Laico Regency Hotel, Nairobi14 April 2011

Presented by:

Gilbert Mwalili CA CIAConvener – RM&IAWP ICPAK

Director – Absolute Business Systemswww.abs-africa.net

Every year, huge amounts of funds are generated from illegal activities such as drug trafficking, tax evasion, people smuggling, theft, arms trafficking and corrupt practices. These funds are mostly in the form of cash.

The criminals who generate these funds need to bring them into the legitimate financial system without raising suspicion. The conversion of cash into other forms makes it more useable. It also puts a distance between the criminal activities and the funds.

‘Money laundering’ is the name given to the process by which illegally obtained funds are given the appearance of having been legitimately obtained.

By some estimates, more than USD1.3Trillion of illegal funds are laundered worldwide each year!

This is more than the total output of an economy the size of the United Kingdom. Of the world-wide total, an estimated USD100Million (Kshs.8.3Billion) is laundered in Kenya.

There are several reasons why people launder money. These include: ◦ hiding wealth: criminals can hide illegally

accumulated wealth to avoid its seizure by authorities ◦ avoiding prosecution: criminals can avoid

prosecution by distancing themselves from the illegal funds

◦ evading taxes: criminals can evade taxes that would be imposed on earnings from the funds

◦ increasing profits: criminals can increase profits by reinvesting the illegal funds in businesses

◦ becoming legitimate: criminals can use the laundered funds to build up a business and provide legitimacy to this business

◦ undermining financial systems: money laundering expands the black economy, undermines the financial system and raises questions of credibility and transparency

◦ expanding crime: money laundering encourages crime because it enables criminals to effectively use and deploy their illegal funds

◦ 'criminalising' society: criminals can increase profits by reinvesting the illegal funds in businesses

◦ reducing revenue and control: money laundering diminishes government tax revenue and weakens government control over the economy

The passing of the anti-money laundering law comes in the wake of the release of a U.S. State Department report saying $100 million of earnings from drug trafficking are laundered in Kenya’s financial system annually.

In February 2010, the Financial Action Task Force on Money Laundering (FATF) published a list of 28 high risk jurisdictions in an effort to combat money laundering.

Kenya was among 20 countries whose AML regimes had deficiencies though the governments had commitments for improvement.

It is evident in light of this that Kenya’s passage of the law is not based on principle or will to fight the vice but on fear of being labeled a pariah state. This therefore does leave us to question whether there will be successful implementation of this legislation.

The Act establishes a Financial Reporting Centre (FTC) which is expected to be the regulator.

Supervisory bodies:(a) Central Bank of Kenya;

(b) Insurance Regulatory Authority;

(c) Betting & Licensing Control Board;

(d) Capital Markets Authority;

(e) Institute of Certified Public Accountants of Kenya;

(f) Estate Agents Registration Board;

(g) Non-Governmental Organizations Co-ordination Board ;

(h) Retirement Benefits Authority.

Financial Institutions; Designated non-financial businesses and

professions;

The public is also affected, as any person who moves physical cash of USD10,000 or more has certain reporting obligations.

Financial Institutions:“financial institution” means any person or entity, which

conducts as a business, one or more of the following activities or operations—

(a) accepting deposits and other repayable funds from the public;

(b) lending, including consumer credit, mortgage credit, factoring, with or without recourse, and financing of commercial transactions;

(c) financial leasing;

(d) transferring of funds or value, by any means, including both formal and informal channels;

(e) issuing and managing means of payment (such as credit and debit cards, cheques, travellers' cheques, money orders and bankers' drafts, and electronic money);

(f) financial guarantees and commitments;

(g) trading in—(i) money market instruments, including cheques, bills, certificates of deposit and derivatives;

(ii) foreign exchange;

(iii) exchange, interest rate and index funds;

(iv) transferable securities; and

(v) commodity futures trading;

(h) participation in securities issues and the provision of financial services related to such issues;

(g) trading in— cont’d(i) individual and collective portfolio management;

(j) safekeeping and administration of cash or liquid securities on behalf of other persons;

(k) otherwise investing, administering or managing funds or money on behalf of other persons;

(l) underwriting and placement of life insurance and other investment related insurance; and

(m) money and currency changing;

Designated non-financial businesses“designated non-financial businesses or professions”

means—

(a) casinos (including internet casinos);

(b) real estate agencies;

(c) dealing in precious metals;

(d) dealing in precious stones;

(e) accountants, who are sole practitioners or are partners in their professional firms;

(f) non-governmental organisations; and

(g) such other business or profession in which the risk of money laundering exists as the Minister may, on the advice of the Centre, declare.

Reporting entities have various regulatory obligations under the AML Act. These include:

◦ Monitor and report suspected money laundering activity;

◦ File reports on all cash transactions exceeding USD10,000;

◦ Identification and verification of customer identities;

◦ Lodging International Funds Transfer Instruction (IFTI) Reports, Threshold Transaction Reports (TTRs),Suspicious Matter Reports (SMRs);

◦ Establish and maintain internal reporting procedures; and

◦ Record-keeping requirements of up to 7yrs.

The Act also requires the Minister to pass regulations that require Reporting entities fulfil various regulatory obligations. These include:

◦ implementing an AML compliance program; ◦ train employees in recognition and handling of

suspicious activities;◦ to provide for an independent audit of its

monitoring procedures; ◦ Establish and maintain internal reporting

procedures to make employees aware of domestic laws relating to money laundering and the procedures and related policies established by them pursuant to the AML Act.

Handling or helping – 14yr jail and/or fine not exceeding Shs.5M or vale of property involved whichever is higher.

Supervisory bodies failure to report – a staff member liable to 3yr jail term and/or fine not exceeding Shs.1M. Shs.5M fine for the institution.

Leaking information being reported to FTR – Shs.10M fine for the institution or amount equivalent to the value of property. 7yrs jail for the staff who leaks and/or fine of Shs.2.5M.

At this stage, illegal funds or assets are first brought into the financial system. This ‘placement’ makes the funds more liquid. For example, if cash is converted into a bank deposit, it becomes easier to transfer and manipulate. Money launderers place illegal funds using a variety of techniques, which include depositing cash into bank accounts and using cash to purchase assets.

Placement techniques: ◦ smurfing and structuring ◦ alternative remittance ◦ electronic transfer ◦ asset conversion ◦ bulk movement ◦ gambling ◦ insurance purchase.

Smurfing and structuring Smurfing is a common placement technique. Cash from illegal

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

Structuring involves splitting transactions into separate amounts under US$10,000 to avoid the transaction reporting requirements of the AML Act. Many money launderers rely on this placement technique because numerous deposits can be made without triggering the cash reporting requirements. However, it can backfire if an attentive financial institution notices a pattern of deposits just under the reportable threshold. This can lead to reporting such activity to under the suspicious activity provisions of these instruments. Structuring is a criminal offence itself, as well as an indicator of other potentially illegal activity.

Alternative remittance ‘Alternative remittance’ refers to funds

transfer services usually provided within ethnic community groups and known by names particular to each culture. Generally such services accept cash, cheques or monetary instruments in one location and pay an equivalent amount to a beneficiary in another location. In some communities this form of money transfer is commonly known as hawala, hundi, chuyen tien, yok song geum, or pera padala.

Alternative remittance is a common placement technique. For example:

Onyancha brings a large sum of illegal cash to an alternative remittance provider. Larry specifies the identity and location of the recipient and the alternative remittance provider arranges for the funds to be sent overseas. Onyancha may or may not receive a receipt for the transaction.

The recipient, Sukuma Wiki, goes to the counterpart of the alternative remittance provider in the overseas location. The counterpart provides the specified amount of cash (less any transfer charges) to Sukuma. Again, no documents may be involved.

Electronic transfer

Electronic transfer is a common placement technique. ◦ Onyancha takes cash to an electronic funds transfer

agency such as Western Union/M-Pesa/ZAP/YU-Cash etc and requests a transfer of funds to Sukuma Wiki in the Uganda.

◦ Sukuma Wiki goes to the Transfers branch in Uganda, presents her identification and collects the funds.

In the money laundering context, this technique involves the transfer of money through electronic payment systems that do not require sending funds through formal bank accounts. This method is also known as wire transfer.

Electronic transfer

Electronic transfers can be compared to alternative remittances in that both are person-to-person transfers that do not require sending funds through the formal banking system.

Criminals make use of the electronic financial system because it enables the transfer of large denominations of money instantly locally or to offshore jurisdictions. This speedy disbursement of funds to and between foreign jurisdictions makes the transactions difficult to investigate and trace back to the source.

Asset conversion Asset conversion is a common placement technique.

◦ Onyancha gives cash from his illegal operations to a trusted friend.

◦ The friend uses the cash to purchase diamonds from his friendly jeweller and hands these diamonds over to Onyancha.

Asset conversion simply involves the purchase of goods. Illegal money is converted into other assets, such as real estate, diamonds, gold and vehicles, which can then be sold.

Generally, money launderers prefer to purchase high-value items that are small and easy to sell or transport to another country. Often these assets will be purchased in the name of a friend to avert suspicion.

Bulk movement Bulk movement is a common placement technique.

◦ Onyancha generates a large amount of cash from his illegal business in Kenya. He boxes a large stack of cash in Computer CPU’s.

◦ The cash and watermelons are transported across to the Tanzania as part of a larger export shipment of Computers.

Bulk movement involves the physical transportation and smuggling of cash and monetary instruments, such as money orders and cheques.

Often money launderers use their cash to purchase less bulky items such as jewellery and other expensive goods. The criterion is that the items must be of high value and small, making them physically easy to smuggle as well as relatively easy to reconvert into cash at the point of destination.

Bulk movement Bulk shipments of

illegally obtained funds (or goods acquired with the funds) are smuggled across borders concealed in private vehicles, commercial trucks and air and maritime cargo. They may also be carried by couriers travelling on commercial airlines, trains and buses. Further, they can also be sent through parcel delivery and express mail services.

Gambling Gambling is a common placement technique.

◦ Fraudulent Onyancha and friends make periodic visits to a local club where they insert illegal money into gaming machines.

◦ After spending an evening enjoying the local band and night life, they cash out their money. This money can now be justified as ‘winnings’ from the local club.

Gambling is used to launder money by inserting illegal money into gaming machines and cashed out as proceeds from gambling. Funds that appear to be winnings can easily be used to justify unusual spikes in income.

Other types of gambling techniques include: ◦ claiming gaming machine prizes/payouts whilst

not being the legitimate prize-winner (that is, not the player who has accumulated the subject credits or turnover)

◦ exchanging cash for or purchased gaming prizes/payouts from legitimate prize winners

◦ exchanging cash for prize-winning cheques. This may be coordinated by ‘spotters’ who look for winners. They target problem gamblers who may want their winnings straight away and are willing to receive 95% of the face value of the ticket

Other types of gambling techniques include: ◦ exchanging cash for prize-winning gaming

machine tickets. ◦ negotiating cash loans to other

members/patrons for the purposes of gambling.◦ engaging in activity that may otherwise be

considered illegal or contrary to responsible gambling activities. For example, some machines pay a 98% return. Patrons may work in groups on networked machines, cover as many betting options as possible and win as a group.

Insurance purchase Insurance purchase is a common placement

technique. ◦ Maembe Life Insurance sells life insurance

products through a large number of independent agents including Twisted Spoon Insurance Brokers. Onyancha buys life insurance policies from Twisted Spoon Insurance Brokers.

◦ Onyancha later redeems these policies and requests that the funds be transferred to a bank account.

Insurance purchase Illegal money is

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

Insurance purchase ‘Single premium’ insurance products can be

particularly vulnerable. They involve a single payment 'up-front' and the ability to immediately purchase a fully paid instrument. To a money launderer, these products are attractive because they: ◦ involve a one-time payment ◦ have a cash surrender value ◦ may be transferable

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

School fees deposited in school bank account for relatives;

‘Chama’ contributions;Financing small businesses such as butcheries, kiosks, Mtumba business;

Proceeds of corruption;Proceeds of violent crime.

To conceal the illegal origin of the placed funds and thereby make them more useful, the funds must be moved, dispersed and disguised i.e. Layering.

At this stage, money launderers use many different techniques to layer the funds. These include using multiple banks and accounts, having professionals act as intermediaries and transacting through corporations and trusts. Funds may be shuttled through a web of many accounts, companies and countries in order to disguise their origins.

Funds can be hidden in the financial system through a web of complicated transactions using different techniques of layering including:

◦electronic funds transfers ◦offshore banks ◦shell corporations ◦trusts ◦walking accounts ◦intermediaries.

Electronic funds transfers Typically, layers are created by moving

money through electronic funds transfers into and out of domestic and offshore bank accounts of fictitious individuals and shell companies.

Given the large number of electronic funds transfers daily and the sometimes limited information disclosed about each transfer, it is often difficult for authorities to distinguish between clean and dirty money.

Offshore banks Offshore banks are banks that allow for the

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

Offshore banks Offshore banks are popular with money

launderers (for layering funds), tax evaders and corrupt officials. Money launderers also like to keep funds in offshore banks because their fixed term deposit accounts provide interest income.

Some offshore centres combine loose anti-money laundering procedures with strict bank secrecy rules. Criminals can easily maintain and transfer funds from banks in these centres because details of client activities are generally denied to third parties, including most law enforcement agencies.

Shell corporations Using shell corporations is a common layering technique.

◦ Onyancha sets up Mama Mboga Trading Co. under the laws of Kenya.

◦ Mama Mboga Trading Co. opens bank accounts with various banks.

◦ Smurfs working for Onyancha transfer illegal funds to the Mama Mboga Trading Co. accounts.

◦ Mama Mboga Trading Co. transfers these funds to other accounts or invests them in securities.

A shell corporation is a company that is formally established under applicable corporate laws but does not actually conduct a business. Instead, it is used to engage in fictitious transactions or hold accounts and assets to disguise the actual ownership of these accounts and assets.

Shell corporations Sophisticated money launderers use a complex maze of shell

corporations in different countries. Most money transfers take place through these shell corporations. At times, money is transferred through numbered accounts rather than through named accounts.

To further avoid unwanted attention, money launderers build the transaction history of the shell corporation so that it looks as if it has been in business for a long time.

In many countries (particularly offshore banking centres), the reporting and record-keeping requirements for corporations are quite minimal, which makes it easy to disguise ownership of the corporation.

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

Trusts Using trusts is a common layering technique.

◦ Onyancha establishes a business trust by appointing a corporate trustee and drawing a deed of trust, which names Mwenyeji Trading Co. as a beneficiary.

◦ Onyancha transfers funds to the corporate trustee and under the deed of trust, Mwenyeji Trading Co. is empowered to directly use and invest the funds.

Trusts are legal arrangements for holding funds or assets for a specified purpose. These funds or assets are managed by a trustee for the benefit of a specified beneficiary or beneficiaries.

Trusts Trusts can act as layering tools because they enable

the creation of false paper trails and transactions. Trusts are principally governed by a deed of trust drawn up by the person who establishes the trust. Trusts are more complex to use than corporations, but they are less regulated.

The private nature of trusts makes them attractive to money launderers. Secrecy and anonymity rules help conceal the identity of the true owner or beneficiary of trust assets. Also, the presence of a corporate trustee provides an appearance of legitimacy.

In addition, offshore trusts may contain a 'flee clause’. This clause allows the trustee to shift the controlling jurisdiction of the trust if it is in danger because of war, civil unrest or, more likely, the activities of law enforcement officers or litigious investors and consumers.

Walking accounts Using walking accounts is a common layering

technique. ◦ Using shell corporations, Onyancha sets up three

accounts with three different banks. He provides instructions to transfer all funds immediately on receipt to one or more of the other accounts.

◦ Smurfs deposit cash into the first account. Without the need for further action, the funds are 'layered' by being transferred to the third account.

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

Intermediaries The use of intermediaries is a common layering technique.

◦ Onyancha transfers funds to a special account for client funds maintained by the law firm called Shady Deals & Co. Advocates.

◦ Shady Deals & Co. Advocates establishes a shell corporation, Mwenyeji Trading Co. , which opens various bank accounts. Shady Deals & Co. Advocates now transfers Onyancha's funds into these accounts.

Lawyers, accountants and other professionals may be used as intermediaries between the illegal funds and the criminal. Professionals engage in transactions on behalf of a criminal client who remains anonymous. These transactions may include the use of shell corporations, fictitious records and complex paper trails.

Many countries have realised that criminals are increasingly using non-financial professionals as intermediaries. To counter these activities, many countries have included non-financial professionals in new anti-money laundering legislation.

Laundered funds are made available for activities such as investment in legitimate or illegitimate businesses, or spent to promote the criminal's lifestyle. At this stage, the illegal money has achieved the appearance of legitimacy.

It should be noted that not all money laundering transactions go through this three-stage process. Transactions designed to launder funds can also be effected in one or two stages, depending on the money laundering technique being used.

Integration is the third stage of the money laundering process, in which the illegal funds or assets are successfully cleansed and appear legitimate in the financial system, making them available for investment, saving or expenditure.

Integration techniques include:

◦ credit and debit cards ◦ consultants ◦ corporate financing ◦ asset sales and purchases ◦ business recycling ◦ import/export transactions.

Credit and debit cards

Credit and debit cards are efficient ways for money launderers to integrate illegal money into the financial system. By maintaining an account in an offshore jurisdiction through which payments are made, the criminals limit the financial trail that leads to their country of residence.

In recent years, authorities have grown more attuned to the use of offshore credit cards as a money laundering technique. As a result, certain offshore jurisdictions now enable regulators to obtain from banks all records of transactions made by their credit card clients.

Consultants Consultancy arrangements can cover a wide range of

non-quantifiable services and are often used to integrate illegal funds into the legitimate financial system.

• The consultant might not even exist. For example, the criminal could actually be the consultant and the money is declared as income from services performed and can be used as legitimate funds.

In many cases, the criminal will employ an actual consultant (e.g. accountant, lawyer or investment manager) to do some legitimate work. This could involve purchasing assets. Often, the criminal transfers funds to the consultant's client account from where the consultant makes payments on behalf of the criminal.

Corporate financing Corporate financing offers a flexible way to transfer money

between companies. This technique is often used in sophisticated money laundering schemes. ◦ Onyancha sets up a shell corporation and a related bank

account in an offshore jurisdiction. He also sets up a legitimate business in his country of residence.

◦ Using illegal money in the offshore account, the shell corporation makes a business loan to, or equity investment in, the legitimate business.

Corporate financing is typically combined with a number of other techniques, including the use of offshore banks, consultants, complex financial arrangements, electronic funds transfers, shell corporations and actual businesses. This allows money launderers to integrate very large amounts of money into the legitimate financial system.

Corporate financing

Money launderers may also take a tax deduction on interest payments made by them in corporate financings!

From appearances alone, such transactions are identical to legitimate corporate finance transactions. Financial service professionals serving legitimate businesses need to look closely to find peculiarities in their dealings, such as: ◦ large loans by unknown entities ◦ financing that appears inconsistent with the

underlying business ◦ unexplained write-offs of debts.

Asset sales and purchases To integrate illegal funds into a legitimate financial system,

money launderers often resort to actual or fictitious sales and purchases of assets. ◦ Onyancha sets up a shell corporation and a related bank

account in an offshore jurisdiction. He also owns or controls a legitimate business or real estate asset in his country of residence.

◦ The shell corporation purchases the business or real estate at an inflated price. The earnings from this transaction are treated as legitimate profits.

This technique can be used directly by the criminal or in combination with shell corporations, corporate financing and other sophisticated methods. The end result is that the criminal can treat the earnings from the transaction as legitimate profits from the sale of the assets.

Business recycling Business recycling is a common integration technique

in which illegal funds are mixed with cash flow from a seemingly legitimate business. ◦ Onyancha owns or controls a legitimate, cash-

intensive car wash business. ◦ Onyancha deposits illegal funds into the business.

These funds are treated as revenue from the legitimate business.

Legitimate businesses that also serve as conduits for money laundering are referred to as 'front businesses’. Cash-intensive retail businesses are some of the most traditional methods of laundering money. This technique combines the different stages of the money laundering process.

Business recycling The principal requirement when using businesses

as fronts is that they have high cash sales and/or high turnover. This way it becomes easy for criminals to merge illegal funds and difficult for the authorities to spot the scheme.

An important indicator of front businesses is the relation between the size and nature of the business and the amount of revenue it generates. For example, if a newspaper stand starts making deposits into its bank account at $1 million a month, this should alert the bank to the possibility of illegal activity.

Import/export transactions Import/export transactions are a common integration

technique used by money launderers, especially in order to move illegal funds between countries. ◦ Onyancha sets up an import company in a foreign

country as well as an export company in his country of residence.

◦ The export company exports goods to the foreign import company. The import company remits illegal funds to pay for the goods on an over-invoiced basis.

To bring 'legal' money into the criminal's country of residence, the domestic trading company will export goods to the foreign trading company on an over-invoiced basis. The illegal funds are remitted and reported as export earnings. The transaction can work in the reverse direction as well.

In many cases, there is no actual export of goods or only the export of fake goods. In such cases, the trading companies may also exist only on paper. Bankers may be able to spot these transactions if the underlying trade documentation is inadequate or the underlying pricing is incorrect.

◦ ensuring that only legitimate and bona fide customers are accepted

◦ ensuring that customers are properly identified and that they understand the risks they may pose

◦ verifying the identity of customers using reliable and independent documentation

◦ monitoring customer accounts and transactions to prevent or detect illegal activities

◦ implementing processes to effectively manage the risks posed by customers trying to misuse facilities.

There are five types of risks that an effective KYC policy can help to mitigate:

reputational operational legal financial concentration.

Reputational risk: The reputation of a business is usually at the core

of its success. The ability to attract good employees, customers, funding and business is dependant on reputation. Even if a business is otherwise doing all the right things, if customers are permitted to undertake illegal transactions through that business, its reputation could be irreparably damaged. A strong KYC policy helps to prevent a business from being used as a vehicle for illegal activities.

Operational risk: This is the risk of direct or indirect loss from

faulty or failed internal processes, management and systems. In today's competitive environment, operational excellence is critical for competitive advantage. If a KYC policy is faulty or poorly implemented, then operational resources are wasted, there is an increased chance of being used by criminals for illegal purposes, time and money is then spent on legal and investigative actions and the business will be viewed as operationally unsound.

Legal risk: If a business is used as a vehicle for illegal activity by

customers, it faces the risk of fines, penalties, injunctions and even forced discontinuance of operations.

Apart from regulatory risk, involvement in illegal activities could lead to third-party judgments and unenforceable contracts. In addition, professionals working within many financial and other professional sectors may also personally be subject to legal action or prosecution.

Due to the nature of business, these risks can never entirely be eliminated. However, if a business does not have an effective KYC policy, it will be inviting legal risk. By strictly implementing and following a KYC policy, a business can mitigate legal risk to itself and its staff.

Financial risk: If a business does not adequately identify

and verify customers, it may run the risk of unwittingly allowing a customer to pose as someone they are not. The consequences of this may be far reaching. If a business does not know the true identity of its customers, it will also be difficult to retrieve any money that the customer owes.

Concentration risk: This type of risk occurs on the assets side of

a business if there is too much exposure to one customer or a group of related customers. It also occurs on the liabilities side if the business holds large concentrations of funds from one customer or group (in which case it faces liquidity risk if these funds are suddenly withdrawn).

KYC policy has five major elements:

Customer acceptance: The point at which a new customer is accepted or rejected is the easiest point at which the risk of dealing with illegal money can be avoided. By following good customer acceptance policies, dealing with entities and individuals who might engage in illegal transactions can be avoided.

Customer identification: Establishing the identity of customers is central to the KYC policy both for the customer acceptance or rejection decision and for the ongoing monitoring of customer accounts and transactions. By identifying customers effectively, the business is able to deal with them in the appropriate manner.

Customer verification: Verifying that customers are who they say they are is vital to any customer identification procedure. Merely collecting customer information is not enough for an effective KYC policy. Reliable and independent documentation should be used to support and confirm the identification details a customer provides. For example, citing an original primary photographic identification document such as a passport or drivers licence.

Accounts and transactions monitoring: In an effective KYC policy, customer accounts and transactions are properly classified in terms of risk and are regularly monitored. Through checks and thresholds, unusual activities, activities by high-risk customers, or suspicious behaviour can be detected and reviewed.

Risk management: To ensure that the risks posed by money laundering and other criminal activities are identified, mitigated and managed good risk management practices are essential.

Another objective of the KYC policy is to look past the appearance of the customer and obtain visibility into the sources of the customer's money. The basic objective is to obtain an understanding of the risk the customer poses to business. Could the customer use the business to facilitate money laundering?

Reporting entities must monitor their customers to identify, mitigate and manage any Money Laundering risk that may be posed by providing a designated service. OCDD obligations apply to all customers, including pre-commencement customers and also those who were identified by another reporting entity. There are three mandatory components of OCDD: ◦ KYC information ◦ a transaction monitoring program ◦ an enhanced customer due diligence program.

Reporting entities need to determine when and in what circumstances additional KYC information should be collected, updated or verified.

A transaction monitoring program that sets out how customer transactions will be monitored, how the reporting entity will identify transactions that are unusual or suspicious and how such transactions will be managed once they are identified as unusual or suspicious is a requirement of an effective AML program.

Under the AML Act, a reporting entity must make and retain a record of its applicable customer identification procedures.

The records must be retained for seven years after the end of the reporting entity's relationship with the relevant customers.

Compliance Risk management

Compliance is about meeting obligations, which in this case are mandated by the AML Act.

Risk management involves:• the identification of different types of risk • assessing the impact of these risks• determining the risk appetite of the organisation• putting in place risk management procedures and controls.

Compliance is about meeting obligations that may have a mandatory component.

Risk management does not have a mandatory component as the organisation determines how to deal with the various risks it faces.However, risk management may have to deal with both mandatory and non-mandatory elements.

All compliance risks must be dealt with. Risk management is used to prioritise the compliance risks.

Compliance identifies all the obligations an organisation has.

Risk management techniques are used to prioritise the response to the obligations in terms of control procedures and processes, levels of monitoring and reporting requirements.