anti-money - afma€¦ · goodrem and champion boxer kostya tszyu. entertainment and sports...

A time to nurtureSowing the seeds of good compliance

LOOSE LIPSTips on how not to tip-off

ENEMY WITHINThe US shell company dilemma

LURCHING SPRINGBOKSouth Africa’s criminal woes

anti-money launderingCOMBATING MONEY LAUNDERING IN FINANCIAL SERVICES

FEBRUARY / MARCH 2007

EDITOR’S LETTER

ANTI-MONEY LAUNDERING 1FEBRUARY / MARCH 2007

I N ALL THE TALK about the new law,sometimes the basics are forgotten. Despitemuch political rhetoric over the danger

of terrorism-related funds, the two biggest laundering problems in this country – at leastthose where we seem to have abundant proof –are tax evasion and online fraud.

Andrew Walls, a principal consultant withinformation security specialist Cybertrust,says he believes the windows of opportunity for criminals are expanding as home internetusage continues to grow. It’s no longer the 15-year-old cyber hacker behind the scams,it’s now organised. There has been an influx of organised criminal elements into that general area of phishing, hacking and online fraud, he says.

Fraudsters are now increasingly using fake job offers as a guise to suck users into their traps. This has been used not only to get users to hand over sensitive information but more recently to recruit “mules” for money laundering operations.

The use of people to transfer drugs and/ormoney, a long-standing practice of the criminalfraternity, is being replicated in the high-techcrime environment.

According to intelligence analyst Rob McCusker at the Australian Institute ofCriminology, the mules (ostensibly innocentpeople unrelated to the criminal activity that creates the illicit funds) transfer relatively small amounts of money lodged in their bankaccounts to overseas accounts held by criminals.

Money mules seem to be recruited largelyfrom the US, UK and Australia and transfer illegal funds to criminals located primarily inparts of Russia and Eastern Europe. The basicprocess of muling itself is relatively simple,McCusker says.

A job advertisement offers work as “financial agent” or a “job-seeker” signs up andopens – or allows access to – a domestic bankaccount. The fraudsters then transfer victims’money to the job seeker’s account who thentransfers money to fraudster’s overseas account.The job seeker then receives commission.

Mules are recruited primarily through the use of cyber fronts (fictitious online companies which appear legitimate) or spam

advertisements (offering bogus employmentopportunities via email).

Titles for muling positions vary but haveincluded “private financial receiver”, “moneytransfer agent”, “shipping manager” and “sales representative”.

Over the next few months we hope to givereaders the most up-to-date insights into the latest laundering and fraud scams – and howsynergies between the two are proliferating. ■■

The terror's in the technology

By Adam CourtenayEDITOR

Upcoming AFMA anti-money launderingevents

■ Immediate steps to mobilising your organisation for AML/CTF4 April 2007, Sydney

■ Risk-based AML/CTF program, risk-based identification and verification17 April 2007, Sydney

■ Section 43B compliance reports

1 May 2007, Sydney

■ AUSTRAC’s audit and feedback process 15 May 2007, Sydney

■ Detecting and managing terrorist financing risk 29 May 2007, Sydney

■ Anti-money laundering magazine inaugural anti-money laundering and counter-terrorist financing congress & dinner13 & 14 June 2007, Sydney

For more information or to register contact Diana Zdrilic on 02 9776 7923 or [email protected]

CONTENTS


REGULARS

6 LONDON CALLING BY CHRIS HAMBLIN

How the Brits are adopting a light touch when it comes to due diligence

8 IN EUROPINION BY JULIE BEESLEY

How the EU hopes to construct a unified approach to AML

10 STATE OF THE NATIONBY BRETT WOLF

A potted guide to the big US events of last year

12 INSIDE STORYBY KENNETH RIJOCK

How the crooks are trying to derail internet due diligence

13 OPINION BY JOY GEARY

The use of a ‘requirements plan’ can go a long way to setting up a program

30 REGIONAL REVIEW: SOUTH AFRICABY JULIETTE ISHLOVE AND GARY GILL

The Rainbow Nation may be free, but the new South Africa also has a new criminal landscape.

35 INSIGHTBY JOE GARBUTT

We get the benefit of some early thoughts on getting to know your customer

38 RISK TRIGGERSBY MICHELLE HANNAN

How to see risks before they come – build a proper risk evaluation program

40 CASE NOTESBY MICHELLE HANNAN

How to know if you’re customer is doing well – or falsely inflating invoices

COVER STORY:A FLOURISHING CULTUREBY ALEXANDRA CAIN

With the shouting just about over, it’s time to look at what is needed to get with the staggered program.

LOOSE LIPS SINK SHIPSBY EMILY BRAYSHAW AND JULIE BEESLEY

There’s has been much confusion as to what constitutes “tipping off”. The averageemployee needs to get it right.

RELATIVE VALUESBY ANDREW YOUNG

Rules on ‘designated business groups’ have just come in. It’s mostly about who is related to whom.

OLD LAWS, NEW WAYSBY JOHN KAVANAGH

Now the master AML/CTF law is in, how do you stay compliant with the old ones?

FEATURES

18

23

28

33

NEWS

M ELBOURNE: The multi-govern-ment agency probe into the use ofoffshore tax evasion and tax

havens by wealthy Australians landed its firsthigh-profile scalp – the former promoter ofthe Little River Band, John Farnham, DeltaGoodrem and champion boxer Kostya Tszyu.

Entertainment and sports promoter GlennWheatley has decided to plead guilty to taxoffences in a deal with the Australian CrimeCommission (ACC).

Wheatley will be the first conviction byOperation Wickenby, the taskforce comprisingfive government authorities in their attemoptto indict wealthy individuals using illegal off-shore tax minimisation schemes.

Some of the allegations have Wheatleyusing the Swiss accounting firm Strachans to funnel funds overseas, citing a particularcase in 2003 where he used the Swiss firm

to minimise his tax liabilities from incomegenerated from promoting a Kosta Tszyu fight against American boxer Jesse JamesLeija in Melbourne.

Strachans allegedly sent Wheatley invoices for $700,000 for services not rendered. Wheatley’s company then allegedlypaid about $400,000 into offshore trusts managed by Strachans on his behalf.

The charges carry potential jail terms of up to 10 years.

“I’m trying to work my way through this,”Wheatley said this month after the convictionwas made public by the ACC. However, heexpressed frustration about his being made the scapegoat for the Wickenby taskforce.

“I haven’t thrown up anything in theACC’s way. Why am I the only celebritywho’s been named in this? There are supposed to be 300 of them.”

In February last year, Justice MinisterSenator Chris Ellison announced investigatorshad won a further $305m over seven years tospend on Wickenby.

In July, Treasurer Peter Costelloannounced the first three arrests and said therewould be more to come. But seven monthslater, only Wheatley has been charged.

Paul Hogan and his partner John Cornellhave been embroiled in the investigation, buthave not been charged. The case against threeGold Coast businessmen is reportedly stillworking its way through the CommonwealthMagistrates Court in Brisbane.

The ACC said this month that morecharges were imminent. “Investigations arecontinuing in Australia and overseas into anumber of similar complex cases involvingnumerous individuals,” it said. ■■

Australians are struggling to keeppace with a growing number ofonline threats from cybercrooks

developing new tricks to exploit a boomingpopulation of internet novices.

Andrew Walls, a principal consultant withinformation security specialist Cybertrust,says he believes the windows of opportunityfor criminals are expanding as home internetusage continues to grow.

“Unfortunately, for a lot of the users outthere, the dominant user of a computer in afamily is usually under 20 – the kids are betterat making heavy use of it, Walls said.

“The most worrying thing we see in the background is that there has been an

influx of organised criminal elements into that general area of phishing, hacking andonline fraud,” he said.

Fraudsters are now increasingly usingfake job offers as a guise to suck users intotheir traps.

This has been used not only to get usersto hand over sensitive information but morerecently to recruit “mules” for money laundering operations.

While such recruiting did not necessarilyinvolve accessing personal data, MatthewAuburn from the Australian ComputerEmergency Response Team says such laundering activities were nearly always tied to those behind other scams.

However, malicious software applications– or malware – were the subtlest form ofattack and work by installing themselves ontohome computers through internet connections.

Once installed, malware can potentiallycarry out any task a home user can.

“It can impersonate you, it can steal your data – it gains the rights of the user thatwas logged on,” Auburn said.

“In the past, you could just advise peoplenot to click on links . . . but now we’ve seenthe number of links to malicious sites expandto use not only those in emails but also instantmessages and postings to popular web discussion forums.” ■■

FEBRUARY / MARCH 2007 ANTI-MONEY LAUNDERING4

Wickenby charges first high flyer

Online crooks start to get organised

EDITORIAL

EDITOR: Adam [email protected]

CONTRIBUTING EDITOR: Emily Brayshaw

SUB-EDITORS: Siobhan Brahe, Leah Ingram

CONTRIBUTORS: Charis Palmer, Nick Kochan, John Kavanagh

PRODUCTION AND DESIGN

CREATIVE DIRECTOR: Jo Fuller

PRODUCTION MANAGER: Fiona McLennan

PHOTOGRAPHY: Craig Newell, See4

PUBLISHINGREGIONAL SALES MANAGER: Diana Zdrilic – Tel: + 61 2 9776 [email protected]

ANTI-MONEY LAUNDERING MAGAZINE IS PUBLISHED SIX TIMES A YEAR BY

AFMA Services – Level 3, 95 Pitt Street, Sydney NSW 2000.GO Box 3655, Sydney NSW 2001 Tel: + 61 2 9776 4411 Fax: + 61 2 9776 4488

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Disclaimer: This publication is designed to provide accurate and authoritative information in regard to the subjects covered. It is distributed with the understandingthat the AFMA Services is not engaged in rendering legal, accounting or other professional service. If legal advice or other expert assistance is required, the services of competent professional persons should be sought.

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NEWS

EU hampered by failures to implement AML laws


NASD fines BAI$US3m over compliance failures

N EW YORK: The NASD announced lastmonth that it had fined Banc of AmericaInvestment Services $US3m over the

firm’s failure to obtain customer information for cer-tain high-risk accounts.

It said BAI also failed to have adequate com-munication with its parent bank to ensure thatBAI’s independent suspicious activity report filingobligations were met.

NASD found that BAI failed to obtain requiredadditional customer information for high riskaccounts.

The 34 accounts at issue involved trust and pri-vate investment corporations domiciled in the Isleof Man and apparently affiliated with one family.

The offshore entities located in the Isle of Mancollectively held from $US79m to $US93m inassets and engaged in multi-million-dollar wiretransfers across international boundaries.

At the time the accounts were opened inAugust 2003, BAI had established anti-moneylaundering procedures designed to address certaincustomer account risks by requiring additionalinformation from the accountholders. ■■

The European Union’s fight againstmoney laundering is being hampered by member states’

improper implementation of EU law acrossthe bloc, according to a new report.

EU member states “fell some way short”of creating a consistent anti-money launderingregime across the EU when they implementedthe 2001 second money laundering directive,concluded the study released in December by the City of London Corporation.

“An effective anti-money launderingregime, which deters and detects determinedcriminals without placing unrealistic burdenson honest businesses and their advisers, isessential if we are to maintain the integrityand effectiveness of the financial system,”said Michael Snyder from the City ofLondon Corporation.

“Within the EU single market, it is alsovital that this regime operates in a uniformmanner,” he added in his statement, explain-ing that there were major discrepancies inthe directive’s scope and interpretationacross the different EU countries.

The report pointed out that the waymember states identified and reported suspicious actions differed from each other,while some countries are too slow to react to fishy money movements making it impossible to take action against them.

It also says that the directive’s rules on “tipping off” clashes with the EU’s own Data Protection Directive giving thecustomer the right to obtain access to information about him or herself.

The directive was meant to be implemented in 2003 for the 15 old EUmember states and in 2004 for the 10 newEU countries. But Italy was six months late while Greece implemented the law two and a half years late.

The City of London analysed in detailhow the directive was implemented in sixcountries – UK, Spain, Italy, Greece,Poland and Lithuania.

The report comes as European policymakers and regulators will strive to implement the third money laundering directive in 2007. ■■

I N THE National Electricity Market (NEM), electricity flows througha gross pool where all generators’ production is scheduled to meetanticipated demand. Generators of 30MW+ must submit bids to the

market administrator, NEMMCO, for their intended generation targets foreach half-hour dispatch interval on the day before supply is to occur.

NEMMCO uses the pool to:• match supply and demand• select generators for despatch based on price and availability• determine the pool price for every half hour interval for each NEM

region (spot market)• publish the spot price after each trading interval• effect financial settlements within the market through Austraclear.

As demand increases, NEMMCO dispatches more expensive plant. To protect the market, a price cap is set at $10,000 per MW/h. The spotmarket is volatile and unpredictable due to weather conditions and genera-tion availability. Participants hedge their risk exposure through derivatives.

Electricity derivatives are exchange-traded on the SFE or negotiat-ed off-market between counterparties, directly or through a broker andare traded almost exclusively between NEM registered participants.OTC derivative transaction terms are determined by the InternationalSwaps and Derivatives Association’s global Master Agreement.

To deal in NEM electricity derivatives, a party:• must hold an Australian Financial Services Licence• is subject to supervision by ASIC• must be a member of Austraclear (requiring bank sponsorship)

• must have a BBB- minimum credit rating/bank guarantee, and• is subject to SFE rules and oversight for exchange traded

derivatives.Major participants in the derivatives market are also in the

physical electricity market which is subject to oversight by the ACCC,NEMMCO, the Australian Energy Market Commission and theAustralian Energy Regulator.

AFMA, through our Electricity Committee, promulgates MarketConventions to ensure efficient and orderly markets in electricity derivatives. AFMA Financial Markets’ members undertake to observethe AFMA Code of Ethics/Code of Conduct which provides a framework for ethical and transparent market conduct.

Based on the unpredictability of cash flows, barriers to entry andprudential requirements discussed above, it would be impractical andunrealistic for a money launderer to enter the NEM. The market is discrete; participants are highly visible and are government owned orlarge corporations, making it unamenable to AML/CTF abuse.

However, Table 1, item 35 of section 1 of the AML/CTF Act,appears to apply to electricity derivatives. Compliance costs would be considerable and would raise electricity prices, for no perceivableAML/CTF benefit. Accordingly, AFMA and its electricity memberswill be seeking an exemption/reduced compliance for the NEM electricity derivatives market from the AML/CTF Act. ■■

- Patrick Searby, AFMA

Why electricity derivatives should not be in on the Act

NEWS


T HE PHRASE on everyone’s lips inLondon at present is “simplified due diligence”. This is a reference

to firms taking a “light touch” approach tocompiling information about customers ifthose customers seem unlikely to be crooks.The new European Union directive, which the UK must obey, contains explicit references to situations in which financial and other companies can make less rigorousenquiries than usual into people’s backgrounds and habits.

New regulations, old problemsTo enshrine the directive in British law,the UK government has published a new list of money laundering regulations. In them, it has decided that the concept of simplified due diligence is best applied,in the main, to certain insurance products.Life insurance policies “where the annualpremium is no more than €1000 (A$1680) or where a single premium of no more than€2500 is paid” fall into this category.“Employer-led pension funds” do also; pensions into which employees make contributions do not.

The directive does not, of course, cure all ills. It leaves EU countries far too muchlatitude in defining the term “beneficialowner”. It subverts the informal British “10 per cent rule” by which British banks perform extra due diligence on the beneficialowners of more than 10 per cent of a company. The Europeans originally thought of using this figure in their directive, but political expediency reared its head and thepercentage was raised to 25. This is likely to lead British MLROs to cut the amount of verification and monitoring they do in this area.

PEPs under interrogationDwarfing the new financial criminal laws is the spectre of governmental collapse.Britain’s ‘cash for honours’ probe began last year when people who had made large(and undisclosed) loans to the ruling Labour party before the general election of 2005 were subsequently nominated for peerages. It has since grown into a government-threatening scandal.

Australian MLROs at private banks whoare on the lookout for controversial politicallyexposed persons might want to memorise thenames of the following political apparatchiks.The Financial Action Task Force is not yetcalling for MLROs to risk-weight PEPs fromtheir own countries, but this list should be of interest to compliance folk everywhere outside the UK.• Jack Dromey, treasurer of the ruling

Labour Party and the husband ofConstitutional Affairs Minister Harriet Harman MP. He is also DeputyGeneral Secretary of the Transport and General Workers’ Union. Date of birth 21 September 1948.

• Des Smith, 60, a head-teacher whose job it has been to attract sponsors for a failing educational initiative to do with ‘city academies.’

• Lord (Baron) Levy, Labour’s chieffundraiser whose nickname is ‘Lord Cashpoint’. His full name isMichael Abraham Levy. Date of birth 11 July 1944.

• Professor Sir Christopher Evans, 48, aWelsh biotech tycoon. He runs MerlinBiosciences, which is currently the subject of investigation by the SeriousFraud Office because someone seems to have misappropriated £2.5m.

• Ruth Turner, director of government relations. Born in Dublin 1970.Smith, Levy, Evans and Turner have

all been arrested – in Levy’s case, twice.Turner has also had to face a charge of perverting the course of justice. Newspapersare taking this as evidence of a cover-up.

A farewell to EarlThe Home Office’s shortcomings are not limited to a bad prison policy. The much-vaunted Assets Recovery Agency, the setting-up of which was the centrepiece of the Proceeds of Crime Act 2002, is beingpulped and its personnel soaked up by theSerious Organised Crime Agency. There are many reasons for this, and some involve the agency’s ineffectiveness inNorthern Ireland.

The fundamental reason for the ARA’sdeparture, however, was best described by one opposition MP: “This financial yearalone it spent £18 million to recover £4.3 million.” It was also a long-standing mysterywhy the government picked Jane Earl, apleasant middle-aged lady from the world of local government with no crime-fightingexperience, to lead the agency.

The ARA was originally set up to impoverish the 50 or so “Mr Bigs” of crime. In October an Irish computer chip billionaire agreed to pay a considerable sum in cash – its biggest result. Apart fromthis triumph, however, the agency failed to bring down a single additional Mr Big. Its failure has now entered the public consciousness as a small part of the HomeOffice’s greater failure. Governmental collapse – the grand theme behind the evolution of financial crime policy in the UK– continues to take many forms. ■■

No hard diligence please– we’re British

LONDON CALLING

By Chris HamblinEDITOR-IN-CHIEF

COMPLINET

There’s the ‘take no prisoners’ way of interrogating customers and the‘light touch’ approach. The Brits have made a speciality of the latter.

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NEWS


M EMBERS OF THE EuropeanUnion have until the end of 2007to enshrine the European Union’s

Third Money Laundering Directive (ThirdDirective) into local law. On 22 January 2007,the UK government issued a 110-page draft of its new Money Laundering Regulations, tobring the Third Directive into British Law.This followed responses from financial firmsto a consultation paper published in July2006. The public consultation is open until 2 April 2007 and the UK government willimplement the regulations by December 2007.

The proposals include:• extended supervision so that all businesses

in the regulated sector comply with moneylaundering requirements, including estateagents, trust and company serviceproviders and unsecured lenders;

• strict tests to ensure people runningmoney services businesses and those who help set up trusts and companies are fit and proper;

• extra checks on customers who firmsidentify as posing a high risk of moneylaundering, including beneficial owners;

• a requirement to establish the source ofwealth for those in high-risk situations,for example those involving deals withpolitically exposed persons (PEPs); and

• a strengthened and risk-based regime incasinos in line with, but more robust than,international standards.

In addition to taking tough action wherethe risks require it, the government hopes that the measures announced will reduce regulatory burdens in “low risk” areas.

For example:• firms will be able to make fewer

checks in low-risk situations, such as employer-led pension funds and child trust fund administration;

• the number of identity checks will bereduced with firms being able to relyupon checks of other firms in certain situations; and

• greater flexibility will be introduced to record keeping rules so that firms can keep important details rather thanwhole documents.

For higher risk areas, many sectors havevoiced concerns about requirements regardingfirms’ verification of “beneficial ownership”.The UK government has decided to take anapproach similar to that of the Treasury’s JointMoney Laundering Steering Group in itsattempt to resolve this issue. The proposalsstated: “The government expects supervisorsor industry to develop guidance on whatmeasures can and should be undertaken tomeet the requirements imposed to ascertainthe beneficial owner. The government willwork closely with these bodies to ensure thatthe requirements and any subsequent guidanceare as helpful as possible.”

For lower risk areas, the government has‘fleshed out’ the Third Directive’s concept ofsimplified due diligence, whereby a productor customer can be regarded as “low-risk”enough not to warrant “identification, verifica-tion and continuing monitoring”, although thegovernment has decided that all products andcustomers should be monitored continuously.This appears to be more stringent than thestipulations of the Third Directive.

The government has also decided that theconcept of simplified due diligence is bestapplied, in the main, to certain insurance products such as life insurance policies andemployer-led pension funds, but not pensionsinto which employees make contributions. Theregulations also suggest the imposition of vari-ous limits and product definitions that shouldpertain to simplified due diligence. One of itsaims in imposing such limits is to ensure thatpeople who use insurance products as collateralin financial transactions cannot abuse the system by forming a conduit for laundering.

On the PEP front, the UK government has decided against the publication of an official list of PEPs. It has aligned itself with the EU’s definition and has ruled that this should guide firms in identifying PEPs. Few doubt that this decision has been influenced by cost considerations and by the embarrassment that the government could suffer should it issue incorrect or contradictory lists.

The government has proposed a definitionof foreign PEPs, which encompasses both the Financial Action Task Force’s (FATF) definition and the Third Directive’s definition.The directive refers to “the country of residence” as the crucial country, whereas theFATF definition refers to the location of theperson’s prominent public function only. The government has pledged to decide on thedefinition that “better captures the risk” buthas inserted both definitions in the draft regulations, presumably as a stop-gap. ■■

Sources: Media-Newswire.com, Complinet.com,Dow Jones International News

More than just a patch jobKPMG’s Julie Beesley explores Europe’s attempts to harmoniseanti-money laundering and counter-terrorism financing legislationfrom its current patchwork of inconsistent regulations.

IN EUROPINION

By Julie BeesleyASSOCIATE DIRECTOR,

KPMG FORENSIC

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NEWS


Developments at TreasurySome key developments occurred in the hallowed halls of the Financial CrimesEnforcement Network, the Office of ForeignAssets Control and the rest of the US Treasury Department.

The changes in leadership were significant.In March, William Fox accepted a senior anti-money laundering post with Bank of Americaand handed FinCEN’s reins to Robert Werner,who had previously been the head of OFAC.However, by year’s end Werner had accepted asenior compliance post with Merrill Lynch,Adam Szubin was leading OFAC and FinCENwas searching for a new honcho.

Treasury’s top spot also changed hands. In late May, Treasury Secretary John Snowresigned and was replaced by Henry “Hank”Paulson, who had been the chairman and chiefexecutive officer of Goldman Sachs. Some arehopeful that Paulson’s appointment may preventthe implementation of a mandatory cross-borderfunds transfer reporting regime for banks.

The Terrorist Financing Tracking ProgramSince the attacks of 11 September 2001, USofficials on the trail of terrorists and terrorismfinanciers have used subpoenas to access dataheld by the Belgium-based funds transfer service known as SWIFT. Since the US mediaexposed the program in June, European Unionprivacy officials, and those of several of itsmember states, including the UK, have questioned its legality.

In fact, in November, the so-called Article29 Working Party, the EU’s advisory body ondata protection and privacy issues, threatenedsanctions for SWIFT and its member banks ifthe data sharing continued. It does not appearthat the US Government has any plans to halt,or even cut back, the TFTP, and SWIFT has nothinted that it will stop playing ball either.

FinCEN and the Securities and Exchange Commission sign MoUOn 21 December, just as everyone was leavingthe office for the holidays, FinCEN and the SECdropped something of a bombshell, announcingthat they had signed a memorandum of under-standing that will allow them to exchange infor-mation about BSA compliance at SEC-regulatedfirms.

“The agreement will better ensure thatSEC-regulated firms have robust [AML] pro-grams and assist the agencies’ efforts to identifyfinancial institutions with significant BSA viola-tions or deficiencies and take enforcement andother action,” the agencies stated in a release.

Since December 2005, when FinCEN andthe SEC worked together to gather evidenceagainst Oppenheimer and Co. for a $2.8m civil money penalty, securities firms have been bracing for a hail storm of penalties.Those fears were no doubt exacerbated by the signing of the MoU.

Scrutinising domestic shell companiesA US Senate subcommittee began doggedlypursuing its investigation of so-called domestic“shell” companies this year. Many of the non-publicly traded limited liability corporations,particularly those created in states with especial-ly lax incorporation rules, offer their ownerscomplete anonymity, making them the perfecttool for laundrymen and terrorism financiers.

This comes as no surprise to those in theAML arena. Most interesting is the fact that USpolicymakers may finally be taking an interestin correcting the long-standing problem and thereason is apparent; global criticism has madethese companies an embarrassment.

“Our failure to identify company ownersnot only violates a US promise to comply with international [anti-money laundering] standards, it invites criminals to set up and

misuse US companies,” said Senator Carl Levin(D-Mich.), a member of the US SenatePermanent Subcommittee on Investigations,during a hearing in November.

Challenge to 314(b)In late November, a Muslim charity in Michigansued a bank planning to close its accounts and challenged the constitutionality of USA PATRIOT Act Section 314(b), which allowsbanks to share information regarding possiblemoney laundering or terrorist financing activity.

Life for Relief and Development, foundedby Iraqi immigrants in 1992, filed its lawsuitagainst Comerica Bank in the Eastern District ofMichigan on 22 November. This action wastaken over following a raid on Life by the FederalBureau of Investigation, after which Life wasinformed by Comerica that its accounts would beclosed. The complaint also states that during ameeting with Comerica, Life learned that thebank “plans to invoke Section 314(b) of thePatriot Act during the closure” of the accounts.

Challenge to president’s authorityto designate terrorist groupsA Texas-based Muslim charity, which isaccused of funding the Palestinian terroristgroup Hamas, has filed a motion seeking thedismissal of half of the federal charges it currently faces. Lawyers for the Holy LandFoundation filed the lawsuit in the NorthernDistrict of Texas in an attempt to take advantageof a late November federal court ruling.

In that decision, California District CourtJudge Audrey Collins ruled that the presidentialpractice of designating “terrorist organisations”is unconstitutional. Holy Land and five of itsofficers are scheduled to go on trial in July onterrorist financing and money launderingcharges. In response to Collins’ ruling, the charity claims the government must dismissmore than half of the 42-count indictment. ■■

A potted guide to the big events of 2006They say that what happens in the US eventually reverberates every-where else. Here are the important trends and events that occurredin the US last year which may provide an inkling of things to come.

STATE OF THE NATION

By Brett WolfMIAMI CORRESPONDENT,

COMPLINET

anti-money laundering 2007ANTI-MONEY LAUNDERING MAGAZINE’S INAUGURAL CONGRESS PROGRAM AND DINNER

13th & 14th June 2007, Sydney

For further information on sponsorship opportunities or on the conference, call Diana Zdrilic on 02 9779 7923 or email [email protected]

Program OutlineDAY ONE – 13 JUNE 2007

8:00am Registration and coffee

8:20am Welcome from Duncan Fairweather, Executive Director, AFMA

8:30am Welcome from the chair

8:40am My life as a laundryman: Current and future trends in money laundering

9:20am The new regulatory environment: Feedback from the regulator on implementation process to date

9:40am Q & A with AUSTRAC

10:00am Morning tea break

10:30am PANEL DEBATE: Building better partnerships between reporting entities

11:00am PANEL DEBATE: Implementing the government’s AML/CTF reform – the current and future challenges for fi nancial institutions

11:50am Developing a robust risk assessment methodology

12:30pm PANEL DEBATE: Identifying trends in money laundering, terrorist fi nancing and their predicate crimes

1:20pm Delegate luncheon

2:30pm Identifying the money laundering risk in mutual, wealth and funds management sectors

3:10pm Identifying and mitigating money laundering risk in retail banking products and channels

3:50pm Afternoon tea break

4:10pm Money laundering risk in trade-based fi nancing/operations and alternative remittance providers

4:50pm Identifying money laundering risk wholesale banking products

5:20pm Identifying and assessing country risk

5:50pm Cocktail reception

6:30pm End of conference

ANTI-MONEY LAUNDERING MAGAZINE DINNER

7:00pm Registration

10:00pm End of dinner

DAY TWO – 14 JUNE 2007: MASTER CLASS SERIES

8:30am Developing an effective Anti-Money Laundering Training Program

10:00am Morning tea break

10:15am Know your Customer: Wholesale, Retail and Funds Management

11:45am Tea Break

12:00am Monitoring

1:30pm Delegate luncheon

3:00pm PANEL: Australian AML Forum Question & Answer Session

4:30pm End of conference

>> <<

BROUGHT TO YOU BY

INSIDE STORY

M ONEY LAUNDERING reportingofficers and compliance officerswho routinely access the internet

as a means of performing due diligenceenquiries on new clients need to bear in mindthat money launderers and assorted otherfinancial criminals are also computer literate.Fraudsters and other financial criminals areoften skilled in certain tricks of the tradewhich could result in your staff passing a new accountholder who would have beendeclined if their history of deceiving financialinstitutions had been known.

First, when financial criminals find thatsome exceptionally negative informationabout their misdeeds has been posted to theinternet (whether through a news article,posting by victims, publishing of investigativestory, etc.), they often set about to practisedamage control. What is done is to postfavourable information, either directly or by having other sources do so, and to seekmultiple postings of their “legitimate”business operations, social and charitableactivities, and other internet information containing their names. This often results in a large number of new websites being pickedup by search engines on the first page or twoof any search, by one making enquires, suchas a compliance officer. This is accomplishedbecause most commonly-used search enginesdisplay the latest and newest websites first,reasoning that users desire the most currentinformation available and that old web datamay be stale, untrustworthy, or superseded by more updated internet postings, blogs,websites or news stories. What has beenaccomplished is a “dilution” of the damaginginformation; it has been relegated to one ofthe back pages of an internet search.

Many compliance officers, rushed toaccomplish due diligence enquiries due to alarge backlog of assignments, take a danger-ous shortcut; they only look at the first one ortwo pages of their internet search results.Generally, they reason that back pages areprobably not relevant to the subject, which is usually correct, but in this case, somewhereat the tail end of the search is the importantdamaging article that was missed.

The financial criminal was, therefore,able to hide the negative information behindthe mass of positive websites he created, orwere posted through his efforts. Remember,never take shortcuts in your internet due diligence research, lest you make the mistakeof not catching something important, locatedat the end of your search results.

Second, when performing internet duediligence searches, remember that not everyone has a last name that is easily spelledor pronounced. Whilst criminals often usealiases and incorrect birth-dates, they also liketo misspell their names on purpose, in orderthat law enforcement does not pick their previous criminal activities, or even convic-tions. They do not correct the authorities when they misspell their names, either phonetically, using common spellings, orignorance of foreign last names.

This can result in that misspelled nameappearing in newspaper and magazine articlesdetailing criminal investigations, arrests, andconvictions, as well as civil lawsuits, totallydifferent than that of the prospective bankclient whom you are checking.

Therefore, deliberately misspell the name of your search target whilst conductinginternet due diligence searches:

• Check all possible spellings of the lastname in a metropolitan telephone book,and run them all.

• Check under shortened forms of the first names, nicknames and initials.

• Run a Google search of the name,and look at the top of the page; doesGoogle suggest another spelling? Use that as well.

• If this is a foreign name peculiar to a certain country or area, check a regionalsearch engine from that country.

• Was the name Anglicised from anotherlanguage? In essence, take the time to check any

possible name variation; you may be surprisedat the results you obtain. ■■

Kenneth Rijock is a financial crime consultantfor World-Check. For more information, visitwww.world-check.com


By Kenneth RijockFINANCIAL CRIME CONSULTANT

WORLD-CHECK

Alias Smith and JohannesCrooks have many ways of derailing internet due diligencefrom posting fictitious information to simply misspelling theirown names. Watch for the tricks, warns Kenneth Rijock

REMEMBER, NEVER TAKE SHORTCUTS IN YOUR INTERNET DUE DILIGENCE RESEARCH, LEST YOU MAKE THE MISTAKE OF NOTCATCHING SOMETHING IMPORTANT, LOCATED AT THE END OF YOUR SEARCH RESULTS.

OPINION


A master list ofwork in progressAn AML/CTF requirements plan is a good way to avoid regulatory problems. Not only does it tie obligation to businessprocesses, it identifies the controls in place, and identifies the person responsible for managing those controls.

By Joy M GearyAML/CTF ADVISER

U NDER THE NEW AML/CTF Act, all reporting entities face the daunting prospect of having to satisfy Austrac thattheir AML/CTF approach meets the regulator’s requirements.

However, we know when we look at the provisions of the new legislation – and even the current draft of the rules – that many of the obligations are not expressed clearly enough to provide any certainty about what is required.

Many argued for the flexibility that has been provided and arepleased with the outcome. However, the dilemma of the risk-basedapproach lies in that very flexibility.

On the one hand, reporting entities have the autonomy to self-assess their risks of money laundering and terrorist financing,and take steps to identify, mitigate and manage those risks. On the other hand, if they make errors in that process, just through misjudging

uncertain matters, then they are exposed to the risk of breaching thenew laws and the heavy penalties attached.

In this new, uncertain world, a reporting entity needs to be confident that its AML/CTF processes are working as designed. The only way a reporting entity can have this confidence is to use controls to measure the quality of compliance. Typically an organisa-tion would create an over-arching compliance or requirements plan to map and drive the use of such controls.

There are at least four very good reasons why a compliance orrequirements plan is mandatory for reporting entities wishing to achieve a successful AML/CTF implementation.

The first reason is obvious: a list should exist of all the things that need to be done to oversee the quality of AML/CTF activities.

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OPINION

This is because they are so numerous and broad in their impact thatthey must be documented with dates and responsible persons allocatedto each of them. A requirements plan fulfills the function of that list.

Typically the requirements plan ties obligation to business processes, identifies the controls in place, and identifies the personresponsible for managing those controls. The regularity of controlsreview will be set out in the plan, driven by the importance of the business process and the obligation involved.

The second reason arises from the language of reasonableness and appropriateness that appears in both the new Act and the draftRules. It is likely a reporting entity will need to demonstrate to Austrac why its AML/CTF activities have these qualities. It would be unreasonable and inappropriate to manage a large number of activities without having a master list that provides a composite view of all aspects of its AML/CTF processes. Imagine telling Austrac on its first visit under the new regime that there is no masterlist of controls they can review?!

Reporting entities need to be able to use the contents of a require-ments plan as key evidence of a reasonable and appropriate approach to AML/CTF. Being unable to show this could lead Austrac to questionthe entity’s adequacy.

It helps when demonstrating reasonableness to point to compliancewith guidance from regulators. ASIC Policy Statement 164 makes specific reference to Australian Standard 3806-2006 as a useful tool for holders of Australian Financial Services licences when planning their compliance programs. Principle 10 of that Standard focuses on continual monitoring of compliance, and the use of a plan and controls in that process.

The third reason stems from the need to complete section 47 reporting. Section 47 reports will need controls that have beenembedded in the critical business processes that deliver AML/CTFcompliance. All such controls will need to be checked regularly and data captured from them in order to substantiate the contents of the reports filed under s47. A requirements plan provides the completeview of all controls, ensuring that none are missed in the preparation of the s47 report.

The fourth reason is associated with the requirement in the draftRules that reporting entities assess and manage changes in their moneylaundering and terrorist financing risk. Assuming a change has beendetected, a reporting entity needs to know which controls to apply tothe change and would not want to start creating controls from the start.The requirements plan acts as a repository for existing controls andmay, depending on its quality, also provide smart information about the linkages between controls. Doing this ensures that changes made do not introduce new risks.

Requirements plans may be simple Word or Excel documents.Alternatively they may be loaded into purpose-built software that provides users mastery of the plan contents via a set of intelligent functions. This level of mastery engenders reporting entities with thecapability they need to persuade Austrac that their AML/CTF activitiesare comprehensive, reasonable and appropriate. ■■

Joy M Geary is an AML/CTF consultant. Joy is the developer of theAML/CTF content for an AML/CTF requirements plan to be released by Lawlex at the end of February 2007. Enquiries, please contact Lawlexon 1300 555 585


IMAGINE TELLING AUSTRAC ON ITS FIRST VISIT UNDER THE NEW REGIME

THAT THERE IS NO MASTER LIST OF CONTROLS THEY CAN REVIEW?!

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SPONSORED FEATURE


Money laundering standards andstrategies are set by Barclays Group,which creates the policy that is appliedby the individual businesses withinBarclays and executed by the AMLCentre. The Centre is staffed by morethan 30 analysts, where customer activity across the product portfolioincluding current accounts, savings,international onshore and privatebanking in the UK is monitored for suspicious behaviour. Collectively, thisadds up to over 16,000,000 transactionsa day with a ratio of about 700,000accounts to each analyst.

There are three core strands toBarclays comprehensive AML strategy– the opening of accounts, manualalerts generated by the branch network, and the Fortent transactionmonitoring system.

At the Barclays AML Centre, the manual reports generated fromthe network branches and those generated by the transaction monitoring system are merged andinvestigated. The entire professionalteam of analysts deals with upwardsof 500 alerts a day.

Barclays Bank Deploys FortentTechnology to Fight Money Laundering

Customer profile Barclays is a UK-based financial services group, with a very large international presence in Europe, the USA, Africaand Asia. It is engaged primarily in banking, investment banking and investment management. In terms of marketcapitalisation, Barclays is one of the top ten banks in the world.

Barclays has been involved in banking for over 300 years and operates in over 60 countries with more than78,400 permanent employees. In the UK, Barclays has over 24,000,000 accounts.

FORTENT CASE STUDY: Barclays

The Fortent® system is a core component of

the Barclays risk management strategy and

its money laundering detection program.

Its scalability, powerful detection capabilities,

alert quality, and its ability to deliver

supporting information to assist our analysts

in their investigative work, coupled with the

workflow functionality, has radically improved

our ability to be highly effective and efficient

in the process of detecting money laundering.

We believe the only sure way of capturing all

suspicious behaviour is through the Fortent

philosophy that every transaction counts.

– Howard Smith, Manager,

Barclays AML Centre

Examples of Fortent AML detection capabilities

Barclays approach to anti-money laundering

Age rules Using Fortent to target different businessareas, e.g. small, medium and large, hasallowed Barclays to develop flexible rules forthese different businesses. The ‘age’ rulestarget new accounts in the first few months– a time when Barclays consider they aremost vulnerable in terms of criminal activity.

By looking at excessive turnover in theseaccounts in the early months, Barclays is ableto compare with anticipated turnover at thetime of account take-on and make an assessment accordingly. These rules were inputspecifically after discussion within Barclaysacross the multiple business areas.

Tax credit fraud Late in 2004, Barclays began to identifyaccounts being used as repositories for tax credit fraud, i.e. multiple bogus claims and also diversion of valid claims.Developing a rule that looks at the number and value of credits received to an account via BACS (BankersAutomated Clearing Services), the system used by the Inland Revenue to disperse funds, Barclays have been able to identify over 200 such accounts andassist in repatriation of a seven-figure sum to The Inland Revenue.

A major benefit that we get from

working with Fortent comes from

the fact that, because their system

is used in a large number of banks,

we are able to share experiences

through programs like the Fortent

User Group. As the nature of

money laundering is constantly

evolving, being part of the Fortent

community is a very useful source

of knowledge.

– Howard Smith, Manager,

Barclays AML Centre

SPONSORED FEATURE


The Fortent solution was implementedat Barclays in 2001. In 2004, the manualreports generated by the network wereintegrated into and with the Fortentautomatically generated reports. In2003, Barclays acquired The Woolwich,a home loans business, and was able tointegrate and start monitoring theiraccounts very quickly, demonstratingthe flexibility of the Fortent system.

The scalability and robustness of thesystem means that Fortent can monitorover 20,000,000 transactions per day onpeak days generating high-quality alertsfor further investigation.

“Whilst the quality of the alertsfrom the system is high, with over16,000,000 transactions flowing throughthe bank a day, we generate over 500manual and system triggered alerts aday. One of our key challenges is dealing with this number of alerts. Theaverage time spent by the analyst peralert is key. Using Fortent, we are ableto significantly reduce alert investiga-tion time, for both manual and systemgenerated alerts, by presenting the analyst with all the history, context andbackground they need to make a qualified decision on what action totake next,” commented Howard Smith,Manager of the Barclays AML Centre.

At Barclays, the Fortent AML soft-ware reviews all customer and account

activity based on individual and constantly adapting behavioural profilesthat are generated and maintained foreach account and customer. Each profileautomatically and continually self-updates. This allows for the effectivereporting of activity that is genuinelyunusual or suspicious. The sophisticateddetection techniques mean both previously unknown and existing formsof money laundering can be identified.

The software automatically organisesand presents all available informationrelating to detected unusual, suspiciousand high-risk activity, saving resourcesand time by streamlining the wholeinvestigation process. The workflowdrives the escalation process, automati-cally directing relevant information tospecific users, escalating as required andalso automatically generating reportsrequired by regulators.

“Such is the nature of money laundering that we are constantly learning and developing our approach.The Fortent technology allows us totune the system ourselves, to ensure we continue to capture previouslyunknown and potentially suspiciousbehaviour that could be linked tomoney laundering while ensuring thatthe quality of the alerts remains high.At the same time, it is able to accom-modate large spikes in transaction volumes,” said Howard Smith.

From a Barclays analyst perspective,the system is easy to use, providing all the data needed to investigate alertsefficiently and effectively. The systemalso supports the analysts in their investigation of manual alerts generated by the network, improvingtheir productivity. It provides a widerange of support information that canbe easily accessed through drill-down.

An essential component of any anti-money laundering solution is a powerfulworkflow management system to ensurealerts are tracked and followed througheither to closure or required reporting.“The Fortent workflow is very effective.It gives me control and visibility of whatis happening – which is critical, giventhe volume of alerts we are dealingwith,” observed Howard Smith.

One of the key requirements oftoday’s money laundering regulations isthe need to be able to archive all alertsthat have been generated over the previous six years, plus all the alerts that have been reported over the previous 12 years. One of the key developments in 2004 was adding theability to report direct through to NCISvia an encrypted e-mail link. Thisstreamlined the process by which theanalyst compiled the data and allowsfor a direct feed into NCIS’ database. Inturn, Barclays receive a direct feedbackin terms of updating their records.

FORTENT CASE STUDY: Barclays

• Ability to detect not only knownbut previously unknown suspiciousbehaviour.

• High detection rates through building behavioural and statisticalprofiles based on transactional customer activity across all lines of business.

• Highly scaleable, ability to dealwith over 16,000,000 transactions a day.

• Delivered alerts are supported by historical and contextual information, allowing the analyststo be highly productive in theirinvestigative work.

• Powerful and effective workflow to give management control andvisibility of alert status.

• Storage, archiving and search capability for historical alerts(record-keeping).

• Easy system for analysts and compliance officers to be trainedon and use.

• Highly flexible system capable of accommodating changes in thebusiness such as adding newlyacquired banks, lines of business,new products and customers.

• System can be tuned and modified to reflect recognisedchanges in market behaviour.

Summary of benefits realised by Barclays through the use of Fortent AML software

The role and value of Fortent

For more information on Fortent please contact Nigel Peach at 02 8216 0900

COVER STORY


Towards a flourishingcompliance culture

COVER STORY

I T’S ALL GUNS BLAZING in Australianfinancial institutions as they rush to buildimplementation programs to ensure their

systems comply with the new anti-moneylaundering (AML) and counter-terrorismfinancing (CTF) laws which received royalassent on 12 December 2006.

A staggered implementation program for the new laws has been developed by the Australian Transactions Report andAnalysis Centre (Austrac), the regulator in charge of the new laws.

This is to give organisations that areaffected by the new rules – particularly those that may not before have come underAustrac’s jurisdiction – the time to put in place procedures and processes to become compliant.

While some of the obligations, for exam-ple certain record keeping requirements, comeinto effect immediately, organisations have upto four years before they can be prosecuted forfalling foul of some of the new laws.

For example, organisations are likely not to be prosecuted for breaching the requirement to report suspicious transactionsuntil March 2010.

This is because when the deadline to comply with this rule comes into effect inDecember 2008, there is a 15 month moratoriumperiod that kicks in after the compliance dateduring which financial institutions will not beprosecuted for breaches of the new laws.

“But the amnesty is only partial. [To avoid prosecution of breaches of the new laws] you must be able to demonstrateyou have done your best to reach full compliance by the amnesty date,” says Allens Arthur Robinson partner Peter Jones.

The original 12 month moratorium period was extended to 15 months in recognition of the fact that final rules that tell organisations how to apply the new legislation are yet to be issued.

These rules are expected to be released inMarch 2007 (three months after the laws cameinto effect), hence the three month extensionto the amnesty period.

Draft rules were issued in July 2006 byAustrac, and it is understood there has beenextended consultation with industry over the final form of these rules.

The structure of the implementation period is designed to send a clear message toindustry: everyone has been given plenty oftime to gear up for this and there’s no excusenot to be working towards full compliance,notwithstanding that the lack of rules limitsthe amount of preparation that can be done.

“Don’t hold off – it’s important to startworking on your AML program now,” saysSteve Ingram, a partner at professional services firm PricewaterhouseCoopers.

Despite the dearth of final rules aroundthe new legislation, “financial institutions can organise their project teams and prepare agap analysis covering what is currently beingdone in the respective areas as compared towhat is known or expected to be required”,says Deutsche Bank’s Karen Khoury.

First things firstAs a first step, organisations that provideremittance services – that is, entities in the financial sector, the gambling sector,bullion dealers, as well as certain lawyers,accountants and potentially financial planners– need to register with Austrac. This can be done online.

Austrac is currently running a public education campaign in major newspapers toensure firms that offer remittance services areaware they may be caught by the new laws.

Before any work can be done towardscompliance, education needs to happen at theboard and senior management level to ensurethe powers that be are aware of the scope ofthe required program and have adequatelyresourced it. This is important – many are

comparing the scope of the AML/CTFreforms to the introduction of InternationalFinancial Reporting Standards, which costsome firms many millions of dollars.

“But effectively this is a change manage-ment program rather than compliance,” saysIngram. This is because the new laws impactso many areas within an organisation – fromproperly identifying new customers, to wide-spread monitoring of transactions to identifyanything that could be deemed ‘suspicious’.

One of the first steps organisations need to take when embarking on theirAML/CTF compliance program is to identifythe ‘designated services’ they offer that arecovered by the new laws.

The legislation includes a list of 70 different designated services that come underthe new laws, including opening accounts,making loans and issuing debit cards. Othertransactions that are considered designatedservices include providing life insurance policies, being involved in funds transfers and providing custodial services.

The new laws require those that are covered by them to identify the designatedservices they provide which fall under the new laws, and report this to Austrac.

This requirement came into effect on 13 December 2006, although the 15 monthnon-prosecution period applies to it to givefirms time to meet this obligation.

Although identifying designated servicesmight appear to be one of the simpler require-ments of the new laws, AAR’s Jones says thisis a tricky area because the final rules around


The AML/CTF Bill is in, much of the lobbying has come to an end and companies are faced with the task of creating a compliance program that needs to be flourishing in at least two year’s time. Alexandra Cain reports on what it takes to get with the program.

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The amnesty is only partial. [To avoid prosecution of breaches of the new laws] you must be able to demonstrate you have done your best to reach full compliance by the amnesty date

PETER JONESALLENS ARTHUR ROBINSON

COVER STORY

the new laws will contain more detail aboutwhat is considered to be a designated service.Organisations need this detail before they canmake a final list of their designated services.

A particular grey area relates to the saleof securities such as shares and derivatives. It is not yet clear whether share trading is covered by the new rules. Clarification on thisobligation is expected when Austrac issues the final rules around the new legislation.

“If on-market share trading does comeunder the new rules, potentially anyone selling securities as a business would have to identify the person buying the securities.This would be a major change to the wayfinancial markets are currently operated – currently there is no way of knowing who’s on the other side of an on-market share trade,” says Jones.

“This means that the requirements to keeprecords of each security trade apply until therules become clear,” he says.

Indeed, record keeping is one of the first requirements to come into effect, with companies expected to keep records of transactions and funds transfer instructions from 13 December 2006 (subject to the amnesty period). Most financial institutions will, however,already be doing this, although not necessarilyin a way that complies with the new laws.

Another early obligation relates to keepingdetailed foreign exchange records, and recordsof dealings with overseas banks – termed correspondent banking in the vernacular of the new laws. Those covered by the new AML laws have until 12 June 2007to put in place systems that comply with this requirement.

“Immediate records need to bekept for those transaction recordsand customer-provided transactiondocuments that relate to the provision of a designated service and for transferred ADI accounts. The specificrecord-keeping requirementsfor electronic funds transferinstructions that originateoverseas also have imme-diate effect,” says AnnaLenahan, a partner withAllens Arthur Robinson.

Many banks, particularlyinternational banks, willalready keep these records,but gaming houses and bulliondealers that have not before had to report to Austrac have work ahead of them to comply with this requirement.

Experts suggest that banks should alreadyknow the overseas financial institutions withwhich they interact, and be keeping up-to-datefiles about them that match the draft rules thatwere issued by Austrac in 2006.

At this point, it is also expected thatorganisations that are caught by the new lawswill be developing due diligence processes toensure they only transact with trustworthy foreign financial institutions.

Know your customerOne of the largest aspects of the new AML laws is the know-your-customer (KYC)requirement. Some of these new rules come into force on 12 December 2007,for example the requirement to implementcustomer identification procedures. Otherobligations come in on 12 December 2008,for example the requirement to implementongoing due diligence processes.

At the basic level, those caught by thenew laws need to work out what data theyshould gather from a new customer to becomecompliant, across all their product lines. This is a big job, and industry experts stressthat organisations need to start preparing now to comply with this requirement.

Gone are the days of the 100-pointcheck. Now, banks and others are requirednot just to identify their customers at the start of the relationship, but to keep an ongoing eye on their accounts and transactions.

“It’s more than knowing your customers, it’s about knowing the

purpose of a transaction and thebusiness of your client,” says Vicki

Grey from Gadens Lawyers,a specialist advisor to the

mortgage broking industry.“You need to know

what a normal transactionlooks like and set up systems to identify unusualtransactions,” she says.

These systems will rangefrom electronic monitoring ofdirect credit of salaries into customers’ accounts, to manualongoing customer due diligence.

“There will need to be somedegree of manual intervention, for

example an annual compliancecheck of the customer,” says Grey.

ANTI-MONEY LAUNDERING20

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It’s more than knowing your customers, it’s about knowing the purpose of a transaction and the business of your client

VICKI GREYGADENS LAWYERS

FEBRUARY / MARCH 2007

COVER STORY

This might involve a yearly review of acustomer’s account to see, for example, ifthere have been large amounts of moneytransferred into the account from overseas.

David Harley, senior manager, fraud prevention and control, Bendigo Bank, sayshis team is “working through risk profiling”of customers at the moment.

“From that, we’ll make other decisionsthat will impact business processes. This part of the program will drive the rest of theimplementation program,” he says.

“It will take time to build the KYC systems, they’re not something that are goingto be needed tomorrow, but you still have tobe doing a preliminary risk assessment,”says PwC’s Steve Ingram.

The mortgage broking industry has muchwork to do to become compliant with the new laws. Previously, there have been fewrequirements on mortgage brokers to performdue diligence on their customers, and it should be acknowledged that this is a low-riskarea for potential terrorist financing andmoney laundering.

Grey says “the know-your-customer rulesare the biggest looming issue. This is the area of most concern because of the lack of under-standing around these rules. Yes, draft ruleswere issued, but these don’t work with the act,particularly in [the mortgage broking] area. Itwill be difficult for those in the industry tomake the required changes by December 2007.”

“We’re telling clients to sit tight; we expectfinal rules in March. This is a particular issuefor non-bank lenders. It’s important the [mort-gage broking] industry adopts customer identifi-cation processes across the board,” she says.

Keeping tabsThere is a logical flow to the AML implemen-tation process, and it follows that once anorganisation has put in place systems to prop-erly identify its customers, robust record keep-ing procedures must be established to ensurebanks can properly report AML information tothe regulator on an ongoing basis.

Although some customer record keepingrequirements come into place immediately,

the requirement to perform ongoing customerdue diligence on customers, one of the mainrequirements of the new legislation, does notcome into effect until December 2008.

“The final milestone is in two years whenongoing customer monitoring processes mustbe up and running, and suspicious matter,threshold and IFTI reporting obligations willapply,” says Lenahan.

Experts suggest organisations caught bythe rules start sampling record retentionprocesses across business processes now, witha view to making changes to systems toensure record retention processes are in linewith the AML/CTF legislation. The ultimategoal is to make sure saved documents can beeasily retrieved later.

When the moratorium periods for breachesof the new laws end, this will be an easy areafor Austrac to focus on, so it’s important organisations pay close attention to ensuringrecord keeping processes are strong.

The final wordIndustry is particularly keen for Austrac to issue final rules on how organisations should monitor suspicious transactions.Organisations have until 12 December 2008 to put in place systems to report suspicioustransactions to the regulator.

Although this is one of the final requirements of the new laws, many firms are issuing tender documents for new softwareto meet this obligation now. Clarification on the rules around reporting suspicious transactions needs to happen to ensure software firms can be given concrete tender briefs.

“Those aspects with a lengthier imple-mentation period – such as the monitoringrequirements – reflect the complex technical,system and process issues involved with satisfying such requirements,” says Deutsche Bank’s Karen Khoury.

There is much work to be done in thefinancial services sector to meet the differentstages of the implementation program.

Lenahan says “the development of anappropriate program – that’s the biggest challenge, particularly for those that are conglomerates. We have lots of big clientswho have not had to do this before.”

This is a particular challenge, given thefact final rules around the legislation have not been issued by Austrac.

The advice being given is to start smallacross a number of areas, because there’s lots of changes expected once the final rulesare issued. ■■


It will take time to build the KYC systems, they’re not something thatare going to be needed tomorrow, but you still have to be doing a preliminary risk assessment

STEVE INGRAMPWC

The final milestone is in two yearswhen ongoing customer monitoringprocesses must be up and running,and suspicious matter, threshold andIFTI reporting obligations will apply

ANNA LENAHANALLENS ARTHUR ROBINSON

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FEATURE


Loose lips sink ships – steps to avoid tipping offThere has been much confusion about “tipping off” under the new Anti-Money Laundering andCounter-Terrorism Financing Act, with staff at reporting entities often unsure about the concept and what it means for them. In part one of this series, Emily Brayshaw and Julie Beesley fromKPMG shed some light on what tipping off is and what it means for the average employee.

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FEATURE


The offence of tipping off

P ART 11, DIVISION 3, section 123 of the AML/CTF Act creates theoffence of “tipping off”. On a

simplistic level this means that if a reportingentity has sent a suspicious matter report(SMR) to Austrac, then the reporting entitymust not tell anyone about it, least of all the subject of the report.

The reporting entity must not tell a personabout whom they have suspicion that theyhave informed Austrac about their suspicions.This includes not disclosing information to thecustomer about whom the suspicion has beenformed, journalists, the customer’s lawyer or legal team, the customer’s family, the customer’s business associates, people lodgingfreedom of information requests and otherreporting entities, to name a few.

This concept should not be new to anyreporting entities that were subject to therequirements of the Financial TransactionReports Act (FTR Act). While the FTR Actdoes not mention the term “tipping off”, thenew law creates the same offence as thatunder section 16(5A) of the FTR Act.

There is protection under both Acts toensure that reporting entities are protected in theevent that they report any suspicions they mayhave to Austrac. There are also strict provisionsin place for the handling of suspect transactionand suspicious matter reports: the information is distributed securely only to designated agencies with which Austrac has water tightinformation-sharing agreements; and the reportsmay never be used in court proceedings orreleased to the public via requests under theFreedom of Information Act.

Confusion surrounding tipping offMany staff members at reporting entities often confuse tipping off with enhanced due diligence procedures and are under the impression that they will “tip off”a customer if they request further informa-tion when conducting routine, enhanced and ongoing due diligence on higher-riskcustomers. However, this may be managedin some instances by communicating honestly and tactfully with customers. Clear communication with customers fromthe outset of the relationship regarding thelegal requirements to collect additional information about their business activities at regular intervals will ensure that the customer is accustomed to receiving such requests. It will also go a long way to helping them realise that just because

the reporting entity is asking for more information does not mean they are undersuspicion of being up to no good.

However, in spite of these simplistic explanations, tipping off remains yet anothercomplex issue of the new AML/CTF Act that reporting entities will need to grapple with. There are a range of implicationsinvolved when evaluating the risk of tipping off a customer that a SMR has been lodged against them. This is because the reporting entity must handle each case individually,according to the circumstances under which the SMR was lodged.

For example, what happens when a suspi-cion has been formed about a customer, butthe customer becomes increasingly moredemanding in their queries/requests for infor-mation held about them? Questions whichmay require a response include: “What is myrisk rating? Why is my funds transfer beingdelayed? Why are you asking me additionalquestions about beneficial ownership?”

This is where the response starts tobecome cloudy. In such instances, employeesmay make enquiries of customers for moreinformation and provide responses, but suchresponses and enquiries must be handled delicately to avoid tipping off. There are twoimportant steps to take into consideration:• All communication between a reporting

entity and suspected customer(s) MUSTbe actively managed and controlled.

• Employees must not be left unsupervised todeal with queries from customers aboutwhom a suspicion has been formed. Theseemployees will need help as they may facea lot of pressure from suspected customersand the customers’ legal advisers. In some cases, a customer may even ask theemployee directly whether they are undersuspicion. It may well be necessary totransfer responsibility for the conduct ofcommunications with a suspected customerto more senior employees.

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IT MAY WELL BE NECESSARY TO TRANSFER RESPONSIBILITYFOR THE CONDUCT OF COMMUNICATIONS WITH A SUSPECTED CUSTOMER TO MORE SENIOR EMPLOYEES.

FEATURE


When recognising tipping off in the context of each customer and individual case,the reporting entity may wish to consider howoften the customer contacts the organisation to conduct business. There may be a greaterrisk of tipping off a customer who communi-cates with an employee daily to conduct transactions, than of tipping off a customerwho only contacts the reporting entity whenthey need a new product or to change theirdetails. This is because the employee may be less guarded around a customer who theyknow well and let information slip, or mayfeel loyalty towards the customer and want tonotify them. The compliance officer should,therefore, determine the risks and prepareemployees appropriately.

Other processes to considerOther processes should be considered forstaff when evaluating the risk of tipping off.For example, reporting entities should lookto design ways in which call centre staffmay be helped to deal with requests forinformation that could potentially lead to tipping off. They should also consider the extent to which, and methods by which, details of SMRs are kept from customer-facing staff to manage the risk ofdisclosure, while balancing the need forsome of those staff to understand that a customer is higher risk so as to enable themto be more effective in their enhanced duediligence requirements.

Secure electronic and physical storageof SMRs and any documentation surroundingthem is also necessary to protect all of theinformation contained therein. Only a fewkey people within the organisation shouldhave access to that information and thoseemployees should be regularly and rigorouslytrained in AML/CTF and receive regularsecurity screening. It is important toremember that the subject of the SMR’s privacy must be protected, as well as the

privacy and safety of the staff member who reported his/her suspicions. Staff members must feel that they can report theirsuspicions without fear of reprisals.

Another way in which staff membersmay feel that they can report their suspicionsis to set up a secure ML/TF hotline, similarto an internal fraud line, that is managed by members of the internal investigationunit. Staff may report their suspicionsanonymously and those concerns can then be investigated by the reporting entity andreported to Austrac within the appropriatetimeframe (three business days for SMRsand 24 hours for SMRs that relate to terrorist financing). Such ML/TF hotlinesmust be kept internal to the reporting entityin order to avoid tipping off – the potentialfor criminal liability and security concernsinvolved in outsourcing such a hotline would not be worth any potential costs thatthe reporting entity may save.

Reporting entities may also wish to consid-er whether it is appropriate to freeze accounts oravoid making a payment for fear of “assisting”a money launderer or terrorist financier.However, in such instances, the criminal may be “tipped off” because he is suddenly unable toaccess funds. If funds are frozen, the criminalmay cut his losses and run, leaving law enforce-ment with no trail by which to catch him.However, an account that is still operational willprovide law enforcement with a source of information and evidence about money flows.In these cases, it is advisable to lodge the SMRand liaise directly with Austrac for guidance.

In other cases, law enforcement may contact a reporting entity and request that an account be blocked. The reporting entityshould confirm with the law enforcement the kind of information it is allowed to passon to the customer should the customer bring court proceedings to try to force payment from the account. The reportingentity may well need to obtain legal counselin such instances.

The same is true for situations where the reporting entity wishes to terminate a customer relationship after lodging an SMRconcerning that customer. Again, the riskexists that terminating the relationship may tip the customer off, but it may also jeopardisea law enforcement investigation. Reportingentities should, therefore, discuss with lawenforcement both their desire to terminate asuspicious relationship and ways to pass information onto the customer before it proceeds with the account closure. When terminating a relationship, reporting entitiesshould also keep a full record of where customer assets were transferred to in order to provide an “audit trail” for any investigation.Obtaining legal counsel in such cases is also important.

No smooth sailingClearly, tipping off is an area that manyreporting entities must learn to navigate,and there is very little comfort in these hostilewaters. However, the following may help to protect an organisation and its employeesfrom running aground:• clear communication with customers

about procedures where appropriate• close supervision of employees who are

dealing with high-risk and suspected customers

• working with law enforcement whereaccounts may need to be frozen or terminated

• tight internal reporting lines and protection/storage of SMR information

• obtaining legal advice where necessary,and

• treating and handling each case involvingan SMR individually. ■■

Part Two of this series will examine implications for reporting entities under s123 of the AML/CTF Act in relation to designated business groups.

��EMILY BRAYSHAW JULIE BEESLEY

FOCUS SHELL COMPANIES

L ATE LAST YEAR a US tax officialtestified before lawmakers includingCarl Levin, a Democrat, that the

laws of some states regarding the formationof legal entities, or shell companies, had such“significant transparency gaps” that they mayrival some of the most secret and attractive tax havens in the world.

“This domestic transparency gap is animpediment to both US law enforcement and the enforcement of tax laws in other

countries,” said Steven Burgess, director ofexaminations in the small business division of the Internal Revenue Service.

A top Justice Department official echoed those concerns, saying the lack of information on the beneficial ownership ofincorporated shell companies was a “hugelysignificant” problem.

Senator Levin, who represents Michiganand has previously attacked offshore centres

for depriving the US of tax revenues, told theSenate investigations hearing that a small percentage of companies incorporated in theUS function as “conduits for organised crime,money laundering, securities fraud, tax eva-sion and other misconduct”. The problem hasbeen caused, said Levin, by the fact that inmost cases, our states have no idea who isbehind the companies they have incorporated.


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US investigates the enemy withinA new front could be opening in the battle against tax evasion,money laundering and terrorist finance and it’s one thatemanates from within – US incorporated shell companies.

FOCUS SHELL COMPANIES

“A person who wants to set up a US company typically provides less informationthan is required to open a bank account or get a driver’s licence.

“States have been competing with eachother to set up new companies faster thanever, at less cost and with greater anonymityfor the company owners.”

He added that the anonymity they provide is “exactly what we’ve been criticising offshore tax havens for offering totheir clients”.

Levin said many US states will set up anew company in less than 24 hours, with anaverage fee of less than US$100.

In Delaware and Nevada, an applicant can set up a company in less than an hour foran extra $US1000.

“The problem with incorporating nearlytwo million new US companies each yearwithout knowing about who is behind them is that it becomes an open invitation for criminal abuse,” said Levin.

The FBI told the US GovernmentAccountability Office that “anonymously held US shell companies are being used to launder as much as US$36bn from the former Soviet Union”.

In January 2006, a US Treasury-led government money laundering threat assessment stated that “East European and Russian law enforcement agencies haveexpressed concern that regional criminalorganisations were abusing Delaware shellcompanies for money laundering”.

Levin said there were possible solutions.These include issuing new regulations for company formation agents to establish risk-based anti-money laundering programmesthat would “require careful evaluations ofrequests for new companies made by high-risk persons”.

Few will be surprised by Levin’s com-ments on shell banks. The Society of Trustand Estate Practitioners argued in June thatby incorporating anonymously owned UScompanies for foreigners, states are ignoringinternational “transparency” standards, evenwhile the government demands that othercountries adopt them.

The Financial Crimes EnforcementNetwork is also focusing on the risk that shell companies pose to financial markets by veiling ownership.

In both the keynote address and in theanti-money laundering breakout sessions at therecent NASD autumn securities conference inLos Angeles, representatives of FinCEN madenumerous recommendations for scrutinisingthe beneficial ownership of accounts (and thecompanies that have accounts).

These discussions, coupled with aFinCEN advisory issued November 9 2006,confirm that broker-dealers need to look closely at customer-identification program procedures in determining beneficial owner-ship. At a minimum, they need adequate information to know who the customer reallyis. Broker-dealers should have internal poli-cies, procedures, controls, systems and trainingprograms designed to prevent, detect andreport possible money laundering and otherfinancial crimes involving shell companies.

The FinCEN advisory was released alongwith an assessment showing that shell compa-nies can be exploited by money launderers andother perpetrators of financial crime becauseof the lack of transparency in the formationprocess and the inability to identify beneficialowners. To exacerbate a complex matter,FinCEN clearly included limited liability com-panies in its definition of shell companies.

While legal entities such as LLCs are legitimate corporate mechanisms, FinCENbelieves that states whose laws do not requireLLCs to disclose or report identities of members or managers are attractive to peopleseeking to form a shell company for illicit purposes. This is significant because there are47 jurisdictions in the US in which ownershipof an LLC may legally remain unreported,depending on how the LLC is structured. ■■


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(US) States have been competing with each other to set up new companies faster than ever, at less cost and with greater anonymity for the company owners

The problem with incorporatingnearly two million new US companies each year withoutknowing about who is behindthem is that it becomes an openinvitation for criminal abuse

SENATOR CARL LEVIN

LEGAL UPDATE

O N 15 JANUARY 2007, Austrac,released its draft Anti-MoneyLaundering and Counter-terrorism

Financing Rules (AML/CTF Rules) about thedefinition of “designated business group”.

The definition of a “designated businessgroup” is important to reporting entities,as the Anti-Money Laundering and Counter-terrorism Financing Act 2006(AML/CTF Act) provides that a reportingentity’s customer due diligence obligations as well as other obligations (such a recordkeeping obligations) can be discharged by another member of the designated business group.

In order to determine whether the administrative and compliance benefits that areavailable to members of a “designated businessgroup” are available to a particular reportingentity, it is necessary to understand the definition of “designated business group”and the practical effect of the draft AML/CTFRules on that definition.

Definition – AML/CTF ActA “designated business group” is defined in section 5 of the Anti-Money Launderingand Counter-terrorism Financing Act 2006(AML/CTF Act) as follows:

A designated business group means agroup of two or more persons, where:

(a) each member of the group has elected,in writing, to be a member of the group,and the election is in force; and

(b) each election was made in accordancewith the AML/CTF Rules; and


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There are some both controversial – and non controversial –aspects of Austrac’s recently released rules on designated business groups. Members of groups must be “related to” each other and each member must also be a reporting entity,says Andrew Young

Relative values – taken to the extreme

LEGAL UPDATE

(c) no member of the group is a member ofanother designated business group; and

(d) each member of the group satisfies suchconditions (if any) as are specified in theAML/CTF Rules; and

(e) the group is not of a kind that, under theAML/CTF Rules, is ineligible to be adesignated business group.

It is apparent, therefore, that as the definition of “designated business group”in the AML/CTF Act relies heavily on theAML/CTF Rules, it is necessary to considerthe AML/CTF Rules in order to determinewhether a person may be a member of a designated business group.

Definition – draft AML/CTF RulesUncontroversially, the draft AML/CTF Rulesrequire that a person’s election to membershipof a designated business group be made byway of an “approved form” (ie Form 1 in thedraft AML/CTF Rules).

Further, the requirement in the AML/CTFRules that the “approved form” be provided to Austrac by a “nominated contact officer”(who may be an “officer” under theCorporations Act 2001, or an AML/CTFCompliance Officer appointed to be a nominated contact officer), is also uncontro-versial, as is the requirement that the “nominated contact officer” notify Austrac of the withdrawal or election of a member,termination of the designated business groupor other details regarding the group or the“nominated contact officer”.

What is more controversial, however, isthe nature of the conditions to be satisfied formembership of a designated business group.

The draft AML/CTF Rules require eachmember of a group to satisfy one of the following conditions:

1. Each member of a group must be “related to” each other member of thegroup (pursuant to s50 Corporations Act2001) and each member must also be areporting entity.

This means that, unless one of the twoother conditions described below is met,reporting entities that are members of corporate groups cannot rely on relatedcompanies who are not reporting entities

(or non-related companies who are report-ing entities) to discharge the member’scustomer due diligence and reportingobligations under the designated businessgroup regime. Further, as this conditionalso only applies to related companies, itis not available to non-corporate entities.

2. Each member of a group must be providing a designated service pursuant to a joint venture agreement to whicheach member of the group is a party.

Although this condition does not expressly refer to each member being areporting entity, given that, subject tothere being a relevant “geographical link”with Australia (s 6(6) AML/CTF Act), anentity who provides a designated servicewill be a reporting entity, each party tothe joint venture agreement must be areporting entity in order for this conditionto apply. The parties to the joint ventureagreement need not be related companies(and need not be companies at all).

3. Each member of a group must be a company in a foreign country which, if it were resident in Australia, would be areporting entity and which is related toanother member of the group and thatother member is a reporting entity.

This condition is very narrow in that itappears to require each member of thegroup to be a reporting entity (by reasonof satisfying one of the “geographicallink” requirements in section 6(6)) of theAML/CTF Act) and a foreign company. It would appear, therefore, to apply onlyin circumstances where all members are

foreign companies and are all subsidiariesof an Australian resident company.

A further limitation of the designatedbusiness group regime lies in the fact thateven though a member’s customer due diligence obligations as well as other obliga-tions (such a record-keeping obligations) canbe discharged by another member of its designated business group, the designatedbusiness group regime does not provide anyrelief from regulation in circumstances wherea member provides a designated service toanother member of that group. Whether reliefin this regard will be provided through the asyet unpublished remaining AML/CTF Rules,is yet to be determined.

Scope for changeThe draft AML/CTF Rules could be improvedby allowing companies that are related to eachother – but are not reporting entities – to bemembers of a designated business group. This would allow those non-reporting entitymembers to discharge certain obligations ofother members that are reporting entities.

It is clear that although the designatedbusiness group regime can provide adminis-trative and compliance benefits to members of such designated business groups, unless the draft AML/CTF Rules regarding thesegroups are substantially amended prior tobeing finalised, the regime will be limited inits scope and application and is likely not toprove to be the regulatory panacea hoped for by many reporting entities. ■■

Andrew Young is a senior associate at Blake Dawson Waldron lawyers in Sydney


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What is more controversial, however, is the nature of the conditions to be satisfied for membership of a designated business group.


South Africa –is the Rainbow Nation attracting more than just tourism?

South Africa is a vibrant nationwith an equally vibrant economy.But the abolition of apartheid hasbrought increased opportunitiesfor not only legitimate business,but also organised crime. JulietteIshlove and Gary Gill from KPMGexplore the laundry landscape ofthe new South Africa and themeasures that authorities aretaking to fight it.

South Africa –is the Rainbow Nation attracting more than just tourism?

REGIONAL REVIEW

REGIONAL REVIEW

S OUTH AFRICA is a nation of diversity, with more than 47 millionpeople and a variety of cultures,

languages and religious beliefs. Now ruled by a democratic government of all races,South Africa is often referred to as the “rainbow nation”, a phrase coined by Nobel Peace Prize winner Desmond Tutu.

South Africa’s economy has been com-pletely overhauled since the dawn of democra-cy in 1994. Bold macroeconomic reforms haveboosted competitiveness, grown the economy,created jobs and opened South Africa up to themarkets of the world. In 2006, the WorldBank ranked South Africa at 29th for ease ofdoing business – the highest score in Africaand ahead of similar emerging markets such asIndia, Russia, the Czech Republic, Mexico,China and Brazil. According to the WorldWealth Report 2005 by Merrill Lynch, SouthAfrica experienced the highest growth in high-net-worth investors, along withSingapore, Hong Kong and Australia.

Global watchdog, TransparencyInternational, has rated South Africa as the sec-ond least corrupt country on the continent ofAfrica in its 2006 Corruption Perception Index.The country scored 4.6 in the annual survey,on a scale from zero for countries perceived tohave high levels of corruption, through to 10for those with no corruption. South Africacame in at 51st place, a position shared withTunisia, out of the 163 countries surveyed. Theonly other state on the continent to score higherwas Botswana, with a score of 5.6, placing it at37 overall. To put this into perspective,Australia was scored 8.7, bringing its rating toequal ninth, alongside the Netherlands.

With deregulation comes organised crimeIn spite of the positive reforms and impressive economic growth since the return of SouthAfrica to the international arena, the deregula-tion of financial markets and advances incommunications technology have brought adramatic increase in organised crime to theRepublic. With its established financial mar-kets and advanced computer networks, SouthAfrica stands out as an ideal site for moneylaundering. As the wealthiest country inAfrica, it offers a huge market for drugs. As a regional hub, it attracts numerous traffickers for transshipment of drugs.

Criminal gangs involving several nation-alities operate in drug trafficking and otherforms of cross-border crime. Nigerian resi-dents play a dominant role, cooperating with

local groups and syndicates from other continents. The use of “419” fraud (TheNigerian Advance Fee Scheme, known internationally as “4-1-9” fraud after the section of the Nigerian penal code whichaddresses fraud schemes) remains a threat, aswell as other types of fraud using counterfeitcheques, credit cards and pyramid schemes.

Additionally, other organised crime groupsfrom Eastern Asia and Eastern Europe havealso established a firm presence. Drug traffick-ing goes hand in hand with other organised

crime, including the large-scale smuggling offirearms and related money laundering. Othersources of criminal proceeds are generated byabalone smuggling, vehicle theft, mineral andprecious stone trafficking, and violent crimessuch as robbery and hijacking. The CIA WorldFact Book 2006 quoted South Africa as “anattractive venue for money launderers given theincreasing level of organized (sic) criminal andnarcotics activity in the region”.

Laundry techniquesCriminals use various means to launder theirproceeds in South Africa. These meansinclude the purchase of properties and goods,the establishment of companies and trusts forlaundering the proceeds of crime, the misuseof businesses, the use of casinos, and usingthe informal, cash-based sector. The moneylaundering investigations that have occurredinvolve predicate offences of fraud, theft,corruption, racketeering and gambling.

It is relatively easy to purchase an “offthe shelf” pre-registered corporation. Theseare advertised for as little as A$90 and can be registered personally or through an agent.Popular front businesses that often feature inlaundering schemes within South Africa willnormally be cash-based, ie. bars, restaurants,shebeens (a slang term of Gaelic originbrought to South Africa in colonial timesmeaning “unlicensed bar in townships”), cashloans businesses (especially micro-lenders)and mobile phone shops. Slot machines incasinos have also proved vulnerable for abuseby launderers who continue to use them suc-cessfully to launder bank notes that have beenstained by dye during cash heists.

A substantial portion of South Africa’spopulation does not have bank accounts,instead relying on informal traditional methodsof transferring money, ie they rely on mini-bustaxi operators to transport money around thecountry for a fee. As an informal transportsystem, mini-bus taxis are responsible formore than 60 per cent of public transport commuters. For example, Party A (located inJohannesburg) wishes to send money to a family member residing in Kwazulu Natal,600km away. An envelope containing thecash, together with an agreed fee and a

personal identification number (PIN) code isgiven to the taxi operator. The taxi operatorwill, in turn, only give this envelope to therecipient in Kwazulu Natal on being told thePIN. However, this system is being abused asa popular means of transporting the proceedsof cash in transit heists around the country.

Abusing a well-developed systemSouth Africa has a well-developed financialsystem. Products on offer vary from internetbanking facilities and sophisticated offshoreunit trust investments to small savings accountsfor a target audience comprising people whohave not previously had a bank account or areunder-banked. These facilities see a sizableamount of dirty cash being deposited into bank accounts. There is also a trend of usinglegitimate bank accounts of family members orthird parties. For example, a criminal maymake an arrangement with a family member,who then allows the criminal to deposit andwithdraw money from the family account. The first two convictions ever handed down for statutory money laundering in South Africa were based on such arrangements.Alternatively, a homeless person may be paid asubstantial amount of money to open a savingsaccount, which will subsequently be abused.

Sizable amounts of cash are also depositedinto community-based rotating credit schemesthat operate general savings schemes (whichare known as stokvels), or dedicated savingsschemes (for instance, burial societies). In themajority of these cases, all of the members areknown to one another. Each member regularly


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The CIA World Fact Book 2006 quoted South Africa as “an attractivevenue for money launderers given the increasing level of organized(sic) criminal and narcotics activity in the region”.

REGIONAL REVIEW

deposits an agreed sum of money into a fundthat is given, in whole or in part, to each member in rotation. Although the majority ofschemes technically cannot be penetrated by alaunderer, launderers can operate sham stokvelsas a front to launder money.

Collusion plays a major role in moneylaundering schemes and syndicate placementsin financial institutions have also becomemore prevalent. In the first South Africancase in which a conviction was handed downfor statutory money laundering, S v Dustigar,an attorney and a police officer played pivotalroles in planning and operating different laundering schemes.

Identity fraud and theft also contribute to money laundering schemes. There havebeen many corruption and bribery cases reported in the media regarding Department of Home Affair officials (responsible for allforms of identification documentation in South Africa) and the involvement of EasternEuropean and Nigerian syndicates. TheDepartment of Home Affairs has even gone to the lengths of establishing a link on theirwebsite, whereby individuals can check theirmarital status, in response to the number offalse marriages being registered for a person to illegally gain citizenship.

The responseSouth Africa has developed a comprehensivelegal structure to combat money laundering.Money laundering was first criminalised fordrug trafficking in 1992 and the scope of theoffence was then broadened in 1996. Currently,the main statutes are the Prevention ofOrganised Crime Act 1998 (POCA) and theFinancial Intelligence Centre Act 2001 (FICA).It is now more than three years since SouthAfrica’s financial intelligence unit, the FinancialIntelligence Centre (FIC), commenced its oper-ations and FICA was introduced.

FICA is premised on the understandingthat money laundering is a problem for which the solution is not only national action,but also international co-operation. FICA isaligned with the POCA, which introduces arange of money laundering offences and the Protection of Constitutional Democracyagainst Terrorist and Related Acts, which tookeffect in May 2005 and creates provisions tocombat the financing of terrorism.

Before the FICA was enacted, businessesin South Africa had to notify the South AfricanPolice Service if they suspected that propertywas the proceeds of an unlawful activity, pur-suant to section 10 the POCA. Under section29 of FICA, which came into effect on 3February 2003, businesses must report to theFIC cases where they know or suspect thatproperty is the proceeds of an unlawful activity.

They are also required to report any transactions that: have no apparent business or lawful purpose; are intended to avoid reportingduties under the Act; are relevant to tax evasion; or are otherwise related to moneylaundering. The reporting obligation is there-fore very broad. Similarly, the legal provisionsconcerning protection from proceedings andprohibiting “tipping-off” are comprehensive.

FICA is the first piece of legislation thatimposes personal liability on employees ofaccountable institutions (ie banks, legal firms, financial advisers, etc.) in the form of15 years imprisonment or a R10m (A$2m) penalty for the institution for non-compliancewith certain provisions in the Act, ie notreporting suspicious transactions. ■■

In the next issue we explore the implementation of South Africa’s anti-moneylaundering regime from 2003 to date and some of the challenges faced.


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FEATURE

C OMPLIANCE MANAGERS chargedwith the job of getting AML/CTFprograms up and running since the

passage of legislation last December have hadto think about more than just one new piece oflegislation. The AML/CTF Act is the latest ina line of laws dating back to the late 1980sthat are aimed at cracking down on criminalslaundering money and funds being directed to terrorist organisations.

Since the passage of the FinancialTransaction Reports Act in 1988 there hasbeen a steady stream of legislation addressingsimilar issues. The Suppression of theFinancing of Terrorism Act was passed in2002, in the wake of the September 11 attacksin the United States. In the same year theProceeds of Crime Act was passed. And allthe while the Criminal Code has includedanti-money laundering provisions.

Similar developments have been occur-ring overseas and companies with internation-al operations have had to take account ofmeasures such as the US Patriot Act andAML/CTF-type laws in many countries.

The provisions of these laws overlap but each has its distinctive requirements. The question for risk and compliance managers is whether to take on the burden of designing an umbrella program that willcover all requirements of all those laws orwhether to have specific programs that deal with specific issues.

A senior counsel at Freehills, AngelaQuintarelli, says most companies will look forsynergies. “At the moment people are focusedon simply getting their AML/CTF programsup and running, and being ready for the next round of implementation in mid-year.What we are talking about here is a fairlysophisticated level of planning that few havebeen able to get to. But eventually you will see companies aiming to design masterprograms that cover everything.”

The partner in charge of forensic servicesat Deloitte, Chris Cass, says there is nothingin the various pieces of legislation that wouldstop companies implementing an umbrellaprogram. Cass says: “It is possible to haveuniversal compliance that even covers

international standards. The anti-money laundering standards that are being introducedaround the world are all drawn from standardswritten by the Financial Action Taskforce on Money Laundering (FATF) (which was set up at a G7 summit in Paris in 1989 andnow has 28 members).”

Cass says AML/CTF sets a higher standard than some of the other laws. “There have been problems with the operationof the Financial Transaction Reports Actbecause The Australian Transaction Reportsand Analysis Centre was not given proper regulatory authority to administer it.

“We have had very poor compliance with the Suppression of the Financing ofTerrorism Act. The Department of ForeignAffairs and Trade has a proscribed list andfinancial institutions are supposed to use it as a checklist. There is evidence that manyinstitutions have not used the list,” says Cass.

“What we have seen to date is that thereare gaps in compliance. We have seen lawspassed but very little done to raise communityawareness of the need to implement them andwe have seen weaknesses in regulation. It waswhat I would describe as a C grade regime.

“AML/CTF is a big step up from that. We have proper oversight and regulation in this area for the first time. Companies will have to comply. AML/CTF will changethe level of awareness and there will be more focus on the risks of dealing in the proceeds of crime or in funds that are beingused to fund terrorism.


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New ways to embrace old lawsThere have been a raft of anti-money laundering laws in the last 15 years, but many have not been complied with any great gusto. Now the AML/CTF law has come in, John Kavanaghlooks at how all the laws can be embraced and a master program set up.

Eventually you will see companies aiming to design master programsthat cover everything

ANGELA QUINTARELLIFREEHILLS

FEATURE

“We are going to see a lot more litigation. Anyone who suffers loss as a result of money laundering will use the law to sue for damages. We are seeing it overseas and we will definitely see it here. When that sort of thing happens, risk managers will really pay attention.”

Quintarelli says: “AML/CTF has wide obligations to build, update and maintain a compliance system. Companies have to decide if theywant one wide program to cover all their responsibilities under variouspieces of legislation. Many companies will find synergies in the management and administration of these responsibilities that will make it worth doing.

“But circumstances vary and some companies may prefer to keepthese areas discrete and operate a series of sub-programs. Some companies have been dealing with the Financial Transactions Reports Actfor some time and have structures in place now that work very well. They may decide to leave those structures as they are. It is fair to ask why you should throw away a process that is working.

“My own view is that these obligations all feed into each other. But you have to remember that each law carries obligations that are notpart of AML/CTF. Companies should be looking to do some gap analysisto get a clear picture of what they are doing now under existing laws,what they need to do under AML/CTF, how much overlap there is and how much they still need to do. Because we are talking about a risk-based system each company must make its own assessment.”

Quintarelli says companies were caught off guard when theAML/CTF bill was passed in December, with immediate effect.Commentators had been predicting a period before implementation.“Plenty of people were caught short. The focus has been on getting programs going. More strategic thinking will come down the track.

Cass agrees and says a lot of companies are frustrated that they are not getting more assistance from Austrac. “People are looking foroperational guidance and the feedback we get is that they are not gettingit. I think Austrac has its own issues getting up to speed. There are a lotof new people going in there and they are under pressure.” ■■


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Financial Transaction Reports Act.

Under section 16 of the FTR Act, should anyorganisation or individual defined as a cashdealer have reasonable grounds to suspect thatinformation concerning a transaction, or anattempted transaction, may be relevant to theinvestigation of a breach of a law in Australia,the cash dealer must make a report to the director of Austrac. Financial institutionsincluded under the heading of cash dealersinclude financial institutions, securities dealers,fund managers, bullion dealers, insuranceintermediaries and issuers of travellerscheques and money orders.

A cash dealer is required to lodge a suspecttransaction report as soon as practicable afterforming a suspicion. Once a suspect transactionreport is made to Austrac it may authorise theAustralian Federal Police to have access to the information.

The Criminal Code. Division 103 of theCriminal Code makes it an offence to intention-ally provide or collect funds where the person is“reckless” as to whether the funds will be usedto facilitate or engage in a terrorist act. It is alsoan offence to make funds available to a personwhere the person is reckless as to whether thefunds will be used to engage in a terrorist act.

The Suppression of the Financing of Terrorism Act.

The Acts makes it offence to provide or collectfunds with the intention that the monies be usedto facilitate terrorist activities. The Act enablesAustrac, the Commissioner of the AFP and thedirector general of ASIO to disclose financialtransaction reports to foreign governments, foreign law enforcement bodies and foreignintelligence agencies.

The Proceeds of Crime Act.

The Act provides a scheme to trace, restrain andconfiscate the proceeds of crime againstCommonwealth Law. In some circumstances itcan also be used to confiscate the proceeds ofcrime against foreign law or the proceeds of crime against State law.

We are going to see a lot more litigation.Anyone who suffersloss as a result ofmoney laundering will use the law to sue for damages. Weare seeing it overseasand we will definitelysee it here. When thatsort of thing happens,risk managers willreally pay attention

CHRIS CASSDELOITTE

INSIGHT


By Joe GarbuttSENIOR MANAGER, GROUP COMPLIANCE

RISK, NATIONAL AUSTRALIA BANK LTD.

Achieving near 100 % KYC accuracyPrevious articles have discussed the impor-tance of measuring KYC accuracy, but sometips to help you achieve compliance are to:

• make the KYC procedures as clear andsimple as you can

• train, train and train again (one UK bankbranch network had five AML sessionsin a 13 month period in 2002-3 to raise standards)

• help the guys at the coal face – considerlaminated procedure cards, intranet sites,telephone helplines, and explanatoryleaflets for the customers

• take any opportunity to warn customersbefore they arrive in the branch of theneed to bring identification

• deploy customer-friendly technology ifyou can i.e. some electronic verification

• achieve buy in from the most senior levels of management, and ensure theycommunicate to middle and junior management the importance of achieving KYC accuracy. Motivate themto help fight financial crime and protectthe firm from regulatory censure

• ensure KYC accuracy is measured bythe business with a strong review andremediation process for overall and

individual business unit failures.Examples include communicating anyrequired clarifications of procedure orundertaking local retraining

• ensure local measures of KYC accuracyare verified via independent inspectionsfrom the risk, audit, compliance or otherreview functions

• ensure a strong focus is given to theurgent remediation of those cases discovered to have been opened withoutfull or appropriate KYC, and that controls are in place to ensure cases are remedied every time.

Paper versus electronicThe relative merit of paper versus electronicverification has become an interestingdebate. Law enforcement officers may sometimes prefer paper verification becauseit can help with investigations. Supporters ofelectronic verification, however, point to theease with which paper can be forged. Theysay that the electronic footprints are stronger,as they build a profile of activity over a period of time. But this claim reminds me ofa regulator’s supervisor, who often said tome “OK, this electronic trail of activity isfine, but how do we know who started it in the first place?”

I worked with an electronic verificationsystem in the UK that saw 60% of all newbranch customers verified without referenceto any form of paper. These systems are popular with directors for their relative lowcost and low customer impact.

Reflecting on this, it seems to me both systems have their place. I believe identification that includes a passport or similar and an electronic trail is the bestsolution, and could even be considered, ifpracticable, for high-risk designated services.It is encouraging to see the draft Austracrules recognising both in a balanced way,and allowing for combined use.

Financial exclusion and the risk-based approach We have seen reference in an earlier editionto the UK Co-operative Bank’s scheme ofopening accounts for prisoners. Addressingfinancial exclusion has been a major policyissue in the UK for government and theindustry. (A report published in Australia in2004 offered one definition as “the lack ofaccess by certain consumers to appropriatelow cost, fair and safe financial products andservices from mainstream providers.”)

As a UK money laundering reportingofficer (MLRO), I used to take decisions onwhether or not to open accounts in unusualcircumstances. Occasionally, accounts mightbe opened where there was a clear reason for the potential customer’s limited identityinformation: for example, an aged person inresidential care. There were other caseswhere there were a number of identity items,but they did not quite match the bank’s pro-cedures. As the branch network were highly

Some earlythoughts on Know YourCustomer

Customer identification is one of the major challenges ofAML/CTF reform. Joe Garbutt provides some early thoughts,based on his experiences as a UK money laundering reporting officer pursuing 100% KYC accuracy.

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INSIGHT

motivated and consistently achieving a 99% KYC accuracy rate, it was important toemphasise to them that telephone helplineswere available to request procedural excep-tions. In order to ensure the branch was notcaught out by branch inspectors from thesame central department, the MLRO teamused to fax to branches a ‘KYC exception certificate’ to place on the customer file. Ofcourse many exception requests were refused,and any suspicions must be reported.

Whilst there are minimum requirementsin the new draft rules, firms here may wish toconsider how much room to allow for flexibil-ity in risk-based identification decisions, andhow to control the execution of this flexibility.

Account opening sections: the business as usual impactIn a retail bank we might expect the branchtellers to open as many accounts as they didunder FTRA 1988, even if the requirementsand processes differ.

However, where a firm’s verification ofidentity involves verifying companies, thefirm may need to consider whether existingapproaches are adequate for the new require-ments. This might mean expanding existing,or establishing new, account-opening sectionsthat are independent of sales personnel.

Such a move strengthens the complianceframework: if the account-opening section isaccountable for compliance and customerservice, that function has no incentive to‘bend’ the verification of identity rules inorder to close a sale that contributes to thesalesman’s targets.

When the UK AML reforms were effectedin 2002, the headcount of the account openingsection in one commercial/wholesale bank wasexpanded significantly and procedures wereoverhauled. Such was the commitment toachieving the bank’s stated target of 98% KYCaccuracy that one small team devoted theirtime to rechecking samples of accounts openedby colleagues in the section, and producedaccuracy statistics by individual team member.

These statistics were subject to senior levelscrutiny, and where performance had dipped,prompt remedial action such as coaching andretraining was undertaken. A full-time expertcompliance specialist was even hired to resolvemore complex account opening challenges.

Flexing the approach for high-risk business linesIn the UK, more information became availablefor money service businesses, as they becameregulated by HM Customs and Excise (HMCE).

Banks were required to undertake a series ofchecks, including sighting their HMCE registra-tion certificate and identifying that they hadappointed an MLRO. One bank voluntarilyintroduced site visits by its compliance team tocommercial customers. Site visits, which overand above the minimum customer identificationrequired by the rules, represent a useful part ofwider KYC, whether they are undertaken bysales colleagues in the ordinary course of busi-ness or risk specialists as an added check.

Re-verification of identityHaving experienced the UK’s ‘voluntary’ initia-tive – the “current customer review” of reverify-ing the identity of existing customer bases – I think it a fantastic outcome that the draft rules do not prescribe for any form of blanketre-verification of existing customers. I think thiswould have been too blunt an instrument in thefight against financial crime. We also heard at arecent AFMA seminar that South Africa hasdone a lot of work in this space. At one stage ofthe UK Current Customer Review, banks weretaking KYC from existing customers when buying new products, an initiative that causeduproar with some customers.

Whilst avoiding these outcomes is greatnews, I suggest that responsible cash dealersshould reflect on the over-arching principle ofa risk-based approach. They should establishhow robust their past account opening hasbeen for high-risk business lines, and remedyany weaknesses they discover. If a sizeablegroup of customers require remediation, itmay be prudent to discuss the intendedapproach with Austrac. I am aware of oneyear-long remediation project in the UK that,at its peak, totalled 30 people. This was not anisolated review, so if discoveries are made,firms may need to bite a resourcing bullet.Reverification using electronic rather thancustomer contact can reduce costs.

Customer identification is a hurdle, not a brick wall – the importance of monitoringIt is easy to be sceptical of the value of identi-fication as a preventative tool – after all, crim-inals use legitimate identities to launder – andwe have all heard stories about launderersusing a group of “smurfs” to split large dirty

cash amounts into smaller sums for launderingby each member of the group. Another exam-ple is the launderers that receive, for example,$20,000, then pay on $19,000 and pocket$1,000 as their commission for laundering thedirty cash. False identity is also a major chal-lenge: in Sydney in 2005, the newspapersreported the arrest of someone who had 1,000false identities to service the criminal commu-nity, and there have been stories in Europe of‘identity factories’.

Customer identification is therefore merelythe first step in the journey of risk management.The draft Austrac rules recognise this by requiring on-going due diligence, such as atransaction monitoring program and training.

In conclusionBased on my experience in the UK, I wouldsummarise the key steps to KYC success as follows:• Work hard at achieving close to the

vaunted 100% KYC accuracy• Consider the respective merits of paper

versus electronic when designing identification systems

• Financial exclusion is a challenge – consider what flexibility the rules allowin your risk-based approach and how you will control its execution

• If your business is particularly complex,you may wish to think about expandingor establishing an account opening sec-tion, which may introduce independencefrom sales functions, and expertise andquality control to boost KYC accuracy

• Visiting higher-risk commercial customers is a useful tool as part of thewider KYC picture

• Cash dealers may wish to understand howrobust account opening has traditionallybeen in high-risk business lines and remedy any weaknesses

• Identification is merely the start of theAML journey, and on-going due diligence,training, and transaction monitoring are of critical importance to identifyingmoney laundering effectively. ■■

Joe Garbutt is the Head of Group RegulatoryStrategy at National Australia Bank. The articlerepresents Joe’s personal opinions and he is not speaking for National Australia Bank in this article.


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AT ONE STAGE OF THE UK CURRENT CUSTOMER REVIEW, BANKS WERE TAKING KYC FROM EXISTING CUSTOMERS WHEN BUYING NEW PRODUCTS, AN INITIATIVE THAT CAUSED UPROAR WITH SOME CUSTOMERS.

© 2006 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.December 2006. VIC10647FO.

AFMA and KPMG havejoined forces to develop atraining course for financialservices' professionals. The course will equipprofessionals with theskills and knowledgenecessary to understandthe implications of the newanti-money laundering andcounter-terrorism financing(AML/CTF) legislation.

The one-day trainingcourse includes casestudies, examples andactivities designed to helpyou develop effective risk-based AML/CTFprograms.

You will learn practical tips on how to; designcustomer and enhanceddue diligence programs,establish internalmonitoring and evaluationsystems and build aculture of compliance. It will also help youunderstand post-reportingconsiderations.

Successful completion of the workshop andassessment will earn credittowards the nationally-recognised FinancialServices training packageat Diploma level andcontribute to on-goingprofessional developmentrequirements.

One day public and in-house coursescommence February 2007 in Sydney andMelbourne. For furtherinformation and a coursesyllabus contact DianaZdrilic on 02 9776 7923 [email protected]

kpmg.com.au

Anti-money

laundering

are you

ready?

RISK TRIGGERS


A RISK-BASED APPROACH is dependent upon having accurate triggers or indica-tors to alert the reporting entity that a potential risk of money laundering or terroristfinancing exists. Where risk triggers do not exist, potential money laundering

activity will not be identified. Where potential money laundering activity is not identified, theregulatory implications alone can be severe. Where risk triggers do exist, but are inadequate or do not accurately reflect potential money laundering activity, the outcome is effectively thesame as not having risk triggers – potential money laundering activity is not identified and the reporting entity is subject to the same regulatory and reputation implications.

Therefore, a key component of an effective and, hence, successful AML/CTF risk-based approach is to have appropriate and accurate risk triggers. But how does a reporting entity construct these risk triggers and how should these risk triggers be incorporated into an AML/CTF risk assessment process?

Constructing AML/CTF Risk TriggersRisk analysis undertaken by financial institutions whether credit risk, operational risks,counterparty risk, investment risk or fraud risk, involves an evaluation of the source of therisk and how the risks arise, identification of the form these risks may take, identification ofareas of vulnerability of the business to these risks, how to identify if the risk occurs, and thedevelopment of processes to manage potential and actual risk events. However, for moneylaundering and terrorist financing, the tendency has been to leap to the middle of the riskassessment process by developing a risk assessment structure without a previous evaluationof the risks to be assessed. In other words, to date, reporting entities have tended to constructa risk assessment of risk rating or ranking aspects of their business, without identifying oranalysing the risks to be assessed or identifying the relevant risk areas of the business.

Money laundering and terrorist financing activities represent a business and regulatoryrisk like any other risk and should therefore be analysed and managed in a similar manner.In order to construct an effective risk assessment process that will “identify, manage andmitigate” the potential risk of money laundering and terrorist financing, the risks these activities represent to the reporting entity must be identified and evaluated.

How to see it comingbefore it comes

Without a proper risk evaluation program, you cannot perceive the risks. And without knowingthe risks, you will never recognise the problems until they have ocurred. The time has come toassess potential triggers for AML problems, says Michelle Hannan

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RISK TRIGGERS

The first step is to acquire knowledge and understanding of money laundering and terrorist financing methods. Once the risks have been identified and evaluated, the second step is to apply these to the reporting entity to determine the areas of vulnerability.Areas of vulnerability may include poor technology, inadequate compliance practices and procedures, clients, countries the reportingentity undertakes business with either directly or indirectly,counterparties, third party relationships and transactions.

The third step is to identify how these risks will manifest. This is where risk indicators or triggers should be developed. Note that the quality and effectiveness of the risk triggers constructedwill be dependent upon the reporting entities understanding of thenature of the risk, in this case, money laundering and terrorist financing, the quality of information regarding money launderingand terrorist financing methods and a regular review process being

in place and followed to ensure new methods or changes in methodsof money laundering and terrorist financing activity are captured.

Risk Triggers and the Risk Assessment ProcessRisk triggers should reflect money laundering and terrorist financingmethods and how these methods will translate to the business with afocus on areas of vulnerability. Risk triggers allow a reporting entity to identify the potential money laundering and terrorist financing activity, to activate an evaluation of these risk events, prompt further investigation and initiate the risk management process.

In this way, risk triggers are an integral component of a reporting enti-ties risk assessment analysis and processes.

Risk triggers act as a risk identification mechanism in anAML/CTF risk assessment process. The risk assessment process andthe risk indicators should both be derived from the money launderingand terrorist financing activity risk analysis.

ConclusionRisk triggers or indicators are an integral identification mechanism of amoney laundering and terrorist financing risk assessment process andan AML/CTF risk-based approach. However, these risk triggers areonly as effective as the quality of the risk analysis, which needs toinclude an assessment and understanding of money laundering and terrorist financing methods (and by association a broad understandingof the crimes that generate the funds to be laundered or used for financing terrorism) and, based on this understanding, the identificationof areas of vulnerability of the business to the risks of money laundering and terrorist financing activity.

Based on this risk analysis, a reporting entity will know how moneylaundering and terrorist financing activity may manifest through theirorganisation. It is in the construction of risk triggers that the manifesta-tion of money laundering and terrorist financing risks are translated intoan effective risk identification and assessment mechanism. ■■


RISK TRIGGERS ALLOW A REPORTING ENTITY TO IDENTIFY THE POTENTIALMONEY LAUNDERING AND TERRORIST FINANCING ACTIVITY AND TO ACTIVATE AN EVALUATION OF THESE RISK EVENTS, PROMPT FURTHER INVESTIGATION AND INITIATE THE RISK MANAGEMENT PROCESS.

Claim your FREE subscription* to anti-money laundering magazine, the definitive source of information for the financial services sector on anti-money laundering and counter-terrorist financing.

Call our subscription department today on 02 9776 7923 *subscription offer ends June 2007

Don’t get taken to the cleaners

CASE NOTES


T HE CHIEF FINANCIAL OFFICER of Overseas ImportExport Company approaches you to arrange trade finance for a shipment of clothing the company is importing from China

through Hong Kong. In the past, the company has regularly importedclothing from China as the company as it is a small specialist clothingwholesaler in Australia.

To date, they have not required trade finance and have covered theimport bill at the time of delivery or arranged short-term credit termswith the exporter in Hong Kong. The CFO indicates that this shipmentwill be around 75 per cent more than previous orders.

Following this discussion, you have a look at the account activity of Overseas Import Export Company in more detail and get a copy of the latest financial accounts. You suggest a 90-day trade line of credit to allow them time to sell some of the shipment to repay the line of credit. They agree. You explain that you will need a number of documents before you can establish the line of credit, including the invoice for the shipment.

The invoice supplied appears to indeed be for around 75 per centmore than the average sized shipment the company has imported in thepast. The invoiced amount is in US dollars. Before you complete all of the paperwork you ask a few more questions to clarify why this shipment is so much larger and denominated in US dollars.

The CFO assures you that the business has been going well and thecompany would like to increase their stock selection and holdings inanticipation of further improvements in their business. You have a quicklook at the financials, but become a bit confused as it appears thatturnover has been contracting – not expanding – over the last few years.

Possible explanations• A legitimate explanation may be that the business has indeed been

expanding over the last few months, but this is not captured in thelatest financials. Alternatively, the business may have a new largecustomer, which would justify an increase in import orders withoutthe company having time to build up sufficient cash reserves to pay for the invoice upon order or receipt.

• An alternative explanation could be that although Overseas ImportExport Company does legitimately import clothing from China,the business has been increasingly under financial pressure and theowners or the CFO may be letting the company be used to launderfunds. A trade line of credit allows money to be received in Chinadrawn on an Australian bank to appear legitimate, while theChinese exporter may have previously sent the company funds torepay the line of credit, or will do so in the future through a thirdparty or directly.

Questions you should consider• What additional questions should you ask regarding the business

and why the business appears to have recently improved?

• How do you confirm invoice details for trade finance arrangementsand to what extent should these details be validated?

• How do you establish a yardstick to measure if this company andthis business transaction are within acceptable “normal” businessactivities for this type of business?

• What additional information should you collect regarding the owners of Overseas Import Export Company?

• Should you confirm more details regarding the Chinese exportcompany and the company owners?

• How should country risk be incorporated into a risk assessment fortrade finance?

• How should future trade finance transactions for Overseas ImportExport Company be treated in the future to monitor for any possible future risk of money laundering activity? ■■

When the sums just don’t add upIf you’re arranging trade finance for a shipment – and the cargo is far bigger than the customer’s normal size, it may be he’s just doing well. Or he may be over-invoicing for other reasons, as Michelle Hannan explains

HOW DO YOU CONFIRM INVOICE DETAILS FORTRADE FINANCE ARRANGEMENTS AND TO WHATEXTENT SHOULD THESE DETAILS BE VALIDATED?

six steps to implementation

© 2006 KPMG, an Australian partnership, is part of the KPMG International network. All rights reserved. August 2006. VIC10327FAS.

AML legislation.In-depth

knowledgeworking for you.

The Government’s new anti-money laundering(AML) legislation is upon us. At KPMG, we can help you assess clearly and pragmatically theimpacts for your business.

Our team of AML professionals offer deep knowledgeand practical experience in helping financial servicesorganisations, just like yours.

We can help you assess the money laundering andfinancing of terrorism risks faced by your business – and more importantly how to address them.

Our team can assist in the design and implementationof new policies and processes, systems selection andintegration advice and staff training.

We have worked with leading financial institutions,globally and in Australia, in areas such as moneylaundering and terrorist financing risk reviews anddeveloping AML processes, policies, training andtechnology. It all translates into more focused, up-to-date and relevant advice for your business.

So when it comes to understanding the new AMLlegislation, contact the professionals in the know – KPMG Forensic.

For more information please contact Gary Gill on +61 2 9335 7312 or [email protected]

kpmg.com.au

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