Anti Money Laundering and KYCFebruary 23, 2008

Money Laundering

Money laundering is where criminals attempt to

hide the true origins of the proceeds of their

criminal activities by making them appear to

come from a legitimate source. These proceeds

are often referred to as 'dirty money'.

Money Laundering Process

There are three main stages of the money laundering process:

• Placement

• Layering

• Integration

Placement

• Placement occurs when a criminal first 'places' the proceeds of their crime into the legitimate system.

• For example, this might be when a criminal deposits stolen money in a bank account.

Layering

• Layering consists of a series of transactions designed to distance the money from its original source and disguise its illegitimate origin.

• This makes the illegitimate source of the money more difficult for the authorities to trace.

Example : a 4 step transaction

• Example : prudential’s probound

• A criminal deposits stolen cash in a bank account

• The criminal draws a cheque on this bank account to purchase a Prubond

• The criminal surrenders the Prubond in a few days and receives a cheque

• The criminal pays the Prudential cheque into a different bank account

Integration

• Integration occurs when criminals, having been through the previous parts of the process, use their illegally obtained money as if it was legitimate. This means the illegitimate money ends up being integrated back into the legitimate economy.

• For example, a criminal could use the proceeds from the Prubond surrender cheque as a deposit to purchase a property.

FSA (UK)

• the FSA's objective in relation to money laundering is to help reduce financial crime

• money laundering compliance for the financial services sector is regulated by the FSA. The key pieces of legislation are the Money Laundering Regulations 2003 and the Proceeds of Crime Act 2002

• your own activities are also covered under the anti-money laundering regulations

• the penalties for non-compliance are severe, including unlimited fines and sentences of up to 14 years imprisonment

• All employees are legally required to report where they know, suspect or have "reasonable grounds to suspect" that a customer is or may be laundering the proceeds of any criminal conduct.

Suspicious activity reporting

• Suspicious Activity Reports made by employees within financial services firms provide intelligence to law enforcement agencies that genuinely makes a difference. These reports have led to the successful prosecution of criminals and the disruption of terrorist activity.

• Therefore, making a Suspicious Activity Report is not a box ticking exercise.

Acting on suspicion or knowledge

• You are legally required to make a Suspicious Activity Report when you are suspicious about a transaction, or when you know that a transaction relates to money from a criminal source.

There are two things:

• Suspicion

• Knowledge

Suspicion

A customer asks to surrender a large investment

made only a few weeks earlier. He seems to be

financially astute but he tells you that he only

invested the money for a short time pending

completion of a property transaction and he now

needs the money. You are suspicious because the

customer has lost money on the surrender and in

your view, the reason for the quick surrender is not

a plausible one.

Knowledge

For example, If you were processing a policy

application for a significant sum of money and you

knew that customer's only source of money was

from drug dealing, you would be legally required to

make a report.

Reasonable Grounds to Suspect

• You are also legally required to make a Suspicious

Activity Report in a situation where there are

"reasonable grounds to suspect" that money

laundering is occurring.

• This legal requirement has been introduced to make

it easier to prosecute people who were not

suspicious about a transaction when they should

have been.

What to look for

• high value cancellations where it would appear that the customer had no intention of taking up the investment or assurance product

• high value withdrawals (individual transactions or a number of withdrawals over a short period of time) starting soon after the investment, from a long term investment contract

• unusual sources or destinations of funds (eg other country, EU, Channel Islands and Isle of Man)

What to look for… contd.

• a customer notifying us of a change of address followed shortly afterwards by the encashment of a large investment where payment is to be made to a bank outside of the country

• requests for business where the customer is more interested in the surrender/cancellation arrangements than the investment return (especially where there is a loss)

• unusual requests eg dividing proceeds at maturity or surrender into several smaller amounts to a number of different people (possibly outside of the country), or a request to pay initial contributions in cash

What to look for.. Contd.

• resistance to reasonable requests for evidence of ID where

the customer has or wishes to have significant business

with the company (but not where a long term customer with

a low value policy objects to a request for further

verification because they do not consider it necessary

unless you have other reasons to be suspicious)

• requests for business from an unknown intermediary

outside of the country.

What to look for

• where you would not expect the customer to be able to afford the investment in question (perhaps because of where he or she lives)

• where a corporate pension applicant does not appear to be trading and does not appear to have any 'real' employees

When suspicions are around prior to the completion of transaction

• Where your suspicions are aroused prior to the completion of a transaction (and regardless of whether you have yet completed a suspicious activity report) eg:

• a large investment has been received and you do not know whether or not to accept it

• you are suspicious about an imminent customer payment

Contact the MLRO or one of his team for advice before completing the transaction

Tipping off

• Once you have made a Suspicious Activity Report, you cannot be prosecuted for failing to report the suspicious transaction or for assisting a money launderer. However, you do need to remember that once a suspicion has been reported you should ensure that you do not alert the customer to your suspicions during any subsequent dealings (Tipping-Off).

• If I have concerns about a customer's transaction, can I ask them any questions?

• Yes, this situation does not prevent you from asking the customer the normal commercial questions to help you to determine whether or not you should be suspicious. For example, if a customer surrenders a high value bond a short period of time after the original investment, you could ask the customer why, as they may have other options rather than surrendering. If you have any doubts about what you can say, you should contact me or one or my team.

• If I make a suspicious activity report against a customer, will they be able to claim against me in respect of a breach of customer confidentiality?

• No, the money laundering legislation protects you from any such claims when reporting suspicions and knowledge, provided that you have made the report in good faith.

High Risk Countries

• Countries who do not establish strong anti-money laundering regimes are considered to be particularly high risk in terms of potential for money laundering. These countries are described as Non-Co-operative Countries and Territories or NCCTs.

• Guidance must be sought from the MLRO or one of his team before completing a transaction for individuals, intermediaries, companies and other entities (including banks) in these countries/territories.

NCCT countries:

• Myanmar (Burma)

• Nauru

• Nigeria

In the context of Suspicious Activity Reports, management responsibilities consist of:

• ensuring employees are adequately trained

• keeping records to evidence that training

• advising employees where they have sought guidance on transactions

• where appropriate, adding comments to the report form

• where a report has been made, ensuring that the customer is not 'tipped off'

Know Your Customer (KYC)

KYC

• Many people mistakenly believe that KYC is just about client identity - it is not!

• The identity of a customer is, of course, very important and it does form a major part of KYC, but KYC extends beyond this and can include additional information.

KYC Process

Here are some of the key aspects of the verification of identity process and the wider KYC process:

• Verification of identity -

• Can you positively identify who you are dealing with?

• can you identify the person actually making the payment (if that person is someone else)?

• are they actually who they claim to be?

• do they live, or conduct business, at the address they have given?

KYC

• do you understand why and how a customer wants to transact a particular piece of business?

• what other business does the customer have?

• is the proposed business consistent with what we would expect?

Verification of identity and the wider KYC helps us to understand our customers' needs and potentially recognise suspicious behaviours.

• Some of the verification of identity process and the wider KYC is undertaken at the outset by an intermediary (such as a financial adviser or one of our key business partners). However, it is also up to us to 'know our customer' throughout the term of the policy and/or the duration of that customer's business relationship with us.

• Personal customers are usually people who:

• use the services of a financial adviser

• approach us directly, for example, when they: – apply for a stakeholder pension over the internet

– respond to a marketing campaign

– apply for other business or top-up an existing product

To verify the identity of personal customers, we need to verify:

• the customer's name

• the customer's address

Corporate Customers

• Corporate customers can come to us directly. For example:

• Limited Companies

• PLCs

• Partnerships (groups of individuals running a business)

• Sole traders (single individuals)

• regulated financial institutions

• Government Organisations eg Local authorities, government departments, etc

• Charities

• Due to their sometimes complex organisational structures, and the potential difficulties of finding out who really owns and controls them, corporate firms can be ideal vehicles for money laundering.

• The type of information and documentary evidence required to establish corporate identity varies depending upon the type of organisation and the nature of the product or service required.

• In addition, there are other circumstances where we have to verify people other than the client, for instance, some third parties making payments into our customers' policies, trustees or a person acting for our customer under a power of attorney.

• If this is the case we should try to establish and document the reason behind the creation of the power of attorney or trust.

Management Responsibilities

• Although the MLRO is an 'Approved Person' and assumes personal responsibility for anti-money laundering practices and procedures, all people in line management roles play an important part in the fight against financial crime.

• Managers, at all levels, are in a position to influence how seriously employees treat money laundering issues and can make a difference in helping to prevent products and services from being used for money laundering.

In the context of KYC, management responsibilities consist of:

• ensuring employees are adequately trained

• keeping records as evidence that training has been given

• keeping records to evidence that customer identity verification has taken place

• ensuring that any suspicious activity is reported to the MLRO

What records should be kept?

• Customer Records

• Internal Records

Customer Records

• a certified copy of documents used to verify identity (the copy can be held in paper or electronic form) or

• a record of where a copy of the evidence may be obtained (eg document source reference numbers on Intermediary Introduction Certificates (IIC's)

• transaction records, ie details of all types of payments in/out including those made by third parties

• All of these records (with the exception of transaction records) must be kept for a period of at least 5 years after the policy has terminated, matured or been surrendered. Transaction records must be retained for at least 5 years from the date of the transaction.

Internal records

• staff suspicious activity reports, National Criminal Intelligence Service (NCIS) disclosures and transaction monitoring reports

• compliance monitoring reports

• employee training records including: dates of training, training content, attendees, test results, etc

• These records must all be kept for a period of 5 years. Where it is known that a law enforcement investigation is ongoing relating to a NCIS disclosure, case records should be held beyond the 5 years until the MLRO approves their destruction.

Management Responsibilities

Managers must ensure that their people keep records of:

• customer identity verification

• policy transactions

• their anti-money laundering training

What is Fraud?

Combating fraud is the responsibility of all of us.

You should be vigilant and report any suspicion of fraud. All types of fraud need to be tackled, both internal and external. Here is a list of areas that constitute fraud:

• improper withdrawal of funds / making a false claim

• cheque theft / manipulation

• abuse of position for personal or financial gain

• theft of money and all assets, tangible or intangible, belonging to the company or another employee

• falsification / compromise of information or data for personal or financial gain

• corrupt payments, gifts, services or benefits from external bodies

• forgery resulting in personal or financial gain

• abuse of internal procedures / processes / equipment for personal or financial gain

• Fraud can be summarised as 'any deception or dishonesty by which a person or organisation gains, or intends to gain, an improper advantage over another'.

Thank You !!!