practical aml experience & lessons learnt kabul, afghanistan – 19 april 2006
TRANSCRIPT
Practical AML experience & Lessons Learnt
Kabul, Afghanistan – 19 April 2006
2
Money Laundering….
The Global Problem
What is Money Laundering?
3
What is Money Laundering?
Money laundering is the process by which criminals
attempt to hide and disguise the true origin and ownership
of the proceeds of their criminal activities. The term
“Money Laundering” is also used in relation to the
financing of terrorist activity (where the funds may, or may
not, originate from crime).*
* Standard Chartered Bank – Group Definition
4
Criminal Activities
Drug TraffickingBribery / Corruption
Prostitution
Gambling
Tax Evasion
Extortion
Robbery and Fraud
White Collar Crimes
(including Insider
Trading and Securities offences) Smuggling
(arms, people, goods)
Counterfeiting and Forgery
Kidnapping
Serious Crime or All Crimes?
Organised Crime
5
What are the key stages of the Money Laundering Cycle?
Placement– of criminal proceeds into the financial system
Layering– of transactions to confuse the audit trail and distance the original
source of funds (e.g. successive transactions, international
transfers, early termination products, tax haven companies,
genuine businesses).
Integration– of funds back into the real economy as “clean and respectable
money”
6
What does this mean for Banks?
7
What are the risks for banks?
Failure to understand and deal with Money
Laundering can lead to:
– Significant regulatory risk
– Significant reputational risk
– Significant litigation risk
– Significant Operational risk
8
The consequences of non-compliance are serious …
City banks ‘handled dictator’s fortune’. This is
disappointing says regulator Financial Times 9/3/01
Crime bill cracks down on
money laundering
The offence of failing to report evidence of
money laundering will be toughened
Financial Times 6/3/01
Bank of Scotland .. under investigationby the Isle of Man's financial
regulator after being sucked
into a web of alleged money
laundering and bankruptcy
fraud
Financial Times 10/12/00
Credit Suisse.. to be
indicted in the
money-laundering
scandal
over $4bn plundered from
Nigeria by General Sani
Abacha, the country's
former leader
Financial Times 7/12/00
UK signs UN convention
on trans-national
organised crime….
establish a common legal
framework and introduce
measures across Europe
to … crack down on money
laundering…Financial Times 14/12/00
The designated president of the Financial Action Task Force , Jochen Sanio, said the agency will need a bigger budget and tough powers to impose sanctions on countries that don't comply with its rulings
' Everything will be overshadowed by the task of fighting terrorism'
Financial Times 3 October 2001
Paine Webber
International (UK
Limited) fined
£350,000 for serious
compliance failures,
including
inadequate controls
to prevent money
laundering
Complinet 22/08/01Nigerian loot laundered in the
City Sunday Times 17/12/00
9
Regulatory Case Studies
Failure to:– Identify numbered accounts– Investigate Suspicious Activity Reports (SAR’s)– Establish the right internal checks and procedures
“HSBC fined €2.1 million in Spain”21st November 2002
10
Regulatory Case Studies
Failure to:– Report high value cash transactions– Have systems to detect suspicious transactions– Supervise agents– Lodge SAR’s
“Western Union fined $8 million under State Regulations and $4
million under Federal Regulations”2nd December 2002 & 10th March 2003
11
Regulatory Case Studies
Failure to Know Your Customer and check the origin of funds (Sani Abacha – Nigeria case)
“Credit Suisse fined Sfr 750k”2nd December 2002
12
Regulatory Case Studies
Fine imposed due to failure to obtain or retain sufficient ‘know your customer’ (‘KYC’) documentation to adequately establish customer identity in an unacceptable number of new accounts
Bank named, shamed and fined despite:– RBS discovered the problems through its own testing– Bank took an open and constructive approach to FSA’s investigation– No evidence of actual money laundering having taken place– Considerable resources dedicated at an early stage to correct the problem– Group-wide monitoring on compliance now in place– FSA is satisfied the Bank has now adequately dealt with the issue
“FSA fines Royal Bank of Scotland Plc £750,000 for money laundering control
failings” FSA press release, 17 December 2002
13
Regulatory Case Studies
Failure to:– Maintain effective systems & controls– Know your Customer (no evidence of Id)– Manage and escalate SAR’s in a timely manner
“FSA fines Abbey National £2.32 million for compliance failures”
FSA Press release 10th December 2003
14
Regulatory Case Studies
Failure to:– Keep proper Know Your Customer records
(Identification records, system conversion)
“FSA fines Bank of Scotland £1.25 million”
FSA Press release 16th January 2004
15
Regulatory Case Studies
Being involved in fund remittances for an underground group.
Failure to Report SAR to FSA Care to be taken when acting for an Agent or Sub
custodian
“FSA in Japan suspends Standard Chartered’s custody business for 1
year”20th February 2004
16
Regulatory Case Studies
Failure to update its Anti Money Laundering manuals.
“FSA fines Raiffeirsen Zentralbank Osterreich £150k”
20th February 2004
17
Regulatory Case Studies
Failure to: – implement effective AML program– Detect or investigate suspicious transactions– File SAR’s (especially re some Saudi accounts)
“Riggs Bank fined $25 million”13th May 2004
18
Regulatory Case Studies
Illegal transfer of USD currency from Note Depot to sanctioned countries.
Subsequent concealment, falsification of records and returns to the Reserve Bank.
“UBS fined $100 million”10th August 2004
19
Regulatory Case Studies
Closure of Private Banking Offices in 1 Branch and 3 satellite Offices.
Failing to prevent suspected Money Laundering Poor Know Your Customer records Improper trading
“Citigroup ordered to close offices in Japan”17th September 2004
20
Regulatory Case Studies
Failing to prevent suspected Money Laundering implement effective AML program Improper trading
“ABN Amro fined USD 80 mn in New York”January 2006
21
Regulatory Case Studies
Written AML Program Independent Testing and Audit Effective Training SAR’s & KYC Review historic transactions Progress Reports
“Standard Chartered enters into agreement with US Federal Reserve to improve AML
controls”13th October 2004
22
What is Standard Chartered doing about it?
23
Key components of the SCB Group Policies and Standards
Organisation and Internal Policies
Identify Your Customer
Know Your Customer (Risk Based KYC)
Ongoing Monitoring (outflows as well as inflows)
Record Retention
Reporting Suspicious Activities
Awareness and Training
24
Money Laundering Prevention - Organisation
Country CEO
Head of Legal and Compliance
Country MLRO
Business MLPO Business MLPO
Unit MLPO Unit MLPO Unit MLPO
REGULATOR/ FIU
25
Tailored to suit our international business ….
Consumer Bank Guidance Notes
Wholesale Bank Guidance Notes
Country procedures taking into account
– Local regulatory requirements
– Group Standards
– CB & WB Guidance Notes
26
CUSTOMER DUE DILIGENCE
Know Your Customer (KYC)
Identity Verification Address Verification Nationality Business/ Profession Source of Income/ Wealth Transaction Profile
27
CUSTOMER DUE DILIGENCE
Non-Personal Accounts - Companies/ Trusts
KYC of major share holders/ beneficial owners KYC of all the directors and controllers of funds KYC of the trustees/ settlers of trusts
POA holders/ Intermediaries/ Agents
KYC of the Principals as well as agents/ POA holders/ intermediaries
Correspondent Banks
Ensure that the correspondent bank has equivalent ML prevention procedures
28
CUSTOMER DUE DILIGENCE
PEP (Politically Exposed Person)
A person holding post of a high public function in a foreign country like, heads of state, ministers, senior officials of judiciary, armed forces, etc.
Senior Management approval for opening account. Enhanced due diligence on source of funds, source of wealth Periodic Review and monitoring FATF Recommends extension of the principle to the countries
of domicile as well.
29
Risk based approach to KYC
1. Accept or Reject business?
• Profitability
• Suitability
• Reputational Risk
• Sanctions
• Suspect/Blacklists
Reject due to Business Consideratio
ns
Reject due to Business Consideratio
ns
Reject due to Sanctions
etc
Reject due to Sanctions
etc
Accept
2a. Borrowing Customers
Existing KYC Process
3. Risk Assessment
Man
ag
e a
s
Level
3 R
isk
Man
ag
e a
s
Level
3 R
isk
Man
ag
e a
s
Level
2
Ri s
k
Man
ag
e a
s
Level
2
Ri s
k
Man
ag
e a
s
Level
1 R
isk
Man
ag
e a
s
Level
1 R
isk
2b. Non-Borrowing Customers risk profiled using agreed and easy to implement filters.
3. Separate out Level 3 customers using agreed filters.
3. Impose Basic KYC only
3b. Impose Enhanced KYC
30
Risk based approach to KYCLevel 3
riskLevel 3
riskLevel 2
RiskLevel 2
RiskLevel 1
RiskLevel 1
Risk
Monitor Account Activity which requires account to be classified as Level 2 or 3.
Monitor Account Activity which requires account to be classified as Level 2 or 3.
Monitoring to identify account activity which requires account to be reclassified as Level 3.
Monitoring of transactions against customer profile every 12 months.
Monitoring to identify account activity which requires account to be reclassified as Level 3.
Monitoring of transactions against customer profile every 12 months.
Account Opening
Ongoing Account
Management
6 Monthly Review
-Monitoring of transactions against customer profile
-KYC Relationship review approved by Senior management
6 Monthly Review
-Monitoring of transactions against customer profile
-KYC Relationship review approved by Senior management
Enhanced KYC
-Basic KYC Plus
-Nature of business
-Origin of funds
-Purpose of account
-Type & level of activity
Enhanced KYC
-Basic KYC Plus
-Nature of business
-Origin of funds
-Purpose of account
-Type & level of activity
Basic KYC
-Evidence of Identity
-Evidence of address
Basic KYC
-Evidence of Identity
-Evidence of address
31
Account Monitoring & Suspicious Activity Reporting
32
Suspicious Activity
Suspicious Activity will often be one which is inconsistent with the customer’s known, legitimate business or personal activities or with the normal business for that type of account
“The first key to recognition is knowing enough about the customer’s business to recognise that a transaction, or series of transactions, is unusual”
(“..unusual or large transactions with context to the account, which have no apparent genuine economic or lawful purpose…”
33
Account Monitoring & Suspicious Activity Reporting
Need to monitor accounts:– Manual Monitoring– System monitoring
• Daily reports on thresholds and account recency• Trend reports
Need to report suspicions:– External Reporting where laws and regulations require this
(accounts may be frozen)– Internal Reporting (account closure)
What are the consequences of not reporting?
34
Reporting Suspicions
“Suspicion” is not proof, but neither is it a “flight of the imagination”
“Believing something to be true, but without proof”.
Some events always suspicious, in absence of contrary evidence.
Can be a series of events
If unsure report anyway
35
Potential cases of Suspicion
Frequent cash deposit where inconsistent with customer’s known status
and occupation
Frequent use of cash for early loan repayment
Large numbers of electronic transfers into and out of account.
Multiple accounts where no need
Transactions with countries where no business
Excessive request for privacy
Unnecessary use of intermediaries
Receipts/remittances for which source/destination cannot be identified
36
SAR Regulatory Environment
60% of enforcement actions taken over the last 3 years
have been for SAR deficiencies.
Earlier actions related to Cash Transaction Reporting in
USA.
More recent ones have focused on management and
timeliness of SAR’s
37
Challenges in improving SAR numbers
Low staff awareness
Staff training not specific enough about SAR’s
Not disciplining non compliant staff
Fear of losing business
High work volumes and pressures
38
What is SCB doing on Training?
AML Training a part of the staff Induction training.
Compulsory to clear test within first week, bar at 80%
Refresher training every quarter with testing
AML Guidelines broken down into simple fact sheets for
ease of reference
Senior Management commitment to the process is a MUST
39
Record keeping
5 years record retention (Group Standards)
Retention is from the date account is closed or suspicious discovered
Record should be kept centralised and ready to be provided upon any query in a timely manner
40
Questions?