Constant war of auditors Constant war of auditors agianest money laundryagianest money laundry

By: Gholamhossein Davani

• Managing Partner of Dayarayan auditing & Financial Services Firm (Associated with RSM International)

• IACPA,NYSSCPA,CFE,IICA,IMA,AAA,IIA,BAA,EAA,• AIA,ACFE,CAAA,FMA,

1st.Annual Preventing Abuses Fraud Financial

Conference Dec.21,22 -2010

Tehran-Iran

1

World at a glanceWorld at a glance

2

Population 11/02/2010

6,802,000,000Millionaires (US$):

10,000,000(2010)-Forbes

People Paid Below $2 per day:

~3.25 billion (~50%)

Billionaires

(US$):1011 (2010) -Forbes

GDP(PPP) US$70.21 trillion (2009 est.))

GDP (Currency):

$58.07 trillion (2009 est.)

GDP/capita (PPP): $10,500

GDP/capita (Currency):

$7,178

Total World Stock

October 2010 = $52,699 trillion

Global Exchange market as April 2010

Average daily turnover in global foreign exchange markets is estimated at $3.98 trillion.

The $3.98 trillion break-down is as follows:

$1.490 trillion in spot transactions$475 billion in outright forwards$1.765 trillion in foreign exchange

swap$43 billion currency swaps$207 billion in options and other

products

Source:BIS –Triennial Central Bank Survey report on global foreign exchange market activity in Dec. 2010

4

Des. 2009 2008 2006 2005 1990 1980 1950

GDP (Billion)

70,170 70,630 47,776 44,454 22,721 11,741 4,285

Export (Billion)

12,460 15,970 14,464 12,684 4,256 2,408 304

Import (Billion)

12,300 15,800 14,282 12,585 4,283 2,422 309

Population (Billion)

6.7 6.6 6/5 6/4 5/3 4/4 2/5

Inflation%

5-20% %4-20 3/8 3/7 26/1 16/9 13/2Source: IMF

1-GDP, Export, Import, Population, and Scale is Billion

2- GDP- Current price at US. Dollars

What does Globalization?

5

Description

World USA EU China

India

Iran

Export 12,460 1,069 1,952 1,204 168 69

Import 12,300 1575 1,690 954 274 59

GDP 43,920 12,470 13,310 1,790 3,680 825

GDP (Per

capital) PPP10,000 42,000 28,100 630 3,200 10,900

Comparison selected countries 2009

Source: Bank of International Settlement (BIS) as of April 2010 TriennialCentral Bank Survey Report on global foreign exchange market activity in 2010

Average daily turnover in global foreign exchange markets is estimated at $3.98 trillion.

The $3.98 trillion break-down is as follows:

$1.490 trillion in spot transactions

$475 billion in outright forwards$1.765 trillion in foreign

exchange swap$43 billion currency swaps$207 billion in options and other

products

18 Major Stock 18 Major Stock

Exchanges 31/12/2009Exchanges 31/12/2009

7

Economy Stock Exchange Market

Capitalization(USD Billions)

Trade Value(USD Billions)

USA New York + Nasdaq 15067 30829

Japan Tokyo 3306 3704

Europe Euro next 2869 1935

UK London 2796 1772

China Shang hay+ Shenzhen 3573 7828

Hong Kong Hong Kong 2305 1416

Canada Toronto 1677 1245

Spain BME Spain 1435 1259

Brazil BM& F Bovespa 2532 1437

India Bombay & National Stock 1307 264

 Germany Deutsche Borse 1292 1517

Australia Australia 1225 799

Switzerland SIX Swiss 1065 740

South Korea South Korea 835 1570

Nordic CountriesNasdaq Amex Nordic 817 697

South Africa Johannesburg 799 271

Taiwan Taiwan 658 905

Italy Italy 656 948

Rank Name Citizen Net Assets

1 Carlos slim & Family Mexico 70

2 William Gates US 54

3 Warren Buffet US 79

4 Mukesh Ambani India 52

5 Lackshimi Mital India 59

6 Lawrence Ellison US 65

7 Bernard Arnault France 61

8 Eike Batista Brazil 53

9 Amancio Ortega Spain 74

10 Karel Albrecht Germany 90

1010thth World Leading World Leading companies (Forbes 2010)companies (Forbes 2010)

Rank Company Country IndustrySales($B)

Profit($B)

Assets($B)

Market Value($B)

1 JP Morgan Chase

USA Banking 115.63 11.65 2,031.99 166.19

2 General Electric

USA Conglomerates 156.78 11.03 781.82 169.65

3 Bank of America

USA

Banking 150.45 6.28 2,223.30 167.63

4 Exxon Mobile

USA Oil & Gas Operations

275.56 19.28 233.32 308.77

5 ICBC China Banking 71.86 16.27 1,428.46 242.23

6 Banco Santander

Spain Banking 109.57 12.34 1,438.68 107.12

7 Wells Fargo USA

Banking 98.64 12.28 1,243.65 141.69

8 HSBC Holding

UK Banking 103.74 5.83 2,355.83 178.27

8 Royal Dutch Shell

Netherlands Oil & Gas Operations

278.19 12.52 287.64 168.63

10 BP UK Oil & Gas Operations

239.27 16.58 235.45 167.13

Mafia Money-Laundering Mafia Money-Laundering Profits Swell in Credit CrisisProfits Swell in Credit Crisis

The Crisis has given organized crime room to thrive because access to credit has become more difficult," said Anna Maria Tarantola , the Central Bank’s deputy general director, in a July 12 interview in her Rome office.

Source: Bloomberg 21/07 2010

10

Hundreds of billions in crime Hundreds of billions in crime money knowingly laundered by money knowingly laundered by

banks during credit crunchbanks during credit crunch

Morgan Stanley Swings To Second Quarter Profit (Market Watch) The Bank said earnings for the quarter came in at $1.58 Billion, or $1.09 a share, compared to a loss of $1.26 Billion, or $1.10 a share, in the year-ago period. On an adjusted basis, profit in the latest quarter was $1.44 Billion, or 80 cents a share. Quarterly net revenue at Morgan Stanley rose to $7.95 Billion, up 53% from a year earlier. Wells Fargo Earnings Rise 12% (WSJ) The company reported a profit of $2.88 Billion, or 55..

11

Antonio Maria Costa of the UN Antonio Maria Costa of the UN Office on Drugs and Crime 2009Office on Drugs and Crime 2009

I have seen evidence that the proceeds of organized crime were “the only liquid investment capital” available to some banks on the brink of collapse last year. He said that a majority of the $352bn (£216bn) of drugs profits was absorbed into the economic system as a result….

Source:http://www.nakedcapitalism.com/2009/12/drug-money-saved-banks-in-global-crisis.html

12

Theory 1:The term "Money laundering" is often said to have originated at the time of the famous American gangsters that arose originally out of Prohibition - the banning of alcoholic drinks. Several mechanisms were used to disguise the origins of the large amounts of money generated by the import and sale of alcohol and other "rackets" such as gambling, some of which was illegal. Ironically, one of the methods of concealing the source of the money was legal gambling. The major headache that gangsters faced was that the money was in cash, often in small denomination coins. If the coins were put into the bank, the questions would be asked. But the storage of large amounts of money in low value coins is a storage nightmare. So they created businesses, one of which was slot machines, and another of which was laundries - so, it is said, that the term "Money laundry" was born.

13

Theory 2: Coined due to the laundering of dirty money in a process of numerous transfer

Theory 3: Used first time after Watergate scandal in 1970s and then was recognized internationally

Money laundering is a set of measures taken for transfer of the money generated from illicit transactions such as drug traffic, terrorist activities, and organized crime arrival at the transformation of origin, currency unit, beneficiaries, or the final destination of the money.

Money Laundering MethodsMoney Laundering Methods

• Money Laundering MethodsHow the basic steps mentioned in the Stages of The Process are used depends on the available laundering mechanisms and the requirements of the criminal organizations. The table below provides some typical examples.

• Placement Stage LayeringStage IntegrationStage Cash paid into bank (sometimes with staff complicity or mixed with proceeds of legitimate business). Wire transfers abroad (often using shell companies or funds disguised as proceeds of legitimate business). False loan repayments or forged invoices used as cover for laundered money. Cash exported. Cash deposited in overseas banking system. Complex web of transfers (both domestic and international) makes tracing original source of funds virtually impossible. Cash used to buy high value goods, property or business assets. Resale of goods/assets. Income from property or legitimate business assets appears "clean". 

14

Money laundering as a crime only attracted interest in the 1980s, essentially within a drug trafficking context. It was from an increasing awareness of the huge profits generated from this criminal activity and a concern at the massive drug abuse problem in western society which created the impetus for governments to act against the drug dealers by creating legislation that would deprive them of their illicit gains.Governments also recognized that criminal organizations, through the huge profits they earned from drugs, could contaminate and corrupt the structures of the state at all levels.Money laundering is a truly global phenomenon, helped by the International financial community which is a 24hrs a day business. When one financial centre closes business for the day, another one is opening or open for business.As a 1993 UN Report noted: The basic characteristics of the laundering of the proceeds of crime, which to a large extent also mark the operations of organized and transnational crime, are its global nature, the flexibility and adaptability of its operations, the use of the latest technological means and professional assistance, the ingenuity of its operators and the vast resources at their disposal.

15

16

Evolutionary trend of Evolutionary trend of money launderingmoney laundering

CorruptionCorruption

Drug trafficDrug traffic

Shadow Shadow EconomyEconomy

Underground EconomyUnderground Economy

Organized Organized TerrorismTerrorism

Shadow economy is a set of economic Shadow economy is a set of economic activities – whether in manufacturing or in activities – whether in manufacturing or in services- by the citizens who want to earn services- by the citizens who want to earn more money beyond the frame of formal more money beyond the frame of formal economy.economy.

Bribery, embezzlement, tax evasion, Bribery, embezzlement, tax evasion, nepotism, illicit production, black market nepotism, illicit production, black market of rare, exchange transactions, and fraud.of rare, exchange transactions, and fraud.

The history of Anti-Money The history of Anti-Money Laundry LawsLaundry Laws

Only drug traffic and its proceeds were criminalized.

Ark, Paris (July 1989)

17

The proceeds of all Illicit transactions and original activities were considered “Dirty”.

1990

The proceeds of drug traffic or all criminal activities are “Dirty”

1995

Anti-Money laundering law2003

18

Feature of Money Feature of Money LaunderingLaundering

An organized crime, an organized gang empowered by electronic devices

A long-term, continuous crime

Cross-border activities like those in the capital market

Its proceeds are used in Illicit activities such as fraud in elections

International money laundering is not often done by those involved in illicit activities but by the experts who are familiar with the mechanism of international money and capital market. They are able to distinguish the differences in national laws and use them.

19

Access to illicit financial resources

Physical movement of financial resources

Trying to cancel the financial resources layering

Building a sophisticated network for money transfers and using the electronic transactions and attending tax heavens

Integration

DepositsPurchase of domestic or int’l bondsPurchase of stocksInvolvement in housing marketPurchase and resale of antipodes

Contributing the religion centers and charitiesContributing the religion governmentBanks with int’l legal entity

The process of Money The process of Money LaunderingLaundering

Establishment of specialized banksRegional financial-credit institutionsEstablishment of anonymous companies in the countries where the right of secrecy is guaranteedIssuance of forged export-import notes and bills for money transferAttending the precious goods exchanges such as oil, gold and jewelry

20

A New York or any other bank opens an L/C for a group of gold buyers with dollar-denominated cheques.

American broker himself delivers the cheques to the render from Rio de Janeiro or Sao Paolo. He or she in turn buys gold using the real-denominate cheques and then sends the dollars-denominated cheques to New York.

The gold deliverer send it to a city on the border of Brazil and Uruguay. Here after, it is a smuggled good.

The gold is delivered to a Monte Video Bank

The gold receiver (trustee) informs the New York bank. The latter pays the money in dollars in the deliverer’s account in New York. Then the money goes to a bank account in Monte Video. So the gold is exported legally from Uruguay to USA and will be supplied there as Uruguay gold.

The process of Money The process of Money TransferTransfer

21

The stage of cash transfer into or out of financial system (Conversion)

The stage of international cash flows (integration)

Most responsibility for prevention of going out cash amounts undertake of Iran Customs but Customs hasn’t any experience and authority in this case.

The stage of entering cash money into the financial system

At this stage, money laundering is vulnerable most because the money can not be easily inserted in a bank account due to high opuantity at cash

Report the suspicious transaction to the officials is a powerful instrument against money laundering

Special attention to depositories through verifying the customer’s identity

Critical points in Critical points in Money LaunderingMoney Laundering

22

The authority of government should be high (through using proper financial and tax mechanisms e.g. the cost and risk of

tax penalties) so that the incensories for crime are lowered and the report of any unusual money transfers are encouraged.

Control of corruption in public sector

Expansion of auditing and financial control over economic activities aimed at transparency and preventing the tax evasion.

A proper mechanism should be devised for money and capital market so that a sophisticated supervision is established.

Creating a financial task force against money laundering(Financial Interpol)

The ways for preventing The ways for preventing the Money Launderingthe Money Laundering

23

Money launderers clean their proceeds with the help of lawyers, attorneys, auditors and

top bank executives.

Money filtering= converting the small notes to big ones

Money transfer

Using the bank system

The way of Money The way of Money LaunderingLaundering

24

USA - 5-10USA - 5-10

Australia 4-12 Australia 4-12

Russia 25Russia 25

Germany 25Germany 25

Italy 10-33Italy 10-33

Japan 4-15Japan 4-15

UK 3-15UK 3-15

The cost of money laundering in the world accounts for 20

to 30 percent of the money to be laundered

Currently the US trade deficit is more than $bn 1500. It is said that without “dirty money” in foreign accounts, us economy will be diminished, the living standards will collapse, dollar will be weakened, its capital and borrowing

sources will decrease, and Washington will be no longer the emperor of the

world.

The bulk of shadow economy activities in different The bulk of shadow economy activities in different countries in relation to GDP (%)countries in relation to GDP (%)

The total money laundry is about 2-5% globThe total money laundry is about 2-5% glob

Iran 25-45Iran 25-45

25

The bulk of money laundering in 1995 was $ Billion 500-1500 (2% of world’s gross product, 6% of USA GNP and equal to France’s GDP)

At the beginning, higher crime led to higher demand for money

Currently higher crime leads to lower demand for money

Money laundering and economic crime cause a shift in the direction of proceeds from long-term investments to short-term, risky and profit-

making ones.

Tax evasion is one of the main incentives for money laundering

Government’s income sources decrease. Government’s budget system becomes inefficient

Conclusion: change in method of money laundry and going out of

banking system, and moving award parallel markets and

sophisticated non-monetary tools

Money laundering would lead to the exit of huge amounts of foreign

exchange reserves from the country, giving rise to financial corruption,

inflation and price hikes.

The annual turnover of global drug traffic and its net profit are estimated to be $bn5000 and

$bn500 respectively

The impact of money laundering on The impact of money laundering on economicseconomics

26

Banking activities especially in the banks with international legal entity which are hard to be controlled.

The parallel institutions banking system such as financial-credit ones

Futures markets which cooperate with stock exchange agents

Involvement in informal economic sectors such as precious metals, oil deals, artistic works and antipodes

Tax heavens: Free trade zones with no control over them

Religions centers which perform economic activities. Charities and the like, foundations and special cooperation funds

While converting money, countries become the hosts for converting the dirty money to clean money. As a special example, when Euro was

introduced, a great bulk of dirty money was converted into clean money

The suitable tools for The suitable tools for money launderingmoney laundering

27

Creating the methods for authenticating the customers’ identity

Creating the proper methods for account keeping aimed at the accurate identification of the bulk of transactions

Teaching the legal repair to employees

Teaching the above-mentioned methods to employees

Creating the internal reporting methods for suspicious transactions

Creating the financial police

Legal Requirement of financial Legal Requirement of financial institutions for combating the institutions for combating the

money launderingmoney laundering

The impact of money The impact of money laundering of financial institutelaundering of financial institute

Financial institutions are at the front line of combating the money laundering. On the one hand, the money laundering. In the one hand, the money launderers put these institutions under scrutiny and on the other hand these institutions are obliged to carefully supervise the financial transactions. For example, in UK, the financial organizations are obliged to report any suspicious transactions as well as all transactions with a value of over £10,000. Therefore, the financial institutions are affected by money laundering from two aspect:Legally due to the obligations imposed by the exiting laws; financially due to the compliance with supervisors, the financial institutions are obliged to create the systems which present the money laundering and help officials combat it.

28

History of Anti-Money Laundry in Iran

1-Law of prohibition receipt commission in government transaction- 1993

2- law of struggle with drug- 19983-Law of aggravation punishment

Perpetrators Bribe,Embezzelment and Fraud- 1998

4-Law of Anti-Money Laundry -20075-Bylaw of Anti-Money Laundry -

20096- Central bank regulation about

anti-money laundry 2009-2010:6/1- Cash paid maximum 15,000

USD6/2- National card number6/3- Currency exchange in only

authorized brokers and banks29

Methods of Money laundry in Iran1-Banking system2-Credit financial institutes3- Open account with forged

identity4-Travel and transport agency5- Supplier of expensive goods6- Notary public office7- Housing Investment companies8- Charities entitiesInsurance companies9- Casino10- Transfer currency exchange by

Havale system11- Paper companies

30

Money laundering happens through below financial product:

Money laundering happens through below financial product:

Cash deposits Deposit accounts Client accounts Bank safety deposit boxes Wire transfers Correspondent bank accounts Omnibus accounts Bank bills Credit cards Back to back loans Letters of credit Bank accounts for legal entities Incorporating a bank Private Banking Services

31

Some of Money laundry statics in Iran1- total value of drug product in

east of Iran 11 Billion USD2-Total value of annual smuggled

goods (Import & Export ) 12 Billion

3- Total estimated receipt commission in

International contracts ( Specially I oil & Gas) 3-5% of contract amounts that samples are same

4- ???

32

Centers of money laundry in Iran

1- Private Credit financial Instiutute2- The turn over of one of Gharzal

hassaneh ( Religious Fund) in Khorasan state ( Beside Afghanistan ) has been double more than all banks in the mentioned state !!

3- The assets and operational turn over in one of Gharzol hassaneh with 4 years activity in Khorasan state ( Beside Afghanistan ) has been 2.5 times more than Saderat bank one of the oldest Iranian bank( has established in 1960)

33

Finance& Refinance from Middle East bank especial UAEThe Letter of credit without transfer moneyOver-invoice in Foreign transactionTehran Stock exchange transactionReal state transactionDrug deal ( Afghan road)Non-bank financial institute (Gharz-al-hasaneh funds)Religious CharitiesReligious societies &Mission(charities)Iran Free Industrial &Commercial Zones Gun transaction (Iran-Contra)

34

Simple Money Laundry in Simple Money Laundry in IranIran

Iran new law & regulationIran new law & regulation

Regulations on Avoidance of Money Laundering(2003)

The Law of Electronic Commerce (2003)

The Law of Using the Professional Services of the Certified Public Accountants (1993)

Bill Text of VAT in Iran 2008Anti-Money Laundry Law 2007

35

Jolio Anderoti, Italy’s Jolio Anderoti, Italy’s Democrat-Christian party leaderDemocrat-Christian party leaderTino Croxy, social democrat Tino Croxy, social democrat party leaderparty leaderElizabeth Cap, Former Swiss Elizabeth Cap, Former Swiss minister of justiceminister of justiceRodriguez, Colombia’s Maha Rodriguez, Colombia’s Maha leader residing in Switzerlandleader residing in SwitzerlandPablo Scober, Cali band leaderPablo Scober, Cali band leaderChief executives of Swiss credit Chief executives of Swiss credit bankbankFerdinand Marcos, former Ferdinand Marcos, former Philippines’ dictatorPhilippines’ dictatorMore than nine Japanese PMSMore than nine Japanese PMSRaul Salinas, Former Mexican Raul Salinas, Former Mexican President’s brotherPresident’s brother

Some members of European Some members of European CommissionCommissionAli Sardani, Binazir Boto’s Ali Sardani, Binazir Boto’s (former Pakistani Pm) (former Pakistani Pm) HusbandHusbandOmar Bango, former Gabon Omar Bango, former Gabon dictatordictatorSome South Korean PMS and Some South Korean PMS and high-ranking officialshigh-ranking officialsGen.Abaja, Former Nigerian Gen.Abaja, Former Nigerian dictatordictatorSokaro family, indonesiaSokaro family, indonesiaAlan Garcia, former peruvian Alan Garcia, former peruvian presidentpresidentMoboto Seseseco, Former Moboto Seseseco, Former Zaine dictatorZaine dictatorOsama Bin Laden, Alqaeda Osama Bin Laden, Alqaeda founderfounder

36

World’s famous persons World’s famous persons involved in Money involved in Money

launderinglaundering

The annual turn over in drugs traffic is $ bn 5000 with a The annual turn over in drugs traffic is $ bn 5000 with a net profit of $bn 500.net profit of $bn 500.

In UK $bn 4.5 is spent each year for buying the drugs.In UK $bn 4.5 is spent each year for buying the drugs.Bolivia earns $ bn 450 from Cocaine trade.Bolivia earns $ bn 450 from Cocaine trade.Peru earns $ 900-1300 Million from Cocaine.Peru earns $ 900-1300 Million from Cocaine.

The drug traffickers’ income in USA and Europe is The drug traffickers’ income in USA and Europe is estimated to be about $ 223.000 per minute.estimated to be about $ 223.000 per minute.

The Pakistan annual proceeds of each 500 tons of opium The Pakistan annual proceeds of each 500 tons of opium are $bn 1.5 in Pakistan.are $bn 1.5 in Pakistan.

Cali and Medeline cartels earn about $bn 4 each year.Cali and Medeline cartels earn about $bn 4 each year.The turnover of a Romanian company involved in Arms The turnover of a Romanian company involved in Arms export was $bn 23 in 1993.export was $bn 23 in 1993.

37

Some statistics on global Some statistics on global criminal tradecriminal trade

38

US Mafia

Gray Wolves (Turkey)

(National China, Hong Kong)

Italian Mafia

(Jamaica)

Russian and Chechnya Mafia

Japanese Yakuza

Medeline Cartel (Colombia)

Eastern Europe Mafia

Golden Triangle

World MafiaWorld Mafia

39

Composition of Global Mafia Composition of Global Mafia ProceedsProceeds

Human Smuggling and prostitution

Credit card (mainly in the field of Hong Kong’s activities)

Casinos, Betting and Lottery (Soccer matches, boxing, horse back riding etc.

Illicit arms sales

Drugs and Alcohol Beverly's Sales ($bn 120-300 Per year)

Attending the international tenders (Brokerage)Bribery and Brokerage

Profit of legal investment

Organized terrors

Production or sales of illicit products such as pornographic items

Foreign exchange transactions

Nepotism

Others

Methods of Money Methods of Money Dirty MoneyDirty Money

Star burstStar burstEstablishing the front Establishing the front

companiescompaniesInvestment in shell Investment in shell

companiescompaniesBlack holesBlack holesFalse fund transfers False fund transfers

between domestic and between domestic and foreign banksforeign banks

Fund transfers using Fund transfers using different foreign exchangesdifferent foreign exchanges

Provisional investment in Provisional investment in legal commercial/ legal commercial/ manufacturing inter- prices manufacturing inter- prices (domestic and foreign)(domestic and foreign)

Investment in national Investment in national bondsbonds

Establishing the charity Establishing the charity foundationsfoundations

Investment in gold and Investment in gold and diamondsdiamonds

Fund transfers to the Fund transfers to the countries with hidden (e.g. countries with hidden (e.g. Switzerland) or free (e.g. Switzerland) or free (e.g. Seychelles) banking rules Seychelles) banking rules and returning them to the and returning them to the origin as legal money origin as legal money (Boomerang)(Boomerang)

Corruption and Corruption and Embezzlement (mainly in Embezzlement (mainly in public. Sector)public. Sector)Political corruption and Political corruption and corrupt officialscorrupt officialsForged invoices and bills: Forged invoices and bills: domestically, in export domestically, in export and even between and even between companies (mainly in companies (mainly in private sector)private sector)Drugs transactionsDrugs transactionsInternational prostitutionInternational prostitutionTaxable wealth and Taxable wealth and incomeincomeSizable wealth and incomeSizable wealth and incomeFunds seized after terrorsFunds seized after terrorsFinancial resources of the Financial resources of the world’s intelligence world’s intelligence agencies (e.g. Iran-contra)agencies (e.g. Iran-contra)Proceeds of taking Proceeds of taking hostages and gamblinghostages and gamblingDonations to terrorist Donations to terrorist organizationsorganizations

40

41

Anti-money laundering Anti-money laundering instructions for ICAEW instructions for ICAEW

AccountantsAccountants

• Provisional Guide for Accounts, published on 12 May 2003

•Criminal proceeds law (2003)

•The Money Laundry Regulation 2007

•Money laundering in Criminal proceeds law:

“Any deals with criminal proceeds is criminalized”.

Accounts must report any information and /or suspicions on money laundering (whether regarding customers or the third parties) to criminal financial information service. Otherwise they will face penal actions.

•Suspicion means any sensible awareness and belief in the existence of money laundering.

Money laundering is the term used for several crimes which

deal with criminal proceeds or terrorist funds. Currently it

involves

the acquisition of criminal proceeds of concealing them in

all

manners. This guide contains the similar activities related

to

terrorist funds. These funds involve those which may be used for

terrorism or those earned from terrorism.

42

Money launderingMoney laundering

Criminal action is that which Criminal action is that which is criminalized in all parts of is criminalized in all parts of

UKUK

Criminal property includes the following (but not limited to them):

• Proceeds of tax evasion

• Proceeds earned from corruption and bribery

• Proceeds earned through a cartel’s activities

• Proceeds (as saved costs) from failure in meeting the repairements in • which the failure is a criminal action.

43

Responsibilities of auditing Responsibilities of auditing FirmsFirms

• They must assign an employee to receive the reports on money laundering from his or her collages and submit them to relevant bodies.

• They must familiarize their employees with specialized applied instructions about the legal repairments of money laundering including how to identify and encounter the potential money laundering, how to report it and how to identify the customers.

• They must authenticate the identity of new customers.• They must established the paper internal practice for

preventing the money laundering

44

Awareness and suspicionAwareness and suspicion

45

Certain Certain AwarenessAwareness

Fin countering the obvious Fin countering the obvious mattermatter

Awareness of the conditions which show the Awareness of the conditions which show the realities to sensible and honest peoplerealities to sensible and honest people

Awareness of the conditions which expose the sensible and Awareness of the conditions which expose the sensible and honest people to questioning but fail to perform sensible honest people to questioning but fail to perform sensible questionings.questionings.

Suspicion has not been defined in law. It is beyond the Suspicion has not been defined in law. It is beyond the doubt but it can not be proved or ascertained. It is doubt but it can not be proved or ascertained. It is subjective but takes the form of an objective matter.subjective but takes the form of an objective matter.

If companies and auditors are not

aware of suspicious of money

laundering but commit it, it mean

that the auditors who have not

reported it, may have committed it.

46

The principle of importance does not exist in revealing the cases suspicious of money laundering. In other words, the reports on money laundering should be issued without may considerations to the gained interests.

47

The repairement for issuing the money laundering reports governs the principle of confidentiality of customer’s documents.

Auditing agencies are not allowed to warn their customers so that they are exposed to prosecution.

Tax evasion is also classified in the field of money laundering.

Those covered by anti-Those covered by anti-money laundering money laundering

• All accountant regardless of the commercial nature of their clients

• People involved in monetary and banking services

• Housing agencies• Cash commodity transactions with a

value of 15,000 or more• Casinos• Tax service agencies• Management consultancy service

agencies• Legal service agencies• Firms registration bureau

48

To conceal “The criminal property (to conceal or to charge the nature, source, place, mode, movement,

possession or the rights thereof; to convert, transfer or taking it out of any part of great Britain)

49

“To arrange” (entering or involving in an arrangement in which a person or a company is

enabled to facilitate the acquisition, maintenance, use or control of a criminal property

Obtaining, using or acquiring a criminal property

Trying to deceive someone to commit such crime

Money launderingMoney laundering

Money laundering penaltiesMoney laundering penalties

Depend on the crime

50

Crimes may be heard by district or supreme courts

Penalties by district courts

•Cash fines up to £5000 or six month of imprisonment

•Imprisonment or both penalties

Penalties by supreme courts

•Cash fines (no limits)

•Imprisonment up to 14 years or both penalties

•Cash fines (no limits) or imprisonment up to 5 years or both penalties for failure in reporting the crime

•Final notice and warning

Companies’ tasks regarding Companies’ tasks regarding Anti-money laundering lawsAnti-money laundering laws

51

They must assign one of their experienced and top employees as anti-money laundering officer and implement the internal reporting practices

They must determine the substitute for the officers in case of leaves

They must familiarize the concerned employees with the implementation of anti-

money laundering law and how to identity the customers on (encounter the potential money

laundering)

They must establish the proper written internal practices for avoiding and

preventing the money laundering and make their employees of this procedure

They must authenticate the identity of new customers and records their documents

Instructions at work or attending the conferences

Computerized instruction

Customer acceptance procedure

Controlling the customers’ money

Proper internal controls

Computerized instructions

They must report the suspicious cases to national anti-money laundering organization

52

Legal persons

Company’s registration ad

Place of institutions

Company managers’ names

Legal persons

Company’s registration ad

Place of institutions

Company managers’ names

Natural persons

A copy of ID card

Passport

Driving license

Natural persons

A copy of ID card

Passport

Driving license

To check the customers’ names with the black list published by anti-money laundering organization

Investigating the accounts of those who deal with foreign exchanges

53

Sending a typical report to anti-money laundering organization on suspicious cases

Within seven days after sending such a report, no measures should be taken by the person or the company

In emergencies, the anti-money laundering organization may be contacted through phone or fax

If no response is received from NCIS within 7 working days, the firm can do process transaction

If NCIS announces its dissatisfaction, there will be a 31 day deadline period in which no transactions will be made. After this period, transactions are allowed.

Tasks of auditors Tasks of auditors and companiesand companies

Money laundering chain Money laundering chain from IFAC’s Perspectivefrom IFAC’s Perspective

Lack of a strong supervisory environment and lack of honesty among the chief executives

(meritocracy)

54

Lack of a relevant, independent and internal program for acceptance of auditing

Extent of Extent of risksrisks

Risk of acceptance: Identification and authentication of customers

55

Operational risk: The risk due to the problems in Operational risk: The risk due to the problems in manufacturing or service transfers threatening a commercial manufacturing or service transfers threatening a commercial unit. This risk is a function of internal controls of information unit. This risk is a function of internal controls of information systems, honesty of employees and many other operational systems, honesty of employees and many other operational process. In the field of combating the money laundering, it is process. In the field of combating the money laundering, it is the most important challenge of banking system. The more the most important challenge of banking system. The more sophisticated and more devise the activities, the greater the sophisticated and more devise the activities, the greater the operational risk.operational risk.

Credit Risk : Failure in acceptance- Risk of acceptanceCredit Risk : Failure in acceptance- Risk of acceptance

Money laundry hurts the reputation of a commercial unitMoney laundry hurts the reputation of a commercial unit

Improving the internal control system is needed to remove it.Improving the internal control system is needed to remove it.

strategic risk: thestrategic risk: the risk that a business is unable to effectively plan, risk that a business is unable to effectively plan, implement and respond to changes and developments within an implement and respond to changes and developments within an industry.industry.

Signs of money launderingSigns of money laundering

• Introducing the special customers by a colleague or a foreign financial institution in a country known for production and traffic of drugs and arms and banking security

• Occurrence of usual changes in conventional accounts and patterns of transactions

• The transactions made through brokers with no commercial reasons

• The transactions in which identifying the two sides is difficult.

• False order in transactions in order to evade the repairement of identification or keeping the documents for supervisory affairs.

• Exchange transaction in high volumes and in usual forms

• Illicit transactions or those which have not been registered correctly (improper and inadequate auditing)

• Extensive cash transactions inconsistent with a person’s profession

56

Institutions targeted by Institutions targeted by money launderersmoney launderers

57

Banks and credit institutions

Holding Investment companies

Money- changers Casinos

Converters of travel cheques, money bills and

credit papers in cash

Money shippers mailing systems

Brokers of precious metals, stores and jewelry

Loan-rendering and financing companies

Travel agencies

Housing agencies

Insurance companies

Loan Bank

Vendors and brokers of vehicles and artic rafts

Federal government companies

Agents or brokers of stocks and goods

Five supervisory factors Five supervisory factors in money launderingin money laundering

•Supervisory

•Risk evaluation

•Supervisory activities

•Continuous supervision

•Information and communication

58

Basel committee’s Basel committee’s supervisory rules on money supervisory rules on money

launderinglaundering

•Using risk-centered supervision

59

• Know your customer (KYC)Know your customer (KYC)

Global institutions and laws for combating the money laundering (1)

60

1986

United States enacts Money Laundering Controls Act, (First Money Laundering Law in the World)

1988

•Basel Committee on Banking Supervision- Prevention of criminal use of the banking system for the purpose of Money- Laundering

•United Nations- Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (“Vienna Convention”)

1989

Financial Action Task Force (FATF)- Established by G-7

1990

•Financial Action Task Force (FATF)- 40 Recommendations

•Caribbean Financial Action Task Force (CFATF)- Established

•Caribbean Financial Action Task Force (CFATF)- 19 Recommendations

•Council of Europe: Convention on Laundering, Search, Seizure and Confiscation of Proceeds of Crime (ETS N0 141)(“Stasburg Convention”)

Global institutions and laws for combating the money laundering (2)

61

1991

•Financial Action Task Force (FATF)- Mutual Assessment Process Agreed

•European Union (EU)- Council Directive on prevention of the use of the financial system for the purpose of money laundering (91/308/EEC)

1992

• Organization of the American States/ Inter-American Drug Abuse Control Commission (OAS/CICAD)- Model Regulations Concerning Laundering Offenses Connected to Illicit Drug Trafficking

1995

•Edgemont Group- Established

•Organization of the American States/ Inter-American Drug Abuse Control Commission (OAS/CICAD)- Summit of the Americas Ministerial Conference Concerning the Laundering of Proceeds and Instrumentalities of Crime- Ministerial Communiqué1996

•Financial Action Task Force (FATF)- 40 Recommendations (First Revision)

•Financial Action Task Force (FATF)- First Typology Report Issued

Global institutions and laws for combating the money laundering (3)

62

1997•Asia /Pacific Group on Money Laundering (APG)-Established•Council of Europe (COE)-Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures (PC-R-EV) – Established•Basel Committee on Banking Supervision (BCBS)- Core principles for Effective Banking Supervision•Organization for Cooperation and Economic Development (OECD)- Combating Bribery of Foreign Public Officials in International Business Transactions1998

• United Nations (UN) – Political Declaration and action plan against Money Laundering Adopted at the Twentieth Special Session of the United Nations General Assembly

•Organization of the American States/Inter-American Drug control Commission (OAS/CICAD)- Model Regulations Concerning Laundering Offenses Connected to Illicit Drug Trafficking and Other Serious Offenses (Amended)

•International Organization of Securities Commissions (IOSCO)- Regulation on the Adoption of the objectives and principles of Securities Regulation

•United Kingdom (UK)- Regulation of the Financial Services in the Crown Dependencies (“Edwards Report”)

Global institutions and laws for combating the money laundering (4)

63

1999

•United Nations- International Convention for the Suppression of the Financing of Terrorism

•United Nations (UN) office on Drugs and Crime- Model Legislation on Laundering, Confiscation and International Co-operation on Relation to the Proceeds of Crime [for civil law jurisdictions]

•Organization for Cooperation and Economic Development (OECD)- Principles of Corporate Governance

•Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG)- Established

•United Kingdom (UK)- Review of Financial Regulation in the Caribbean Overseas Territories and Bermuda (“KPMG Report”)2000

•Financial Action Task Force (FATF)- Establishes Criteria for Non-Cooperative Countries and Territories (NCCT) list

•Financial Action Task Force (FATF)- First NCCT List Issued

•Financial Action Task Force of South America Against Money Laundering (GAFISUD)-Established

•United Nations (UN) office on Drugs and Crime- Model Money Laundering and Proceeds of Crime Bill [For law jurisdictions]

•United Nations (UN)- Convention Against Transnational Organized Crime (“Palermo Convention”)

•International Association of Insurance Supervisor (IAIS)- Insurance Core Principles and Methodology

•Wolfsburg Group- Private Banking Principles (Original Release- “Wolfsburg Principles”)

Global institutions and laws for combating the money laundering (5)

64

2001

• United Nations (UN)- Security Council Resolution 1373 (2001) [S/RES/1373 (2001)]

•Basel Committee on Banking Supervision- Customer Due Diligence for Banks

•International Monetary Fund (IMF)- Public Information Notice (PIN) 01/41- money laundering poses an threat to financial system integrity, and may undermine the sound functioning of financial systems, good governance, and the fight against corruption.

•Financial Action Task Force (FATF)- Special Recommendations on Terrorist Financing

•Financial Action Task Force (FATF)- Behind the Corporate Veil, November 2001

•US Government- Guidance on the Proceeds of Foreign Corruption

•Uniting and Strengthening America by providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) – Enacted

•European Union (EU)- Directive (2001/97/EC) of the European Parliament and of the Council of 4 December 2001 amending Council Directive (91/308/EEC) on the prevention of the financial system for the money laundering

Global institutions and laws for combating the money laundering (6)

65

2002

• Basel Committee on Banking Supervision- Sharing of Financial Records Between Jurisdictions in Connection with the Fight Against Terrorist Financing

•Council of Europe (COE)- Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures- Changes name to (MONEYVAL) (formerly PC-R-EV)

•European Union (EU)- Final Declaration Against Money Laundering (“Paris Convention”)

•Financial Action Task Force (FATF)- Guidance on Terrorist Financing

•Financial Action Task Force (FATF)- Guidance on Terrorist Financing, SR VIII: Combating the Abuse of Non-Profit Organization- International Best Practices

•International Association of Insurance Supervisors (IAIS)- Anti-Money Laundering Guidance Notes for Insurance Supervisors and Insurance Entities

•International Organization of Securities Commissions (IOSCO)- Objectives and Principles of Securities Regulation (Second Revision)

•International Monetary Fund (IMF)- Report on the Outcome of the FATF Plenary Meeting and Proposal for the Endorsement of the Methodology for Assessing Compliance with Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) Standard

Global institutions and laws for combating the money laundering (7)

66

2002

• United Nations (UN)- Security Council Resolution 1390 (2002) [S/RES/1390(2002)]

•Wolfsburg Group- Private Banking Principles (First Revision)

•Wolfsburg Group- Correspondent Banking Principles

•Wolfsburg Group- Statement on the Suppression of the Financing of Terrorism (“Wolfsburg Statement”)2003

• Basel- General Guide to Account Opening and Customer Identification (Attachment to Customer Due Diligence Paper)

•Financial Action Task Force (FATF)- 40 Recommendations (Third Revision)

•Financial Action Task Force (FATF)- Guidance on Terrorist Financing, SR VI (Alternative Remittance) Interpretive Note

•Financial Action Task Force (FATF)- Guidance on Terrorist Financing, SR VI (Wire Transfers) Interpretive Note

•Financial Action Task Force (FATF)- Guidance on Terrorist Financing, SR VI : Combating the Abuse of Alternative Remittance Systems- International Best Practices

•International Association of Insurance Supervisors (IAIS)- Insurance Core Principles and Methodology (Second Revision)

•International Organization of Securities Commissions (IOSCO)- Objectives and Principles of Securities Regulation (Third Revision)

•United Nations (UN)- Convention Against Corruption

•United Nations (UN)- Convention Against Illicit Drugs

•Wolfsburg Group- Statement on Monitoring Screening and Searching

Global institutions and laws for combating the money laundering (8)

67

•2004

•International Association of Insurance Supervisors (IAIS)- Insurance Core Principles on Corporate Governance

•Organization for Cooperation and Economic Development (OECD) – Principles of Corporate Governance (Second Revision)

•Financial Action Task Force (FATF)- Guidance on Terrorist Financing, Special Recommendation IX: Cash Couriers

•Financial Action Task Force for the Middle East- North Africa (MENAFATF) – Established

•Financial Action Task Force Eurasian Group (EAG)- Established

•Edgemont- Revised Statement of Purpose

•European Union (EU)- 3rd Directive of the European Parliament Proposed2005

•European Union (EU)- Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime and on the Financing on Terrorism (updated 1990 Convention)

Five Control Elements in Five Control Elements in Money LaundryMoney Laundry

• The Control Environment• Risk Assessment• Control Activities• Information & Communication• Monitoring

68

Vulnerability type of Vulnerability type of business in Money laundrybusiness in Money laundry

• Securities and commodities brokers or dealers• Investment companies surrounding mutual fund

complexes• Currency exchange houses• Casino (including tribal casinos) and card clubs• Issuers, redeemers or cashers of checks, travelers

checks, money orders, or similar instruments• Money transmitters• Postal systems• Insurance companies• Dealers in precious metals, stones or jewels• Pawnbrokers• Loan or finance companies• Travel agencies• Dealers and sellers of automobiles, airplanes,

boats and other vehicles• Persons who close and settle real estate

transactions• Federal, state or local government agencies with

duties or powers similar to financial institutions, and

• Businesses that engage in significant international trade (import/export)

69

Application of risk-focused Application of risk-focused SupervisionSupervision

Compliance riskMost major international businesses, especially banks and non-bank financial institutions subject to risk-focused supervision, clearly understand that money laundering represents a major compliance risk in sophisticated financial services centers. But many of them continue to struggle with two major money laundering compliance issues. First, they tend to focus more on anti-money laundering record-keeping and reporting rules and less on compliance program development and management. Second, they are frequently confused about what are clearly articulated KYC rules, what are implied rules and what are otherwise best practices in money laundering risk management.

70

Operational RiskOperational Risk

Operational or transactional risk is conventionally thought of as risk to a business arising from problems with service or product delivery. This risk is a function of internal controls, information systems, employee integrity and the many operating processes. This risk is also pervasive to products and services, assets and people, sites of operation, markets and distribution channels.

71

Reputation riskReputation risk

• “Reputation” risk as it relates to money laundering is very straightforward- it is event-driven and is almost always devastating. There are two basic types of money laundering events that can be very damaging to a business’s reputation:

• A compliance failure (compliance risk) or major control deficiency (compliance or operational risk), resulting in bad examination results or even an enforcement action by a regulator and consequent bad publicity; and

• A direct money laundering scandal or merely an alleged link to a money laundering operation or transaction, resulting in a tangle with law enforcement and, worse, long drawn-out, adverse publicity.

72

Strategic riskStrategic risk

Money laundering vulnerability will manifest itself in strategic risk- the risk that a business is unable to effectively plan, implement and respond to changes and developments within an industry.

73

Sources

74

75

Sources

78

79

80

81

82

83