Legal Framework and Legal Framework and Regulatory Regime Required Regulatory Regime Required

for an effective AML/CFT for an effective AML/CFT SystemSystem

Richard PrattRichard Pratt

29 March 200529 March 2005

The context for the regulatorThe context for the regulatorThe essential elements for any effective The essential elements for any effective

regimeregime Criminalise Money Laundering/Terrorist Criminalise Money Laundering/Terrorist

FinancingFinancing Wide range of predicate offences Wide range of predicate offences Special requirements for certain institutions*Special requirements for certain institutions* Monitoring compliance with special Monitoring compliance with special

requirements*requirements* Compulsory suspicious transactions reports*Compulsory suspicious transactions reports* A Financial Investigation UnitA Financial Investigation Unit Powers to investigate and collect informationPowers to investigate and collect information Powers to freeze and confiscate assetsPowers to freeze and confiscate assets Domestic and international cooperationDomestic and international cooperation* * The regulator’s roleThe regulator’s role

How do money launderers and How do money launderers and terrorists abuse banks?terrorists abuse banks?

Cash transactionsCash transactions Rapid international transfer of fundsRapid international transfer of funds Complex transactionsComplex transactions Use of trusts and companiesUse of trusts and companies Identity theftIdentity theft Anonymous accounts / fictitious namesAnonymous accounts / fictitious names Disguising source of fundsDisguising source of funds Use of legitimate businessesUse of legitimate businesses Use of charitiesUse of charities Low value transactions for terrorist actsLow value transactions for terrorist acts

What AML/CFT Regulations on What AML/CFT Regulations on banks should coverbanks should cover

Corporate Governance / Staff TrainingCorporate Governance / Staff Training A risk based approachA risk based approach Knowing the customerKnowing the customer Limiting cash transactionsLimiting cash transactions Monitoring the accountMonitoring the account Complex account structuresComplex account structures Accepting funds only from known sourcesAccepting funds only from known sources Reporting suspicionsReporting suspicions

Corporate GovernanceCorporate Governance

Fit and Proper ManagementFit and Proper Management The Structure of ManagementThe Structure of Management The commitment of managementThe commitment of management A clear policy based on a risk assessmentA clear policy based on a risk assessment Controls and Monitoring (including audit)Controls and Monitoring (including audit) Record keepingRecord keeping Training of staffTraining of staff Regular review of policyRegular review of policy

A risk based approachA risk based approach Reputational, operational, legalReputational, operational, legal DrugsDrugs TerrorismTerrorism Capital flightCapital flight Fraud and tax evasionFraud and tax evasion Corruption and extortionCorruption and extortion Politically exposed personsPolitically exposed persons Risks inherent in new technologiesRisks inherent in new technologies

Knowing the CustomerKnowing the Customer

FATF 5FATF 5 Financial institutions should not keep anonymous Financial institutions should not keep anonymous

accounts or accounts in fictitious names accounts or accounts in fictitious names Financial institutions should undertake customer Financial institutions should undertake customer

due diligence including identifying and verifying due diligence including identifying and verifying the names of their customers, when: the names of their customers, when:

Establishing a business relationshipEstablishing a business relationship Carrying out occasional transactionsCarrying out occasional transactions There is a suspicion of money laundering or terrorist There is a suspicion of money laundering or terrorist

financing financing There are doubts about the accuracy or adequacy of There are doubts about the accuracy or adequacy of

information previously obtained.information previously obtained.

Due diligence must be applied to beneficial ownersDue diligence must be applied to beneficial owners

Knowing the CustomerKnowing the Customer

Applying a risk based approachApplying a risk based approach Identification and verificationIdentification and verification Drilling down through complex structuresDrilling down through complex structures Source of wealthSource of wealth Source of fundsSource of funds Transaction profileTransaction profile Monitoring transactionsMonitoring transactions Reporting suspicionsReporting suspicions

Client Risk Rating Client Risk Rating ( an Example)( an Example)

Due DiligenceDue Diligence Rating/Score

Rating/Score

OilOil

8-108-10

Risk FactorRisk Factor

Dom Co’s/Multiple Relationships

Dom Co’s/Multiple Relationships

22UK

UK

Drug producing country

Drug producing country 8

8

66

1-31-3

36/7 = 536/7 = 5

4-74-7

NationalityNationality

DomicileDomicile

BusinessBusiness

ProfessionProfession

BusinessmanBusinessman

Origin/Source of Funds

Origin/Source of Funds

ComplexityComplexity

SharesShares

Asset VolumeAsset Volume

$80 M$80 M

66

22

66

66

Rating SystemRating System

CashCash

Applying a risk based approachApplying a risk based approach Understanding the purpose, source and directionUnderstanding the purpose, source and direction Reporting cash transactionsReporting cash transactions Reporting suspicionsReporting suspicions

Monitoring the AccountMonitoring the Account The risk based approachThe risk based approach Comparing with profileComparing with profile Identifying suspicions – the use of ITIdentifying suspicions – the use of IT The reason for the transactionThe reason for the transaction The reason for complexityThe reason for complexity The source of fundsThe source of funds The destination of fundsThe destination of funds Wire transfersWire transfers CharitiesCharities

TruckTruckSupplierSupplier

50%50%

50%%

The Isle of Man

Jersey

Switzerland

Nigeria

Understanding complex Understanding complex structuresstructures

The risk based approachThe risk based approach The purpose of the structureThe purpose of the structure The ultimate ownerThe ultimate owner Understand trustsUnderstand trusts

Assets

XYZ CompanyCayman Islands

ABC NomineesUK

DEF Trust Company(Jersey)

GHI Nominees(BVI)

JKL settlement(A Nevis trust)

Mr Smith

Where is the owner?

Funds from suspect sourcesFunds from suspect sources

A risk based approachA risk based approach Shell banksShell banks Correspondent banksCorrespondent banks Wire transfersWire transfers Bank secrecy jurisdictionsBank secrecy jurisdictions Non co-operating countries and territoriesNon co-operating countries and territories

Reporting suspicionsReporting suspicions

A reporting officerA reporting officer Training – what is suspiciousTraining – what is suspicious Monitoring and controlMonitoring and control Relationship with FIURelationship with FIU

Essential Regulatory PowersEssential Regulatory Powers To be independentTo be independent To make rulesTo make rules To vet businesses, owners senior officersTo vet businesses, owners senior officers To impose record keeping requirementsTo impose record keeping requirements To have access to all records, officers, premises, To have access to all records, officers, premises,

without noticewithout notice To mount investigationsTo mount investigations A wide range of sanctionsA wide range of sanctions To share informationTo share information

Regulatory ProcessRegulatory Process

Risk Based ApproachRisk Based Approach LicensingLicensing SupervisionSupervision EnforcementEnforcement

LicensingLicensing

Fit and ProperFit and Proper Competence, integrity, financially soundCompetence, integrity, financially sound

Directors, MLROs, Compliance Directors, MLROs, Compliance Officers, Officers,

Owners and controllersOwners and controllers Defining controlling shareholder, monitoring Defining controlling shareholder, monitoring

shareholdings, removing unfit controllersshareholdings, removing unfit controllers

Seeking informationSeeking information Imposing conditionsImposing conditions

SupervisionSupervision

On-site supervisionOn-site supervision Checking the Guidance and regulations are Checking the Guidance and regulations are

being followedbeing followed Sampling the filesSampling the files

Desk basedDesk based Periodic returns – eg on STRsPeriodic returns – eg on STRs

EnforcementEnforcement

Policy on investigationsPolicy on investigations Criminal or civilCriminal or civil

Staff training on evidence collectingStaff training on evidence collecting Risk based approachRisk based approach Graduated responseGraduated response Proper AppealProper Appeal

Regulatory EssentialsRegulatory Essentials

Risk assessment for the jurisdictionRisk assessment for the jurisdiction Clear regulatory objectivesClear regulatory objectives Regulatory planRegulatory plan Staff training and motivationStaff training and motivation Staff IntegrityStaff Integrity Monitoring ConsistencyMonitoring Consistency Risk based enforcementRisk based enforcement DeterminationDetermination

Legal Framework and Legal Framework and Regulatory Regime Required Regulatory Regime Required

for an effective AML/CFT for an effective AML/CFT SystemSystem

Richard PrattRichard Pratt

29 March 200529 March 2005