made to stop the laundering of money through bulk currency movements, mainly focusing on the confiscation of criminal proceeds and the increase in penalties for money laundering. Congress found that a criminal offense of merely evading the reporting of money transfers was insufficient and decided that it would be better if the smuggling of the bulk currency itself was the offense. Therefore, the BSA was amended to make it a criminal offense to evade currency reporting by concealing more than US$10,000 on any person or through any luggage, merchandise or other container that moves into or out of the U.S. The penalty for such an offense is up to 5 years imprisonment and the forfeiture of any property up to the amount that was being smuggled.

8.17. Office of Foreign assets Control (OFAC)

The Office of Foreign Assets Control (OFAC), a Bureau of the Treasury Department, The Office of Foreign Assets Control ("OFAC") of the US Department of the Treasury administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries, terrorists, international narcotics traffickers, and those engaged in activities related to the proliferation of weapons of mass destruction.

OFAC acts under Presidential wartime and national emergency powers, as well as authority granted by specific legislation, to impose controls on transactions and freeze foreign assets under US jurisdiction. As part of its enforcement efforts, OFAC publishes a list of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries. It also lists individuals, groups, and entities, such as terrorists and narcotics traffickers designated under programs that are not country-specific. Collectively, such individuals and companies are called "Specially Designated Nationals" or "SDNs." Their assets are blocked and U.S. persons are generally prohibited from dealing with them.

8.18. FINRA

To protect investors and ensure the market’s integrity, FINRA—the Financial Industry Regulatory Authority—is a government-authorized not-for-profit organization that oversees U.S. broker-dealers. FINRA work every day to ensure that everyone can participate in the market with confidence. FINRA uses innovative AI and machine learning technologies to keep a close eye on the market and provide essential support to investors, regulators, policymakers, and other stakeholders. FINRA Rule 3310 sets forth minimum standards for broker-dealers' AML compliance programs. It requires firms to develop and implement a written AML compliance program. The program has to be approved in writing by a member of senior management and be reasonably designed to achieve and monitor the member's ongoing compliance with the requirements of the Bank Secrecy Act and the implementing regulations promulgated there under. Consistent with the Bank Secrecy Act, FINRA Rule 3310 also requires firms, at a minimum, to:

a) Establish and implement policies and procedures that can be reasonably expected to detect and cause the reporting of suspicious transactions;

b) Establish and implement policies, procedures, and internal controls reasonably designed to achieve compliance with the Bank Secrecy Act and implementing regulations;

c) Provide for annual (on a calendar-year basis) independent testing for compliance to be conducted by member personnel or by a qualified outside party. If the firm does not execute transactions with customers or otherwise hold customer accounts or act as an introducing broker with respect to customer accounts (e.g., engages solely in proprietary trading or conducts business only with other broker-dealers), the independent testing is required every two years (on a calendar-year basis);

d) Designate and identify to FINRA (by name, title, mailing address, e-mail address, telephone number, and facsimile number) an individual or individuals responsible for implementing and monitoring the day-to-day operations and internal controls of the program. Such individual or individuals are associated persons of the firm with respect to functions undertaken on behalf of the firm. Each member must review and, if necessary, update the information regarding a change to its AML compliance person within 30 days following the change and verify such information within 17 business days after the end of each calendar year.’

8.19. Global Organization of Parliamentarians Against Corruption

The Global Organization of Parliamentarians Against Corruption (GOPAC) is an International nongovernmental organization made up of parliamentarians from across the world, working together to combat corruption, strengthen good government, and uphold the rule of law based in Ottawa, Ontario, Canada.

The Anti-Money Laundering Global Task Force (GTF-AML) works with anti-money laundering experts, and organizations such as the Financial Action Task Force (FATF), the World Bank, the International Monetary Fund (IMF), the United Nations Office on Drugs and Crime (UNODC), Interpol, the Egmont Group, and Transparency International. The GTF-AML has developed a complementary approach to combating money laundering, in particular the laundering of corrupt money, and promotes the use of practical tools and techniques to limit or arrest such activity. To help parliamentarians in the fight against corruption in regards to money laundering, GTF-AML has developed a GOPAC Anti-Money Laundering Action Guide for Parliamentarians. This resource provides parliamentarians with information and tools to become actively engaged in their legislatures in the fight against money laundering. Through the guide parliamentarians will gain the knowledge necessary to introduce anti-money laundering legislation and build a coalition with other parliamentarians to police and prosecute money laundering in their countries. The GTF-AML is currently focusing its efforts in two areas: beneficial ownership transparency and the laundering of money for terrorism financing. The GTF-AML takes action through:

Capacity building – through anti-money laundering workshops, promoting among parliamentarians a good understanding of the evolving practices of money laundering as well as international initiatives to combat them, and, in particular, the ways in which parliamentarians can effectively contribute to this fight;

Partnerships – establishing links with international expert agencies to help ensure they have a clear understanding as to how parliamentarians can provide political leadership and support of the anti-money laundering initiatives carried out by those agencies; to help tailor international organisations’ informational material intended to provide information to parliamentarians; and provide parliamentarians seeking to reform country practices to have improved access to expertise;

Action Plans – developing global and regional plans required to help parliamentarians that are actively seeking to implement improved anti money laundering practices in their countries and regions.

9. Methods of Money Laundering

There is no hard and fast rule that Money Laundering has to follow the sequence Placement, Layering and Integration mandatorily. There are several ways and means by which money laundering is possible. Also, it is not mandatory that all laundered money has to pass through financial institutions, there are several alternate methods such as hawala or cash smuggling. There is a myth that money laundering has to be international transactions. No absolutely not necessary; money laundering can be done domestically too. Money laundering is mostly related to or have political connection. Not mandatory, even businessmen and professionals (such as high net-worth lawyers or doctors) get involved in money laundering. Money laundering is not done by common people. Well unknowingly they can get associated with money laundering. The best example is cuckoo smurfing where common people fall prey.

Let us check on the methods of money laundering in the coming section:

9.1. Ways of Making Illegal Money.

Before we check on methods of money laundering, we must know several ways of making illegal money:

Individuals usually obtain illegal funds in the following ways:

a) Insiders Trading: Insider trading is defined as a malpractice wherein trade of a company's securities is undertaken by people who by virtue of their work have access to the otherwise non-public information which can be crucial for making investment decisions. For example, illegal insider trading would occur if the chief executive officer of Company A learned (prior to a public announcement) that Company A will be taken over and then bought shares in Company A while knowing that the share price would likely rise. An insider trading is considered illegal as this breach the investors’ confidence.

b) Bulk cash smuggling: This involves physically smuggling cash to another jurisdiction and depositing it in a financial institution, such as an offshore bank, with greater bank secrecy or less rigorous money laundering enforcement.

c) Corruption: Corruption and money laundering are intrinsically linked. Corruption offences, such as bribery or theft of public funds, are generally committed for the purpose of obtaining private gain.

d) Bribery: Bribery involves the improper use of gifts and favours in exchange for personal gain. This is also known as kickbacks or, in the Middle East, as baksheesh. The types of favours given are diverse and may include money, gifts, sexual favours, company shares, entertainment, employment and political benefits.

e) Embezzlement, Theft and Fraud: Embezzlement and theft involve someone with access to funds or assets illegally taking control of them. Fraud involves using deception to convince the owner of funds or assets to give them up to an unauthorized party.

f) Extortion and Blackmail: While bribery is the use of positive inducements for corrupt aims, extortion and blackmail centre on use of threats. This can be the threat of violence or false imprisonment as well as exposure of an individual's secrets or prior crimes.

g) Human Trafficking and Drug Trafficking: Drug trafficking is a global illicit trade involving the cultivation, manufacture, distribution and sale of substances which are subject to drug prohibition laws. Human trafficking is the trade of humans, most commonly for the purpose of sexual slavery, forced labor or commercial sexual exploitation for the trafficker or others.

9.2. Money Laundering Through Smurfing

This is a method of placement whereby cash is broken into smaller deposits of money, used to defeat suspicion of money laundering and to avoid anti-money laundering reporting requirements. The people who are involved in such kinds of money laundering are called “smurfs”. Smurfs adopt simple step of money laundering. They are aware that if a large dump of cash is deposited in a bank, it comes under the purview of banking surveillance. Hence, they break it into smaller deposits in different regions and different banks to avoid reporting thresholds. Smurfing looks simple but is a complex and time taking process as each day smurfs deposits small chunk of amounts. There is another term related to smurfing which is 'cuckoo smurfing' originated in Europe because of similarities between this typology and the activities of the cuckoo bird. Cuckoo birds lay their eggs in the nests of other species of birds which then unwittingly take care of the eggs believing them to be their own. In a similar manner, the perpetrators of this money laundering typology seek to transfer wealth through the bank accounts of innocent third parties. The term 'cuckoo smurfing' originated in Europe because of similarities between this typology and the activities of the cuckoo bird. Cuckoo birds lay their eggs in the nests of other species of birds which then unwittingly take care of the eggs believing them to be their own. In a similar manner, the perpetrators of this money laundering typology seek to transfer wealth through the bank accounts of innocent third parties. The Cuckoo Smurfers hire legitimate account holders who for a commission without having the knowledge that they are actually involved in money laundering transfer money as per the instructions from the smurfs.

9.3. Money Laundering Through Structuring

A person structures a transaction if that person, acting alone, or in conjunction with, or on behalf of, other persons, conducts or attempts of conduct one or more transactions in currency in any amount, at one or more financial institutions, on one or more days, in any manner, for the purpose of evading the CTR filing requirements. In simple terms, it is the practice of executing financial transactions in a specific pattern, well planned and calculated to avoid triggering of suspicion in banks or other financial institutions. Structuring and Smurfing are similar with a hair line difference. Structuring is the act of altering a financial transaction to avoid a reporting requirement while Smurfing is the act of using runners (or smurfs) to perform multiple financial transactions to avoid the currency reporting requirements.

9.4. Money Laundering Through Cash Intensive Businesses

Cash intensive business is one that receives the majority of its revenue from a non-traceable source, such as, cash currency, money orders, barter, or some form of digital cash. Cash-intensive businesses and entities cover various industry sectors. Most of these businesses are conducting legitimate business; however, some aspects of these businesses may be susceptible to money laundering or terrorist financing. Common examples include, but are not limited to, the following:

  • Convenience Stores

  • Restaurants/Hotels/Bars/Night Clubs

  • Retail Stores

  • Liquor Stores

  • Vending Machine Operators

  • Parking Garages

The cash intensive business is hugely used to launder money. These businesses may be companies that actually do provide a good or service but whose real purpose is to clean the launderer's money. The launderer can combine his dirty money with the company's clean revenues in this case, the company reports higher revenues from its legitimate business than it's really earning; or the launderer can simply hide his dirty money in the company's legitimate bank accounts in the hopes that authorities won't compare the bank balance to the company's financial statements. The Launderer let’s say owns the restaurant would funnel his ill-gotten gains through the books of the restaurant fraudulently showing the funds as profits from food/other sales.

9.5. Money Laundering Through BMPE

This system is the largest drug money-laundering mechanism in the Western Hemisphere came to light in the 1990s. The Colombian Black Market Peso Exchange [BMPE] has developed over the years to the point that it is widely portrayed, and generally accepted, as being a tool used by narco-traffickers to launder money.

The foundation for the BMPE was laid in the 1960’s by the government of Colombia, albeit inadvertently. The government did two things that gave birth to this system; specifically, they banned the US dollar, and they established high tariffs on imported goods. The idea was to strengthen the value of the Colombian peso, and increase the demand for Colombian goods.

Their intentions notwithstanding, this served to create an underground economy, generally referred to as a “black market,” and it created a black market exchange system where people, known as cambistas, exchanged Colombian pesos [COP] on the streets of Colombia for US dollars on deposit in American financial institutions.

The Black Market Peso Exchange system operates through brokers who purchase narcotics proceeds in the United States from the cartels and transfer pesos to the cartels from within Colombia.

  • The dollars are placed — that is, “laundered” — into the United States financial system by the peso broker without attracting attention;

  • The dollars are then “sold” by the brokers to businessmen in Colombia who need dollars to buy United States goods for export; and

  • Goods ready for export is often actually paid for by the peso broker, using the purchased narcotics dollars, on behalf of the Colombian importer.

This underground financial and trade financing system is a major—perhaps the single largest avenue for the laundering of the wholesale proceeds of narcotics trafficking in the United States. It also reflects the desire of Colombian importers (who may otherwise be legitimate businessmen) to avoid paying extensive Colombian import and exchange tariffs by smuggling goods into Colombia. Finally, this system exploits United States exports in the recycling of narcotics dollars. The U.S. Customs Service believes that the “United States exports that are purchased with narcotics dollars through the BMPE system often include household appliances, consumer electronics, liquor, cigarettes, used auto parts, precious metals, and footwear.”

9.6. Money Laundering Through Trusts

  1. Trust accounts can conceal the sources and uses of funds, as well as the identity of beneficial owners.

  2. The settlor of the trust can transfer assets for possible money laundering or tax evasion.

  3. A trust enables assets to segregate itself from sponsor hence, are secure avenues for money laundering.

  4. Trust owners can be hidden under nominee set up.

  5. Trust accounts are formed by the private banking department in a bank hence, clientele with criminal background gets expert advises to hide illegal funds.

9.7. Money Laundering Through Shell Companies

A shell company can be defined as a non-operational company i.e., a legal entity that has no independent operations, significant assets, ongoing business activities, or employees, have no physical presence, and produce nothing. In essence, shells are companies that exist mainly on paper; they are frequently used to shield identities and/or to hide money. A shell company can often be identified by a number of red flag indicators including:

  • No phone number.

  • No e-mail address.

  • No physical address.

  • No company logo.

  • No contact person.

  • No federal identification number.

Shell Companies can open bank accounts and wire money like any other company, making them a favourite tool for money launderers to hide their business and assets from authorities.

9.8. Money Laundering Through Shelf Corporation

A shelf corporation is a paper or shell corporation that is administratively formed and then "put on a shelf" for several years to age. A shelf corporation doesn't engage in any real business, but during the aging period some efforts may be undertaken to establish a credit history, file basic tax returns, open a business bank account, and other simple actions to demonstrate some activity.

Shelf corporations are legal and do have legitimate purposes. They are frequently used for holding personal or business assets. Another common purpose for the creation of a shelf corporation is as a turn-key business package that can later be sold to someone who wants to start and operate a company without going through the effort to form a new one; or, sold to and used by someone who may not otherwise qualify for a bank loan, line of credit, or government contract because they or their existing company do not have the required credit scores or a two to five year established business history. By purchasing a shelf corporation, an entrepreneur now instantly owns an established company that has been "in business" for several years without debts or liabilities.

Criminals can also create, purchase, and use shelf corporations. In some cases, they may use one with a name similar to a targeted legitimate company in order to specifically impersonate that company and deceive creditors or suppliers. In other cases, they may use a shelf corporation, or a series of shelf corporations, to appear to be a well-established, legitimate business in order to defraud other businesses, lenders, or financial institutions.

9.9. Money Laundering Through Offshore Financial Centres

The Offshore Financial Centres were originally known as “tax havens” and later became “banking havens”. Offshore banking activity is practiced with non-resident clients and usually very rich. In the global economy, Offshore Financial Centres offer many advantages, but their main characteristic is the banking secrecy. Keeping the banking secret and the development of money laundering operations’ may encourage illegal and criminal activities.

Tax havens have the following main characteristics:

  • Lower taxes or total lack of the income tax

  • Financial and banking secrecy and ensuring commercial information protection

  • Important role of the banking activity

  • Promotional advertising through which are publicized the fiscal advantages offered in order to attract foreign investors.

Offshore financial centres provide financial management services to foreign users in exchange for foreign exchange earnings. There are many channels through which offshore financial services can be provided. These include the following:

Offshore banking which can handle foreign exchange operations for corporations or banks. These operations are not subject to capital, corporate, capital gains, dividend, or interest taxes or to exchange controls.

International business corporations (IBCs), which are often tax-exempt, limited-liability companies used to operate businesses or raise capital through issuing shares, bonds, or other instruments.

Offshore insurance companies, which are established to minimize taxes and manage risk. Onshore insurance companies establish offshore companies to reinsure certain risks and reduce their reserve and capital requirements.

Asset Management and protection allows individuals and corporations in countries with fragile banking systems or unstable political regimes to keep assets offshore to protect against the collapse of domestic currencies and banks. Individuals who face unlimited liability at home may use offshore centres to protect assets from domestic lawsuits.

Also known as Fiscal paradises they are generally small states with political and economic stability which favour the development of financial activities. The most famous and popular offshore banking centres in the global market are the Cayman Islands and Switzerland. Other well-known established destinations for offshore banking include the following (in alphabetical order):

Bahamas, Barbados, Belize, Bermuda, British Virgin Islands, Cyprus, Dominica, Gibraltar, Ghana, Hong Kong, Labuan, Malaysia, Liechtenstein, Luxembourg, Malta, Macau, Mauritius Monaco, Montserrat, Nauru, Panama, Seychelles, Turks and Caicos Islands.

Criminals prefer financial centres and offshore jurisdictions because the anonymity guaranteed by their banking, tax and company regulations provides an effective shield against requests for information by law enforcement agencies. Anonymity, in fact, is an essential requisite for the laundering of criminal proceeds and their reinvestment in the legitimate economy without incurring the “law enforcement risk”.

9.10. Money Laundering Through Travel Agencies

Travel agency is any person who sells, as an agent and not as a principal airline tickets, rail tickets, hotel and motel reservations, and cruise reservations, or some combination of these services. The definition excludes direct sales by service providers such as hotels and tour buses. Travel agencies can also be used as mode of money laundering for example, prepaid airline tickets--that is, tickets purchased through a travel agency for use by another person, usually in another city can be especially used as Money laundering tool. One can purchase an expensive airline ticket for another person who then asks for a refund. Another example can be sending a tour group to a country and making an offsetting payment in a foreign entity's U.S. or other account while instructing the accountholder to cover the cost of the group's trip. Travel agents can also arrange complex payment or invoicing for customers, thereby structuring cash payments to avoid currency reports. This method is one way that businesses involved in informal value transfer systems, such as hawala, transfer funds between entities in various countries. Let us check in detail:

  1. Travel agents can maintain multiple bank accounts and help structuring.

  2. Travel agents can deal in foreign currency exchange and hence, can help criminals convert currencies.

  3. The same single person or group of persons can operate multiple travel agencies and can act as smurfs.

  4. Travel agents are known for Human trafficking or smuggling of migrants.

  5. Travel agents can operate without license in several countries and hence can escape scrutiny by government.

  6. Travel agents since can clear and issue travelers cheques, they can help in micro structuring.

  7. Since Travel agencies also deal in cash, they can easily co-mingle illegally obtained funds.

  8. Travel agencies can act as hawala agents.

  9. Since travel agents have connections, they can introduce criminals to their known persons working at airlines, cruise lines or hotel industry.

  10. Travel agents can involve in complex wire transfers for their criminal customers.

9.11. Money Laundering Through Prepaid Cards

Prepaid cards are one of the newer developments in the world of consumer electronic payments. Prepaid cards have incorporated in them pre-funding and are integrated into the Visa, MasterCard, and other payment card networks. Money laundering risk associated with prepaid cards lies in their easy transportability and the relative ease of moving and potentially accessing monetary value anonymously. Prepaid card programs do not require customer identification or that do not include rigorous monitoring of suspicious activity are most at risk for money laundering abuse. As these cards are integrated into VISA and Mastercard networks, money is easily access all over the world hence, making laundering of money easier.

9.12. Money Laundering Through Non-profit Organizations

Non-profit organisations (NPOs) are defined by their purpose, their reliance on contributions from supporters and the trust placed in them by the wider community. They often process large amounts of cash and regularly transmit funds between jurisdictions. NPOs have also traditionally operated under less formal regulatory control and generally, a less rigorous form of administrative and financial management. It is argued that the combination of these factors exposes the sector to an elevated risk of criminal and terrorist abuse.

9.13. Money Laundering Through Charities

Many countries recognize the important and significant role the charities plays in building a strong, caring and well functioning society as well as in contributing to employment, welfare and economic growth. As a consequence they provide tax incentives or tax relief to those organizations (and their donors) that typically constitute the charities.

The abuse of charities occurs when:

  1. An organization poses as a registered charitable organization to perpetrate a tax fraud;

  2. A registered charity wilfully participates in a tax evasion scheme for the personal benefit of its organisers or directors;

  3. A registered charity is involved wilfully in a tax evasion scheme to benefit the organization and the donors, without the assistance of an intermediary;

  4. A registered charity is involved wilfully in a tax evasion scheme to benefit the organization and donors with the assistance of an intermediary;

  5. A charity is abused unknowingly by a taxpayer or a third party, such as unscrupulous tax return preparer who prepared and presented false charitable receipts;

  6. Tax sheltered donations as part of a tax evasion scheme;

  7. Salaried employees concealed as volunteer workers;

  8. An organization registered as exempted from the VAT that is performing taxed activities;

  9. The issuance of receipts for payments that are not true donations;

  10. The issuance of receipts to individuals working for the beneficiary organization;

  11. Criminals use names of legitimate organizations to collect money;

  12. Terrorism financing scheme using charities to raise or transfer funds to support terrorist organizations;

  13. Misuse of charity funds by charities; and

  14. Manipulation of the values of donated assets.

9.14. Money Laundering Through Vehicle Sellers

Purchasing vehicles with structured checks and money orders, trading in vehicles for other ones and conducting successive transactions of buying and selling new and used vehicles to produce complex transaction layers, arranging complex payment or invoicing for customers, thereby structuring cash payments to avoid currency reports and accepting third-party payments, particularly from jurisdictions with lax laundering controls makes vehicle sellers vulnerable to money laundering.

9.15. Money Laundering Through Gatekeepers

Gatekeepers include lawyers, notaries, trust and company service providers (TCSPs), real estate agents, accountants, auditors and other designated nonfinancial businesses and professions (DNFBPs) who assist with transactions involving the movement of money in the domestic and international financial systems. “Gatekeepers are thought to be among the most common laundering agents, or at least facilitators. Gatekeepers often utilise the confidentiality afforded by attorney-client privilege as a tool in money laundering schemes. Gatekeepers can cite this privilege to bypass the rules concerning disclosure in numerous financial institutions, including Know Your Customer rules. This allows the gatekeepers to engage in a range of activities on behalf of their clients anonymously, including the establishment of shell companies, buying properties, opening bank accounts, and transferring assets on the behalf of their clients with associated parties or brokers.

9.16. Trade Based Money Laundering (TBML)

Hundreds of billions of dollars are laundered annually by way of Trade-Based Money Laundering (TBML). It is one of the most sophisticated methods of cleaning dirty money, and also one of the most difficult to detect. By definition, TBML is the process by which criminals use a legitimate trade to disguise their criminal proceeds from their unscrupulous sources. The crime involves a number of schemes in order to complicate the documentation of legitimate trade transactions; such actions may include moving illicit goods, falsifying documents, misrepresenting financial transactions, and under- or over-invoicing the value of goods.

9.17. Money Laundering Through Real Estate

Criminals may be drawn to real estate as a channel to launder illicit funds due to the:

a) Ability to buy real estate using cash.

b) Ability to disguise the ultimate beneficial ownership of real estate.

c) Relative stability and reliability of real estate investment.

d) Ability to renovate and improve real estate, thereby increasing the value.

Criminals are also motivated to buy property for further profit or lifestyle reasons. Compared to other methods, money laundering through real estate – both residential and commercial – can be relatively uncomplicated, requiring little planning or expertise. Large sums of illicit funds can be concealed and integrated into the legitimate economy through real estate.

9.18. Money Laundering Through Use of Loans and Mortgages

Criminals use loans or mortgages to layer and integrate illicit funds into high-value assets. Loans or mortgages are essentially taken out as a cover for laundering criminal proceeds. Lump sum cash repayments or smaller ‘structured’ cash amounts are used to repay loans or mortgages. This allows illicit funds to be commingled with legitimate funds. ‘Loan-back’ schemes are an example of this method. Loan-back schemes involve criminals borrowing their own illicit funds. Foreign offshore companies controlled by criminals are used as an apparently ‘arms-length’ lender. The loan is then used to buy real estate and repayments are made using illicit funds. This process hides the true nature of the funds and gives the loan repayments an appearance of legitimacy.

9.19. Money Laundering Through Precious Metals and Diamonds

There are several ways launderers use Precious Metals and Diamonds as given below:

  1. Money can be moved out of the Origin country to a foreign country by importing precious metals and gems at overvalued prices exporting the covered goods at undervalued prices.

  2. Money can be moved into the origin country by importing precious metals and gems at undervalued prices or exporting the covered goods at overvalued prices.

  3. Precious metals, precious stones, and jewels constitute easily transportable, highly concentrated forms of wealth. They serve as international mediums of exchange that can be converted into cash anywhere in the world. For these reasons, precious metals, precious stones, and jewels can be highly attractive to money launderers and other criminals, including those involved in the financing of terrorism.

  4. Launderers use precious metals, especially gold, silver, and platinum which have a ready, actively traded market, and can be melted and poured into various forms, thereby obliterating refinery marks and leaving them virtually untraceable.

  5. Transactions from dealers offsetting prices.

9.20. Money Laundering Through Company or Corporate Structures

Launderers have specialist skills in, and knowledge of, the establishment and administration of company or corporate structures. These structures may include layers of companies and trusts in several foreign jurisdictions. These structures allow criminals to conceal illicit funds, obscure ownership through complex layers, legitimise illicit funds and in some cases avoid tax and regulatory controls. Establishing corporate structures in jurisdictions with preferential tax regimes and secrecy provisions provides a layer or insulation between criminals and their activities. This helps criminals to put distance between themselves and their illicit activities and funds. Let’s look at some more as given below:

  1. Shell companies are the biggest risk of money laundering in the world.

  2. Jurisdictions which allow companies to issue bearer shares without registration are the second largest money laundering risks of a company.

  3. Front companies are good venues for money laundering.

  4. Companies having franchisee model can launder money through False Import or Export Invoices.

  5. Cash intensive Companies are also good venues for money laundering.

  6. Companies can be a vehicle for trade-based money laundering.

  7. Loans can be raised by companies and repaid through illegal monies.

  8. Property dealings through corporate structures can be vulnerable to money laundering.

9.21. Money Laundering Through Insurance Products

Insurance products, particularly life insurance, provide a very attractive and simple means of laundering money. Some popular methods as given below used by criminals and launderers:

  1. Cash out policies prematurely, despite penalties for the early withdrawals.

  2. Policies paid using cheques and wire transfers purchased with criminal money.

  3. Use of dirty money to purchase a general insurance policy to insure some high-value goods (which is also usually obtained through illegal means by criminals).

  4. Paying a large “top-up” into an existing life insurance policy.

  5. Purchasing one or more single-premium investment linked policies, then cashing them in a short time later

  6. Premiums being paid into one policy, from different sources.

  7. Making over-payment on a policy and then asking for a refund.

9.22. Money Laundering Through High Value Goods

High Value Goods Dealers (HVGDs) are businesses involved in the sale of goods of high value where the trader accepts cash payments either in one transaction or a series of linked transactions. Examples of these businesses include antique dealers, boat and car sales, dealers in precious stones, jewellers. Criminals and launderers find it easy to convert illicit money to clean money through purchase of high value goods arts and antiques and then selling the same in open and legal markets. Launderers use chains of dealers and auction houses to effectively do transactions which make feels the illicit money to be legal.

9.23. Money Laundering Through Correspondent Banking

Until the bank of New York scandal erupted in 1999, international correspondent banking had received little attention as a high-risk area for money laundering. The general assumption had been that a foreign bank with a valid banking license operated under the watchful eye of its licensing jurisdiction and bank had no obligation to conduct its own due diligence. The lesson learn was that some foreign banks carry higher money laundering risks than others as they are seriously deficient in their bank licensing and supervision.

The reality is that Correspondent banking is highly vulnerable to money laundering for a host of reasons as given below:

1) Culture of Lax Due Diligence:

Big banks providing correspondent banking are found to be poorly informed about the banks they are servicing, particularly small foreign banks licensed in jurisdictions known for bank secrecy (Offshore Banks) or weak banking and anti-money laundering controls. Account information is often outdated and incomplete, lacking key information about a foreign banks management, major business activities, reputational and regulatory history, AML procedures and transaction monitoring procedures. At larger banks reviewing is often weak or absent between correspondent bankers and foreign clients of foreign banks. Wire transfers are frequently the key activity engaged by the foreign bank, the correspondent banks did not monitor those transfers for filing STR. Subpoenas or bank under legal proceedings directed at foreign banks or their clients were not always bought to the attention of the correspondent banker. Large correspondent banks usually maintain two or three thousand correspondent accounts at a time and process billions of dollars of wire transfers each day. Yet these banks did not invest in software, personnel or training needed to identify and manage money laundering risks.

2) Role of Correspondent Bankers:

Correspondent bankers also called the relationship managers should serve as the first line of defence against money laundering. However, many appear to be inadequately trained or insufficiently sensitive to the risk of money laundering taking place through accounts they manage. This is because, the RM's are paid for the number of new accounts they open or the amount of money their correspondent accounts bring into the bank. Their primary mission is to expand business, open new accounts, increase deposits, and sell additional services to the correspondent accounts. While doing this, they failed in their duties such as evaluating prospective bank clients, and reporting suspicious activity (if any). The RM’s are not collecting the required standard due diligence for foreign banks nor their clients allowing them to perpetrate through correspondent accounts.

3) Nested Correspondents:

Another practice in correspondent banking which increased money laundering risks in the field is the practice of foreign banks operating through the correspondent accounts of other foreign banks. There are numerous instances of foreign banks gaining access to the correspondent bank either directly or through another foreign bank having an account in the correspondent bank. The lack of knowledge that the foreign bank has actually nested in correspondent account another account of foreign bank is the major flaw.

4) Foreign jurisdictions with weak banking or accounting practices:

The international banking system is built upon differing bank licensing and supervisory approaches in the hundreds of countries that currently participate in international funds transfer systems. Some countries require heavy requirements to obtain license however, jurisdictions such as BVI which offer offshore banking services does not require huge investments with either central bank nor huge norms and regulations. The increased money laundering risks for correspondent banking are apparent in such banking systems. Also, in banking systems with weak accounting practices in foreign banks, accountants refusing to provide information about banks financial statements they had audited or about reports they had prepared in the role of a bank reviewer or falsifying certifications provided by the accounting firms all lead to misuse of correspondent banking for money laundering.

5) Bank Secrecy:

Bank secrecy laws further increase money laundering risk in international correspondent banking. Strict bank secrecy laws are a staple of many countries including those with offshore banking sectors. Some jurisdictions refuse to disclose bank ownership. Some refuse to disclose the results of bank audits or examinations. Some jurisdictions prohibit disclosure of information about particular bank clients or transactions to correspondent banks or regulators.

6) Cross Border Difficulties:

Due diligence reviews are difficult to obtain from foreign banks. Investigations around the solvency of banks, negativity is difficult to ascertain as limited information is available in public records. In some countries, have few or no public records. Travel to foreign jurisdictions by correspondent banks to gather first-hand information is costly and may not produce immediate or accurate information.

7) Money Laundering through Payable through account:

The 2012 FATF recommendations define the term payable-through accounts as correspondent accounts that are used directly by third parties to transact business on their own behalf. In other words, the institution providing the Correspondent Banking services allows its Correspondent Banking Clients’ accounts to be accessed directly by the customers of that correspondent, e.g., the customers of the correspondent may have cheque writing privileges or otherwise be able to provide transaction instructions directly to the institution. This is different than a traditional Correspondent Banking relationship in which the Correspondent Bank is executing transactions on behalf of its customers.

The arrangements pose greater risk to an institution if it does not have access to information about the third parties accessing the account. This account becomes a gateway to the launderers. Regulatory standards for managing the risks of payable-though arrangements may vary significantly by jurisdiction, but at a minimum, the institution providing such services should take additional steps to ensure that their Correspondent Banking Client has conducted sufficient client due diligence on its customers which have direct access to accounts of the Correspondent Bank, and that such information can be provided upon request. It may also be appropriate for the institution to conduct its own due diligence on the third parties.

8) Money Laundering through Concentration Accounts:

Concentration accounts are internal accounts established to facilitate the processing and settlement of multiple or individual customer transactions within the bank, usually on the same day. These accounts may also be known as special-use, omnibus, suspense, settlement, intraday, sweep, or collection accounts. Concentration accounts are frequently used to facilitate transactions for private banking, trust and custody accounts, funds transfers, and international affiliates.

Risk Factors:

Money laundering risk can arise in concentration accounts if the customer-identifying information, such as name, transaction amount, and account number, is separated from the financial transaction. If separation occurs, the audit trail is lost, and accounts may be misused or administered improperly. Banks that use concentration accounts should implement adequate policies, procedures, and processes covering the operation and recordkeeping for these accounts. Policies should establish guidelines to identify, measure, monitor, and control the risks.

Risk Mitigation:

Because of the risks involved, management should be familiar with the nature of their customers’ business and with the transactions flowing through the bank’s concentration accounts. Additionally, the monitoring of concentration account transactions is necessary to identify and report unusual or suspicious transactions. Internal controls are necessary to ensure that processed transactions include the identifying customer information. Retaining complete information is crucial for compliance with regulatory requirements as well as ensuring adequate transaction monitoring. Adequate internal controls may include:

Maintaining a comprehensive system that identifies, bank-wide, the general ledger accounts used as concentration accounts, as well as the departments and individuals authorized to use those accounts.

  • Requiring dual signatures on general ledger tickets.

  • Prohibiting direct customer access to concentration accounts.

  • Capturing customer transactions in the customer’s account statements.

  • Prohibiting customer’s knowledge of concentration accounts or their ability to direct employees to conduct transactions through the accounts.

  • Retaining appropriate transaction and customer identifying information.

  • Frequent reconciling of the accounts by an individual who is independent from the transactions.

  • Establishing timely discrepancy resolution process.

  • Identifying recurring customer names.

9.24. Money Laundering Through Arms Dealers

1. Huge amounts or funds are transacted during arms deals and hence, corruption and bribery monies can flow heavily during these transactions.

2. Arms deals can happen through smuggling and, the settlements happen through alternative remittance systems such as hawala.

3. Arms Dealers can get involved in trade-based money laundering.

4. Arms Dealers get involved in huge cash transactions and hence, can be vulnerable to money laundering.

9.25. Money Laundering Through Associations

  1. Professional associations for Conducting games can form various team franchisees and auction teams. The teams can be purchased in an auction by a criminal.

  2. Funds can be raised by a civic association by showing it to be for a particular cause but, can be towards laundering money.

  3. International Clubs can be formed by criminals and show accounting entries as activities of a club which might have never happened.

  4. A criminal can form a missionary association to co-mingle own funds.

  5. Criminals can syndicate real estate by forming an association to actually launder money.

9.26. Money Laundering Through Blocker Corporations

  1. Criminals can invest in Alternative investments such as Hedge or PE funds through blockers.

  2. Blockers can be used to evade taxes.

  3. Ownership structures can be hidden by forming an offshore trust and then investing through blockers.

  4. Through blockers, criminals now have access to foreign investments.

  5. Blockers enables criminal syndicates to easily convert money to legal money.

9.27. Money Laundering Through Cooperatives

  1. The Cooperatives have access to sophisticated banking products such as ACH facilities and wire transfers and hence they can be vulnerable to money laundering.

  2. Cooperatives can conduct transactions by creating fake accounts.

  3. The criminals can become an owner and can hold large deposits in co-operatives and go un-detected.

  4. Banks formed through cooperatives have the weakest AML procedures and hence, vulnerable to money laundering.

  5. Cooperatives can be used as fronts (similar to front companies).

9.28. Money Laundering Through Credit Unions/Building Societies

  1. Credit Unions or Building Societies deal in cash hence, giving a chance to criminals to hide their illicit funds here.

  2. Since Credit Unions or Building Societies allow wire transfers, they are better venues for structuring money than with banking institutions due to less scrutiny.

  3. Easy availability of loans and mortgages to its members make criminal easy access to co-mingle the loan payments with illicit funds.

  4. Children accounts provided by Credit Unions or Building Societies are susceptible to more money laundering as such transactions draw less attention

  5. Criminals themselves can become the Members of Credit Unions and Building Societies.

  6. Reluctance to provide documentary evidence of identity while opening an account can hide whereabouts of the members.

  7. Possibility of third parties paying in cash on behalf of the members of the credit union or building societies.

9.29. Money Laundering Through Diamond Dealers

  1. Diamond dealers can be involved in Trade based money laundering such as over-invoicing or under-invoicing.

  2. Diamond dealers can be a part of alternative remittance systems such as hawala.

  3. Smuggled diamonds can be utilized for terrorist financing.

  4. Diamond dealers can do transactions in bulk cash hence, vulnerable to money laundering.

  5. Diamonds can be purchased by the dealers through illegal funds of criminals by forming partnerships or syndicates.

  6. Diamonds can be used as an alternative currency to purchase prohibited or restricted goods.

  7. Diamonds usually come from countries with lax AML controls hence, there may be involvement of government officials bribe or corruption money during transactions.

  8. In most of the countries diamond businesses are not regulated and hence, they are vulnerable to money laundering.

  9. Dealers of diamonds deal in cross-border movement hence, can easily do varied transactions on behalf of criminals.

  10. Dealers of diamonds can be smurfs.

9.30. Money Laundering Through Endowment Funds

  1. A criminal can set up a charity foundation and co mingle self-earned illegal funds as donations in the endowment funds of such charity.

  2. The endowment property, within the foundation can be applied for the benefit of beneficiaries who are related to the criminals.

  3. Criminally held non-profit organizations can park other criminal funds as endowment funds.

  4. Criminals can co mingle illegal funds into their run hospital endowment fund and form an unrestricted endowment fund.

  5. Criminals can be a trustee of foundations of religious endowments.

9.31. Money Laundering Through Foundations

  1. Foundations can receive donations from anywhere in the world. Quite possible that these donations actually are money received for laundering.

  2. Registration of foundations is simple. Hence, it gives a chance for criminals to open foundations.

  3. Foundations can invest freely and hence, are good conduits for laundering money.

  4. Criminally owned Foundations which are grant making can provide grants to its own companies.

  5. Foundations can own properties for criminals who are usually its founders directly or indirectly through self-owned corporates.

  6. Foundations can transact with third parties hence, can be used by criminals.

9.32. Money Laundering Through Franchises

  1. Instead of criminals opening their own companies can opt for franchise model and co-mingle illegally obtained funds as most of the franchises are cash intensive businesses and the franchisers are already reputed.

  2. Criminals can use franchise model to expand their front companies in other countries.

  3. Criminals can do alternative remittances using franchise models.

  4. Criminals can do trade-based money laundering using franchise models.

  5. Criminals can start up charities (as if they want to do good) in any country where they have franchise and launder money easily.

9.33. Money Laundering Through General Partnerships

  1. General Partnership firms can consist of gatekeepers such as lawyers or CPA’s who can assist money laundering.

  2. General Partnership firms can involve in sale or transfer of real estate purchased with laundered funds.

  3. General Partnership firms can help launderers through investments into securities.

  4. General Partnership firms can help criminals to create shell companies for money laundering.

  5. By operating as General partnership firms, criminals can abuse international banking system.

9.34. Money Laundering Through Hedge Funds

  1. Hedge funds are private placements hence, giving all the opportunity for criminals to invest in such funds.

  2. Foreign investors with criminal backgrounds can invest in Hedge Funds through blockers.

  3. The hedge fund manager is mostly interested in funding for the hedging than source of funds of its investors.

  4. Hedge funds are not regulated and hence, can have lax anti money laundering representation.

  5. Hedge funds can be used in the integration stage where money is already laundered and placed in hedge funds for giving a cleaner picture for such funds.

9.35. Money Laundering Through Holding Companies

  1. Criminals can invest in various companies through holding company structure.

  2. Criminals can syndicate their money in a criminally managed holding company.

  3. Criminals can hold casinos or gambling companies through holding company structures.

  4. Criminals can invest in several cash intensive businesses through holding company structures.

  5. Criminals can expand its businesses through franchise system and comingle its money through holding company structures.

9.36. Money Laundering Through ICAV

  1. The ICAV can be used to structure funds.

  2. ICAV can be purchased through cash.

  3. ICAV are open ended funds meaning, can be purchased and redeemed any time hence vulnerable to Money Laundering.

  4. ICAV allows foreign investments hence, a good venue for money launderers.

  5. ICAV can be used as a vehicle for tax evasion.

9.37. Money Laundering Through Joint Ventures

  1. Two or more criminals from different countries can come together to form a JV and indulge in Trade based money laundering.

  2. Joint Ventures may involve PEP’s and the investments can happen through bribe or corruption monies collected by these PEP’s.

  3. A JV with a local company usually offers faster market entry and can help avoid foreign ownership restrictions a big advantage to criminals and money launderers.

  4. A JV can be used for Cuckoo Smurfing using employees accounts.

  5. A JV can be used for routing payments to the country where criminal wants to receive payments for expanding crime business.

9.38. Money Laundering Through Limited Liability Companies

  1. Limited Liability companies can register without submitting the details of its owners and hence, are susceptible to money laundering.

  2. Limited Liability companies can be used as a “pass through” to allow another company or business to smoothly move financial assets from one place to another.

  3. Purchasing of condo units through a number of limited liability companies. A Condo is a private residence rented out to tenants.

  4. Create different Limited Liability Companies and open bank accounts to structure money instead of opening bank account in launderers’ name.

  5. Shell corporations can be the owners within the Limited liability companies.

9.39. Money Laundering Through Limited Liability Limited Partnerships

  1. Limited partners of Limited Liability Limited partnerships can compose of criminally held corporates.

  2. Limited Liability Limited partnerships are new, are easy to form using agents and come with various protections. Hence, criminal can easily use these structures to launder money.

  3. Criminally held Limited Liability Limited partnerships can hold real estate properties.

  4. Criminals can have opportunity to run a publishing house or car dealerships to co-mingle their money.

  5. Criminals can take advantage of loopholes in this new structure.

9.40. Money Laundering Through Limited Liability Partnership

  1. Limited Liability Partnerships especially at state of Delaware can be easily formed even by foreigners or foreign entities. These loopholes can be used by criminals to form a Limited Liability Partnership and use it as a front for money laundering.

  2. Limited Liability Partnership Structures have firms such as attorney firms or law firms and chartered accountancy firms who usually help criminals to launder money.

  3. Criminals can form partnerships inside Limited Liability Partnerships with domestic firms to do money laundering.

  4. Limited Liability Partnerships can be created with the help of agencies. Hence, the agents themselves can teach a criminal how to be mindful about certain laws.

  5. Limited Liability Partnerships do not require scrutiny by regulators and some jurisdictions do not even ask for annual returns to be filed.

9.41. Money Laundering Through Limited Partnership

  1. Limited partners can compose of foreign corporate partners which are held by criminals.

  2. A criminal can invest in film production houses or real estate or private funds such as venture capital, private equity and hedge funds through Limited partnership structures.

  3. A limited partnership can hold property for a criminal.

  4. Limited partnerships are easy to form using agents. Hence, criminal can easily form these structures to launder money.

  5. Since Limited partnerships are pass through structures can be formed in tax neutral jurisdictions for tax evasion purposes.

9.42. Money Laundering Through Logistics Companies

  1. Logistics companies can involve in over or under invoicing or ‘ghost shipments’ to benefit criminals

  2. Logistics companies can aid in transportation of illegal drugs and counterfeit goods for laundering money.

  3. Logistics companies can aid bulk cash smuggling.

  4. Logistics companies need not do KYC as extensive as banks or sometimes, no KYC at all hence, giving leverage to Launderers for moving monies.

  5. Logistic Companies can aid undervaluing the goods being shipped and benefit launderers to settle money laundering payments.

9.43. Money Laundering Through Mining Companies

  1. Mining companies can be used to do trade-based money laundering.

  2. Illegitimate activity is more easily conducted through unregulated mining operators.

  3. Raw precious metals are easy to smuggle giving a chance to Money launderers.

  4. Criminal miners can run the organized crime groups and terrorist groups.

  5. Miners investing in Private funds such as Private Equity, Venture capital and hedge funds as these avenues require huge investments.

9.44. Money Laundering Through Mutual Funds

  1. The mutual funds can be used to structure funds.

  2. Mutual Funds shares can be purchased through cash.

  3. Mutual funds are usually open-end funds meaning, can be purchased and redeemed any time hence, vulnerable to Money Laundering.

  4. Mutual funds allow foreign investments in some jurisdictions.

  5. In certain jurisdictions, the mutual funds are not regulated. Hence, good avenue for criminals to convert funds by investing.

9.45. Money Laundering Through Mutual Savings Bank

  1. Since depositors or owners, criminals can syndicate to become major owners and have their influence in running the bank and thereby using the banks for money laundering.

  2. Mutual Savings banks are good avenues for structuring the funds.

  3. Criminals can perform layering using products and services of the Mutual savings banks.

  4. It is easy to open banking account in mutual savings bank and hence, vulnerable to money laundering.

  5. Mutual Savings banks are not as regulated as the commercial banks are hence, vulnerable to money laundering.

9.46. Money Laundering Through NBFI's

  1. Insurance companies accepting cash or offering trial periods are susceptible to money laundering.

  2. Investment management companies can carry criminal moneys for investments.

  3. A brokerage firm can help set up investment avenues and structures for criminals to launder money.

  4. Money services businesses and third-party payment processors can knowingly or unknowingly pass on money transfers for money laundering.

  5. Infrastructure finance companies can be held by criminals to offer loans to customers whose source of money is any crime.

  6. Criminals can take loans through loan companies or finance companies, and repay with ill gotten money.

9.47. Money Laundering Through NGO's

  1. Voluntary organizations receiving more dollars in foreign funds, makes the NGOs vulnerable to risks of money laundering and terror financing.

  2. NGO’s receive funds from multiple donors and currencies often in cash hence, vulnerable to risks of money laundering.

  3. NGO’s usually work within or near those jurisdictions that are most exposed to terrorist activity or the money laundering activity.

  4. NGO’s may have unpredictable and unusual income.

  5. NGO’s can have their most of the transactions in black and go un-noticeable.

9.48. Money Laundering Through OEIC's

  1. The OEIC’s can be used to structure funds.

  2. OEIC’s can be purchased through cash.

  3. OEIC’s are open end funds meaning, can be purchased and redeemed any time hence vulnerable to Money Laundering.

  4. OEIC’s allow foreign investments.

9.49. Money Laundering Through PIC's

  1. Private Investment Companies are typically used to hold individual funds and investments, and ownership can be vested through bearer shares.

  2. Shares of a Private investment company may be held by a trust, which further obscures beneficial ownership of the underlying assets.

  3. Private Investment Companies can offer confidentiality of ownership, hold assets centrally hence susceptible for money laundering.

  4. Private Investment Companies are frequently incorporated in countries that impose low or no taxes on company assets and operations and hence encourage tax evasion.

  5. Private Investment Company's require minimal or no record-keeping, hence can be easily exploited by criminals, money launderers, and terrorists.

  6. Private Investment Company's provide only a registered agent’s address, hiding the true identification of Beneficial's address or whereabouts.

  7. Private Investment Company's enable to hide the original originators of funds transfers.

  8. Private Investment Companies can be good conduits for wire transfers for criminals.

9.50. Money Laundering Through Private Equity Funds

  1. Private Equity funds are private placements hence, giving all the opportunity for criminals to invest in such funds.

  2. Private equity fund raises funds from foreign investors too, who can be criminals or can be criminally owned companies.

  3. Private equity funds are not regulated and hence, can be vulnerable to money laundering.

  4. Private equity funds can be used in the integration stage where money is already laundered and placed in Private equity funds for giving a cleaner picture for such funds.

  5. Foreign political corruption funds can be indirectly invested in Private equity funds.

9.51. Money Laundering Through REIT's

  1. Real Estate Investment Trusts operate in high-risk geographies and may also operate in sanctions countries.

  2. Real Estate Investment Trusts comes with complex holding structures

  3. Criminally held foreign entities and individuals can participate in investments with Real Estate Investment Trusts.

  4. REIT's accepts cash.

  5. REIT's can be used as vehicle for tax evasions.

9.52. Money Laundering Through Savings and Loan Associations

  1. Savings and Loan Associations are managed by members some of whom can be criminals and have a say in the decision making or route self-transactions without entering the details in the software of the S&L.

  2. Criminals can perform layering using products and services of the S&L.

  3. Criminals can deposit large amounts of cash easily in the S&L accounts.

  4. Illegal money’s can be converted to various term deposits offered by the S&L. After maturity, the same can be transferred back to the Savings account as proceeds of deposits.

  5. It is easy to join S&L. Hence, S&L becomes good venue for Money Laundering.

9.53. Money Laundering Through Broker Dealers

  1. Broker dealers can enable redeeming a long-term investment within a short period.

  2. Broker dealers can enable change of share ownership in order to transfer wealth across borders.

  3. Broker dealer firms can maintain securities accounts as nominees or trustees permitting concealment of the identities of the true beneficiaries.

  4. Broker dealers can be Engaged for market manipulation such as “pump & dump” schemes (meaning artificial inflation of price of security) and engaging in boiler room operations. A boiler room is a scheme in which salespeople apply high-pressure sales tactics to persuade investors to purchase securities.

  5. Broker dealers can enable customer accounts that are used only to hold funds and not for trading.

  6. Broker dealers can help investors in wash trading meaning enabling customer to do matching buys and sells in particular securities, which creates the illusion of trading.

  7. Broker dealers can enable customers to purchase bearer shares and physical securities in jurisdictions where it is legal to hold these securities.

9.54. Money Laundering Through Segregated Portfolio Companies (SPC's)

  1. The SPC’s can involve in Ponzi schemes.

  2. The SPC structure can be used to evade taxes.

  3. The SPC structure can be used for managing bad assets leading to willful defaults.

  4. The SPC's can be used for tax evasions as they are exempted in tax heavens.

  5. The SPC's can be easily formed.

9.55. Money Laundering Through Shops and Businesses

  1. Since these businesses are cash intensive, criminals have opportunity to co-mingle their ill-gotten money.

  2. Especially shops, they can run alternative remittance system such as hawala.

  3. Shops and establishments can be used as a means for structuring money.

  4. Shops and establishments can get involved in gambling and small betting.

  5. Shops and establishments can be used similar to front companies for laundering money.

9.56. Money Laundering Through SICAV

  1. SICAV can be used to structure funds.

  2. SICAV units can be purchased through cash.

  3. SICAV are usually open-end funds meaning, can be purchased and redeemed any time hence, vulnerable to Money Laundering.

  4. SICAV allows foreign investments in some jurisdictions.

  5. SICAV's can be a good avenue to evade taxes or launderers searching for alternative investments.

9.57. Money Laundering Through Sovereign Wealth Fund

  1. Sovereign Wealth Funds in jurisdictions with lax financial crime compliance can be haven to criminals especially involved in corruption and bribe.

  2. Sovereign Wealth Funds can hail from non-democratic regimes where the officers and managers are political appointees.

  3. Sovereign Wealth Funds can have a lack of transparency and unclear motivation.

  4. Sovereign Wealth Funds performance and corporate governance practices and also usage of funds are not known.

  5. Sovereign wealth funds are handled by PEP's, and hence can be vulnerable to Money Laundering.

9.58. Money Laundering Through Special Purpose Vehicle

  1. Because of their normally off-balance sheet, bankruptcy remote and private nature Special Purpose Vehicles can be used for illegitimate purposes.

  2. Special Purpose Vehicles are used for concealment of losses.

  3. Special Purpose Vehicles held by criminals can be used for money transfers, disguising these transactions as legal business transactions.

  4. Special Purpose Vehicles can be used for betting's or auctions to purchase something with illegal money.

  5. Complex structured products can be created using Special Purpose Vehicles such as CDO’s or CLO’s.

  6. Accounting irregularities can be used by criminals using a Special Purpose Vehicle.

  7. Criminals can get accesses to payable through accounts using Special Purpose Vehicle structures to clear checks and conduct wires.

  8. Criminals can structure money using Special Purpose Vehicles.

  9. Criminals use Special Purpose Vehicle structure to evade tax.

  10. Criminal companies can easily open accounts in international banks by sponsoring a Special Purpose Vehicle for doing transactions.

9.59. Money Laundering Through State Owned Enterprises

  1. Most of the State-Owned entity directors and signatories are PEP’s and, possibility of these PEP’s being corrupt.

  2. The transactions scrutiny level of an SOE is not so robust in banks as they are considered safe.

  3. As SOE's are active in the global marketplace hence, can be abused for high-profile scandals.

  4. Governments often issue operating licenses example, for exploitation of natural resources which can be mismanaged through bribery and corruption.

  5. Mis-appropriation of funds in SOE transactions and receipt of funds to offshore accounts is possible.