anti-money laundering

DECEMBER 2006 / JANUARY 2007

COMBATING MONEY LAUNDERING IN FINANCIAL SERVICES

VIRTUAL COMMUNITIES

The game’s up

Policing people in cyberspace

Casino compliance becomes a priority

PATH TO ENLIGHTENMENT

RED FLAGS Finding signs of illicit activity

What the regulator expects

EDITOR’S LETTER

Nobody said it would be easy

T

By Adam Courtenay EDITOR

ANTI-MONEY LAUNDERING

HOSE WHO CAN REMEMBER far enough back to the advent of the Cash Transactions Reporting Act of 1988 might remember the tiny booklet which accompanied the law. It was about 12 pages long and within it was a list of 14 entities considered to be under threat from money laundering. In those days terrorism financing would have been laughed at by Australian institutions. Indeed most of the detail of the bill concerned itself with big institutions accepting large amounts of cash, and the issues of the day were drugs money laundering, washing the proceeds of fraud and possibly an eye on tax evasion. Step forward to the end of 2006 and we now see the mother of all bills presented to the Australian parliament, running at around 360 pages – which does not include the rules. There are now over 50 designated entities which will have to comply. It must seem amazing to AML practitioners that a bill described as risk-based and ‘regulation lite’ by some could run so long and – as many have complained – have the potential to cut so deep. And that’s not just related to the civil fines attached if you are deemed culpable, but the general cost of complying. While there are grace periods built into the compliance timelines, eventually companies could face civil penalties of up to $11m per incident if they fail to run appropriate checks on their customers’ identities, an amount which some experts believe is well in line with some of the bigger fines levied overseas – and at least comparable with breaches of compliance in other areas of financial services legislation in Australia. That means such things as an entity not identifying a customer properly, not having the right anti-money laundering program in place and not undertaking ongoing customer due diligence when required could spell the $11m fine. Sydney University’s Dr David Chaikin, one of Australia’s top experts on financial crime who has just been appointed as a lead researcher for the FATF/Asia-Pacific Group, says companies need to remember that the redrafted bill actually makes risk management a legal requirement. In other words, any entity that engages in financial transactions without having a program to mitigate risk “is committing a criminal offence”.

When did it all become so serious? Somewhere along the line it stopped being a law enforcement issue and became part of the national security agenda. “It’s not merely the rhetoric of public servants and politicians who talk in one breath about nuclear proliferation, money laundering and terrorist financing,” says Chaikin. “The expectations of government on financial institutions are far greater than ever envisaged.” What we’re hoping to do in this magazine is to explain how to get from the situation which prevailed in 1988 to the situation which prevails now, in all its complexity and seriousness. Suddenly Australia’s financial community is being asked to be incredibly mature about things, come out of 18 years of a prescriptive reporting regime and adopt a risk-based approach to anti-money laundering compliance. As an editor, it’s my duty to try to project the obvious difficulties in change management for all those entities which have to comply. It was a task started brilliantly by Will Sanders, who now moves on to other publishing projects. Sanders has corralled together in one magazine some of Australia’s foremost experts on AML to give compliance personnel an edge in this important yet difficult sector of Australian financial law, ■ an edge we intend to maintain.

Upcoming AFMA anti-money laundering events ■ AFMA/AUSTRAC lunchtime briefing series: Risk-based AML/CTF program, risk-based identification and verification 12 February 2007, Sydney ■ AFMA/AUSTRAC lunchtime briefing series: Section 43B AML/CTF compliance reports 27 February 2007, Sydney ■ AFMA/AUSTRAC lunchtime briefing series: Detecting and managing terrorist financing risk 9 March 2007, Sydney ■ AFMA/AUSTRAC lunchtime briefing series: AUSTRAC’s audit and feedback process 20 March 2007, Sydney ■ AFMA’s annual anti-money laundering and counter-terrorist financing congress 5th June 2007, Sydney For more information or to register contact Diana Zdrilic on 02 9776 7923

DECEMBER 2006 / JANUARY 2007

1

:KR VKLGLQJLQ\RXUFXVWRPHUEDVH"

2YHULQVWLWXWLRQVUHO\RQ:RUOG&KHFNWRILQGRXW

RIWKHZRUOG VWRSEDQNV RI(XURSH VWRSEDQNV RIWKHWRS86EDQNV RIWKHWRS8.EDQNV RIWKHWRS0LGGOH(DVWEDQNV RIWKHWRS8.LQVXUDQFHFRPSDQLHV JRYH JRYHUQPHQWDQGUHJXODWRU\DJHQFLHV

)RU0RUH,QIRUPDWLRQZZZZRUOGFKHFNFRP

CONTENTS

FEATURES 16

COVER STORY: THE GAME’S UP

25

Online casinos are the spanner in the regulatory works and regulators and police investigators will have their work cut out to keep them clean.

RED FLAGS TO A BULL

BY CHARIS PALMER

How do you keep tabs on virtual wonderlands, communities where virtual money takes precedence over real dollars? Here is a challenge of cyberspatial proportions.

BY NICK KOCHAN

20

VIRTUALLY UNRECOGNISABLE

28

BY EMILY BRAYSHAW AND JULIE BEESLEY

What are the red flags that practitioners need to look out for? Setting up a list has its pros and cons, but mostly pros.

AML UPDATE Blake Dawson Waldron’s legal eagles on the big changes to the AML/CTF bill as it awaits royal assent.

REGULARS

5

LONDON CALLING

30

BY CHRIS HAMBLIN

The new bills on British statute books are designed to keep criminals on a leash forever.

6

BY CARL FREDRIKSEN AND GARY GILL

Japan’s attempts to build modern and practical AML legislation was always going to be hard, given the influence and prevalence of traditional criminality.

IN EUROPINION BY JULIE BEESLEY

The tale of a money launderer who came clean and is now a leading money laundering expert.

REGIONAL REVIEW: JAPAN

33

INSIGHT BY JOE GARBUTT

8

A few tried and tested methods to plug the compliance gaps and escape the regulator’s wrath.

STATE OF THE NATION BY BRETT WOLF Identity theft and identity fraud are two of the easiest ways US-based terrorists could fund their activities.

36

OUTSIDE THE SYSTEM BY MICHELLE HANNAN

10

Task Force Gordian is the latest example proving just how useful cash remittance systems can be to the launderers.

INSIDE STORY BY KENNETH RIJOCK

There are some sure-fire checks compliance officers can do to ensure they’re not missing some of the common laundering methods.

42

CASE NOTES BY MICHELLE HANNAN

12

OPINION

Why a Thai takeaway restaurant with strange banking transactions may not have only food on the menu.

BY JOY GEARY

Why aren’t vendors providing pertinent and up-to-date information on trends and events for specific sectors?

ANTI-MONEY LAUNDERING

DECEMBER 2006 / JANUARY 2007

3

NEWS

Parliament passes AML/CTF Bill

A

USTRALIA’S financial services industry has reacted favourably to the Anti-Money Laundering and Counter-Terrorism Financial Bill 2006, which passed through the Senate and became law on December 7. The chief reaction of AML practitioners has been one of relief that more than 14 months after the Financial Action Task Force labelled the country’s anti-money laundering laws as sub-standard, the government has produced highly-acclaimed risk-based legislation that the industry can work with. PricewaterhouseCoopers forensic partner Steve Ingram said companies were often reluctant to admit such benefits, given the substantial cost of compliance and

system upgrades, but the time for crimeproofing had come. “Typically, people will roll their eyes, but it’s really time to roll up the sleeves,” Ingram said. KPMG partner Gary Gill said businesses ought to see the legislation as an opportunity to instill protective measures against broad criminal threats. “Industry can either regard this as another compliance burden – and it is going to cost money, obviously – or they can see the potential opportunities,” Gill said. All the same, the bill did not have a totally smooth passage through parliament and a Senate Committee report on the legislation gave voice to some ongoing concerns within the industry.

The report recommended longer implementation periods, as well as some tempering of the powers of the Australian Transaction Reports and Analysis Centre, whose powers will be significantly stronger now that the legislation has passed. While the government has proposed a 24-month implementation period for the new regime, there were concerns about some obligations commencing from the date of royal assent (January 1) and the committee recommended an extra three-month implementation period. This was effectively quashed by the government but there is an understanding that subsequent directions might allow three months to be tacked on to the end of ■ each staggered time period.

Task Force Gordian breaks Chaikin, Sharman up Asian crime syndicates appointed to

Asia-Pacific Group

A

N AUSTRALIAN police taskforce has uncovered and split up a major South-East Asian crime syndicate suspected of laundering more than $93 million. The taskforce says it has disrupted the activities of over six separate syndicates as part of an operation it has been running since March 2005. Over a period of three weeks in October, 57 people were arrested and charged with a range of money laundering and drug-related offences. Task Force Gordian follows an earlier Australian

Crime Commission investigation into Asian crime syndicates in 2003, which revealed the involvement of accountants, financial advisers, money remitters, electronic transfers and human couriers in laundering the proceeds of crime. Vietnam Airlines was implicated in the current crackdown, after the Melbourne Magistrates Court was told one of the airline’s pilots had been arrested for his role in the alleged scheme. The court heard the airline had carried more than $10 million in laundered funds since July 2005. ■

EDITORIAL

PRODUCTION AND DESIGN

EDITOR: Adam Courtenay [email protected]

CREATIVE DIRECTOR: Jo Fuller

CONTRIBUTING EDITOR: Emily Brayshaw SUB-EDITORS: Siobhan Brahe, Leah Ingram CONTRIBUTORS: Charis Palmer, Nick Kochan, John Kavanagh

PRODUCTION MANAGER: Fiona McLennan PHOTOGRAPHY: Craig Newell, See4 PUBLISHING REGIONAL SALES MANAGER: Diana Zdrilic – Tel: + 61 2 9776 7923 [email protected]

SUBSCRIPTION ENQUIRIES: Annual Subscription: $595 +GST Tel: + 61 2 9776 7923

S

YDNEY UNIVERSITY’S Dr David Chaikin and Dr Jason Sharman have been appointed as lead researchers for the Financial Action Task Force/APG Anti Corruption Project Group. Dr Chaikin, a senior lecturer in business law – and Dr Sharman, a senior lecturer in government and international relations – will jointly produce a research paper on the links between corruption and money laundering. The APG is a regional anti-money laundering body which is part of the global network which governments and international agencies established in 1997 in order to combat money laundering and the financing of terrorism. Contact: [email protected] ■

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

AFMA Services – Level 3, 95 Pitt Street, Sydney NSW 2000. GO Box 3655, Sydney NSW 2001 Tel: + 61 2 9776 4411 Fax: + 61 2 9776 4488 www.afmaservices.com Disclaimer: This publication is designed to provide accurate and authoritative information in regard to the subjects covered. It is distributed with the understanding that the AFMA Services is not engaged in rendering legal, accounting or other professional service. If legal advice or other expert assistance is required, the services of competent professional persons should be sought.

This publication is copyright. Other than for the purposes of, and subject to the conditions prescribed under the Copyright Act 1968, no part of it may in any form or by any means (electronic, mechanical, microcopying, photocopying, recording or otherwise) be reproduced, stored in a retrieval system, or transmitted without prior permission. Enquiries should be addressed to AFMA Services.

4

DECEMBER 2006 / JANUARY 2007

ANTI-MONEY LAUNDERING

NEWS

LONDON CALLING

Crimes for all seasons By Chris Hamblin

There are new bills on the British statute books, mostly designed to prosecute the launderers without a jury and keeping them on a very firm leash once they have been sentenced.

The end of justice Queen Elizabeth II's speech at the recent opening of the British parliament heralded the death-knell of the Englishman's age-old automatic right to a trial by jury. Although this does not as yet extend to money laundering cases, it surely will. Her Majesty made it plain that her government was keen to keep criminalising things and stripping defendants of their ancient rights at the same breakneck pace as ever. A good half-dozen bills are expected to affect various facets of the crime of money laundering in the coming year. The upcoming Fraud Bill is the law that seeks to abolish trial by jury in complex fraud cases. We mention it here because this is the way of the future for criminal cases in the UK in general, money laundering cases included, no matter what the kingdom's European human rights laws say. Fraud, especially identity fraud and carousel fraud, is incidentally one of the major predicate crimes for money laundering in the UK.

Once a criminal... Under the government's new plans, once criminals large or small become enmeshed in the penal system they never truly leave it again. This bill seeks to extend the use of electronic monitoring in respect of offenders on bail, among them money launderers. Evidence suggests that the electronic monitoring system is so flawed that parliament may as well not bother with this legislation, but in framing legislation British ministers find “Dr Evil” clauses irresistible. When the idea was first mooted some policemen spoke of their desire to manage the criminal's expectations “throughout his life”.

ANTI-MONEY LAUNDERING

Money launderers could soon find themselves being tried by people who have never been lawyers. Part two of this bill proposes to revise the minimum eligibility requirements for appointment to judicial office. The bill also strives to reform compulsory purchase orders and the law of civil debt recovery.

...always a criminal This milestone in UK legislation contains provision for a new “prevention order” to impose conditions on the movements and transactions of those suspected of money laundering and other organised crimes. Even today, criminals can only be found to be criminal by courts, being sentenced to imprisonment and later released when they have paid their debts to society. This bill, however, strives to make a misery of the lives of people whom the police allege to be criminals. The day is dawning when, as the man in Bladerunner says: “You're either police or you're little people.” The bill proposes to introduce a new offence of assisting a criminal act in the belief that an offence may be committed. In other words, it plans to stop private citizens from helping financial criminals even if they do not know the nature of the intended crime. It is to be hoped that parliament will break the habit of 20 years and be careful about the parts of this bill that refer to bank staff unwittingly smoothing the path of fraudsters and money launderers. To be truly draconian this part of the bill would have to use the phrase “believes” rather than simply “reasonably believes”. It also contains provisions for more powers to help state functionaries impound criminal assets.

EDITOR-IN-CHIEF COMPLINET

No more technicalities The Queen told parliamentarians that a Legal Services Bill was shortly to appear, aiming to allow commercial companies to own law firms for the first time. The effect on laundering trials could be to make them harder to prosecute, as their interests will be defended by far more wealth than before. In July, home secretary John Reid announced his intention to stop offenders who were “plainly guilty” from avoiding punishment “on technicalities”. The Anglo Saxon world's most effective answer to this problem so far has been the lynch mob but this is about to change, according to Her Majesty when she referred to the new Police and Justice Bill that was already before Parliament.

Legal deluge This is one piece of legislation that Her Majesty did not have to announce, because it has already become law. Originally designed as an “enabling Act” that Adolf Hitler would have been proud of, it has been whittled away by opposition forces. It is now only an Act that allows ministers to make up their own laws without consulting parliament in certain circumstances. Ministers cannot use it to make up new crimes – eg new adjuncts to money laundering offences – but they can create crimes whose punishments are less than two years in prison. “Thinking about tipping-off” could be one for the future. The present government has deluged the UK with new criminal offences since its inception in 1997. Some commentators believe that it has created a new crime for every day that it has been in power. ■ The trend is accelerating.

DECEMBER 2006 / JANUARY 2007

5

NEWS

IN EUROPINION

Through the wash In recent headlines from Europe, Julie Beesley explores the tale of a money launderer who came clean and is now a leading money laundering expert.

W

HEN PARENTS TALK about

their children becoming highflying lawyers, they’ll be hoping they don’t follow the example set by Humberto Aguilar. By the time he was in his mid-20s the law graduate was running his own criminal defence practice and representing some of the world’s biggest drug smuggling organisations. Not only that, he devised a system of laundering millions of dollars and was paid a king's ransom for doing so. His career in criminality lasted nearly a decade before the US government finally caught up with him in 1990, indicting him with conspiracy to defraud the Internal Revenue Service, importing drugs and money laundering. After fleeing to Europe he was arrested in Spain and sentenced to 15 years in jail. Since being released seven years ago, he has reinvented himself and now dedicates his time to travelling the world giving lectures on how to fight financial crime. Born in Havana, he spent his formative years in Cuba before his parents sent him and his sister to live with relatives in New York. He graduated in law from the University of Florida in 1978 and from the outset, he wanted to be a criminal defence lawyer. As the practice grew so did his client base which began to include drug smugglers who wanted to move their “dirty money” in and out of the country. “They would ask me if I could do this and being in my 20s and stupid I said yes, but it got way out of hand and I ended up doing it on a full-time basis,” he says. “I started getting money out of the country and shipped it to different countries

6

DECEMBER 2006 / JANUARY 2007

and moved it around different banking systems in Colombia and Venezuela before moving it to Europe and then back into the United States. Once you had it in the banking system you had it beat, because you could move it around as stock or business ventures.” Most of his clients were Cubans who shipped cocaine into the US where the Colombian drug barons had organised distribution networks. With money pouring in and the authorities yet to unravel his operations, he seemed untouchable. It was the birth of his two children in 1987 that acted as a wake-up call. “That changed my whole outlook,” he says. But when you’re one of the masterminds behind a money-laundering scam involving millions of dollars and your clients include feared international drug smugglers, you don’t simply hand your notice in. “Their thinking would have been nobody who works for millions of dollars suddenly walks out. They thought I must be working for the government and they got nervous and one group tried to kill me three times.” With the help of another client he says a truce was called and he moved to New York where he set up a new law practice with the intention of going straight. But by now the US authorities were hot on his trail and the net closed after one of his former clients was arrested and, facing a life sentence, spilled the beans. Because he had masterminded the money laundering side of operations, Aguilar believes they wanted to use him to smash the drug-smuggling rings. “They said they would give me full immunity and I wouldn’t go to prison.

By Julie Beesley ASSOCIATE DIRECTOR, KPMG FORENSIC

All I had to do was co-operate and give them a complete debriefing. They had the papers right in front of me but I thought these people [his clients] made me money and I wouldn’t rat on them.” He was indicted by the US federal government in 1990 but after posting a personal bond of $US3m, fled to Spain where he was arrested by Interpol. After spending time in prison in Madrid, he was extradited to the US where he pleaded guilty to the charges brought against him. He was released on parole in December 1999, having served nearly eight years in jail. “When I came out I wanted some way of redeeming myself, there was no doubt what I did was immoral and wrong. But when you’re 25 you don't realise this. You have all this money and you can buy anything. You don’t think what you’re doing is wrong.” After leaving prison he got a job as a houseman in a hotel where he quickly worked his way up to become general manager. While working there he met an anti-money laundering lecturer who invited him to give a free talk to students which proved the inspiration to forge a new career as a respected lecturer. Sophisticated money laundering operations, he says, are still going on today but tend to be more prevalent in South and Central America than in Europe. But this is a world he has left behind as he now spends his time advising the same people he once used to try and outwit. ■

Source: Yorkshire Post Today, UK

ANTI-MONEY LAUNDERING

Our AML Team Our dedicated anti-money laundering team can advise you on all aspects of the AML legislation and equip your business to deal with its impact. Our approach is simple – we cut through the complexity of legal requirements and help you build the capability of your anti-money laundering team. Compliance Audit

Process Design

Documentation Drafting and Review

Training

For further information, please contact:

Brisbane Canberra Melbourne Perth Sydney

Stephen Cavanagh Partner t > (02) 9258 6070 e > [email protected]

Phil Trinca Partner t > (03) 9679 3258 e > [email protected]

Jonathan Gordon Partner t > (02) 9258 6186 e > [email protected]

Mark Radford Partner t > (02) 9258 6361 e > [email protected]

Andrew Young Senior Associate t > (02) 9258 5881 e > [email protected]

Jade Harkness Lawyer t > (02) 9258 5761 e > [email protected]

For more information on our compliance training services contact Julian Fenwick National Business Development Manager t > (02) 9258 6382 e > [email protected]

Port Moresby Shanghai Associated Office Jakarta www.bdw.com

BLAKE DAWSON WALDRON L A W Y E R S

NEWS

STATE OF THE NATION

Identity theft poses serious terrorist-financing threat As US officials pat themselves on the backs for having used the Patriot Act to “disrupt terrorist-financing networks” Al Qaeda cells may well be laughing — all the way to the bank. As a recent federal plea bargain demonstrates, terrorists could easily fund an operation within the US by relying solely on identity theft and credit card fraud.

A

CCORDING TO THE bipartisan

9/11 commission, the attacks on September 11 2001, which claimed nearly 3000 lives, cost Al Qaeda between $US400,000 and $US500,000. And traditional bomb attacks are much cheaper. The UK Home Office has estimated that the bomb attacks in London on July 7 2005, which killed 52 people, cost a home-grown terrorist cell “less than £8000 ($US15,000).” With that in mind, consider that Fadi Kourani, 37, a Lebanese national who entered the United States illegally through Mexico, took cash advances on fraudulently obtained credit cards and spent $US12,000 on hair implants. He pleaded guilty recently to aggravated identity theft and conspiracy to commit credit card fraud. Federal Bureau of Investigation agents who raided Kourani’s residence found dozens of credit cards and identity profiles, a thief’s arsenal made more troubling by the fact that he is no criminal mastermind. By all accounts, Kourani is an average man with a juvenile sense of humour – he used stolen social security numbers to obtain credit cards under made-up names such as “Shag Zamour” and “George Armani”. Thankfully, Kourani is not a terrorist, because had he been, authorities might be counting bodies rather than trying to figure out how to forfeit a set of top-dollar hair plugs. In total, the identity-theft ring that Kourani “worked” with bilked more than $1.7m from credit card companies, using nothing more than filched social security numbers. Such data is readily available to anyone willing to pick through garbage to gather carelessly discarded financial documents from dumpsters.

The perfect crime If terror cells are in fact operating – or sleeping – in the US, and it's a good bet they are,

8

DECEMBER 2006 / JANUARY 2007

the threat posed by identity theft and credit card fraud can hardly be overstated. Identity thieves can quickly gain access to thousands of dollars by misrepresenting themselves to lenders and they can safely assume they will have months or even years before overburdened investigators catch up with them. Many identity thieves probably believe there’s a good chance they will never be caught, and they are probably right. With millions of victims being targeted each year in the US, the odds of any particular offender being caught and prosecuted are minute. In a very real sense, it's the perfect crime for terrorists.

Threat of longer prison sentences no threat to terrorists Counterterrorism officials have long recognised the potential threat of identity theft coupled with credit card fraud, but have not been shouting from the rooftops, probably because they realize there is no quick, easy fix. In fact, in July 2002, career Federal Bureau of Investigation special agent Dennis Lormel issued a warning to a Senate terrorism subcommittee; the ominous statement was not widely publicised. Lormel said that the “threat posed by identity theft and the potential nexus to terrorism” was “alarming”. He was voicing his support for new laws to stiffen penalties for those convicted of identity theft. In July 2004, President Bush signed into law the Identity Theft Penalty Enhancement Act, which created the crime “aggravated identity theft”. Those convicted of this crime face a mandatory two-year prison sentence, unless it can be proven that their actions were tied to terrorist activities, in which case a minimum five-year sentence applies. While this law might have a slight chance of deterring run-ofthe-mill criminals, it will not rattle terrorists. Terrorists who are committing identity theft and credit fraud to finance bomb attacks in an

By Brett Wolf MIAMI CORRESPONDENT, COMPLINET effort to murder as many people as possible are hardly going to back down out of fear of criminal charges. The only way to minimise the terror finance threat is to make successful identity theft and credit fraud more difficult to pull off.

Fed and FTC getting warmer In July, the Federal Reserve and the Federal Trade Commission issued a “Notice of Proposed Rulemaking” that would force financial institutions and creditors to develop and implement risk-based identity theft prevention programs. The NPRM was issued under the authority of sections 114 and 315 of the Fair and Accurate Credit Transactions Act 2003. The goal is to ensure that financial institutions enact policies and procedures for “detecting, preventing and mitigating identity theft in connection with both account openings and existing accounts”. The proposed rules are designed to be consistent with section 326 of the US Patriot Act. They would also require credit and debit card issuers to develop procedures to assess the validity of any request for a change of address followed by a request for a replacement card. Additionally, users of consumer reports would have to develop “reasonable policies and procedures” to apply when they receive a notice of address discrepancy from a reporting agency.

Threat will remain Even if these proposed rules are finalised, identity theft will continue to pose a serious security threat. It’s up to financial institutions to develop meaningful best practices that will plug the holes in the credit application and identity verification process. Such measures no doubt would be considered a cost centre by some; those people must be reminded of the price an institution would pay if it were found to have unwittingly financed a terrorist cell ■ that had taken American lives.

ANTI-MONEY LAUNDERING

WANT TO KNOW WHAT’S HAPPENING IN THE MIDDLE EAST? … GET THE MOST UP TO DATE COMPLIANCE NEWS, ANALYSIS AND REFERENCE MATERIAL IN THE REGION AND REDUCE RISK

Complinet is the leading international supplier of compliance services to the financial services industry, and now has coverage in the Middle East region. If your business operates in the region you need to be fully aware of the regulators’ rules that apply to you and be on top of the latest regulatory developments. News – the latest Middle East news with content by leading industry specialists, complemented by our expert in-house team, provides topical news stories and offer in-depth analysis covering: • Islamic finance • Institutional fund and asset managers • Middle East regulatory issues • Commercial and wholesale banking • Investment banking • Insurance • Corporate finance

www.complinet.com

Reference – Middle East reference is an extensive platform with access to vital rules, regulations, laws and legislation from the region. It combines leading technology with up to date and attractively presented texts and enables firms to remain compliant with the latest regulatory challenges in the Middle East. Complinet’s service provides you with full texts of legislation, regulation and supplementary materials from the Middle East’s most prominent regulators and exchanges. Get a free 14 day trial to the Middle East service and see for yourself just how Complinet have made it easier for you to know the rules, stay up to date and reduce risk.

Call +44 (0) 870 042 6410 or email clientsupport@ complinet.com. Alternatively visit www.complinet.com and register now for your free trial.

INSIDE STORY

Tools of the trade In this month’s Inside Story, Kenneth Rijock details some of the more common laundry methods, and the quick checks compliance officers can do to satisfy any growing suspicions By Kenneth Rijock

C

OMPLIANCE OFFICERS and money laundering reporting officers should be familiar with the actual investigative techniques employed by law enforcement, as they may wish to utilise them to determine whether an existing bank client is running a laundering operation through their institution. Here are the most commonly encountered global schemes, together with the proven and effective methods of investigation of each category that the law enforcement profession uses to uncover the truth: • Transfer pricing – The target opens an import-export business, often in a high-tech manufacturing or distribution industry where the market prices of goods are not commonly known to bankers and non-industry businessmen, or are too technical to be generally understood by laymen. For example: A shipment of computer chips worth 50c will be sold for $50,000 each, thereby allowing money to be sent into the country without generating suspicion or enquiries. Conversely, items worth $400,000 each will be sold for 10c, which thus moves items of high value overseas without the risk of transfering funds. After manipulating the import or export prices of goods, he wire transfers funds inbound or outbound purportedly as sales or purchases for goods and services. In truth and in fact, the goods are worth very much more or less than the sale/purchase price. Meanwhile, bank staff with no expertise or knowledge of the field, have no idea this constitutes a money laundering scheme. Investigative technique – check prices of goods against the average of competitors’ prices. If the prices are more than 5 per cent different than the normal market prices, investigate for possible transfer pricing. For details, see the work of Professors John Zdanowicz and Simon Pak, of Florida International University, who conducted groundbreaking research into the subject or contact me direct

10

DECEMBER 2006 / JANUARY 2007

for internet references to their work at: [email protected]. • Commission salesman method – The launderer enlists the assistance of a co-operating company with a large inventory used for wholesale or retail sales. Subjects become salesmen on straight commission, run up large amounts of contrived fictitious sales, for which they are paid big commissions. What is happening is the company inflates the volume of existing clients, or creates phantom sales customers in other countries. Illicit funds are delivered in cash to the company by the money launderer, a fee is deducted, and the balance returned by cheque as commission. The target pays taxes on their “commission” income, and may later leave criminal activity altogether and purchase a legitimate business. Investigative technique – you will probably not find records of the purchase of sufficient inventory to cover the reported high volume of sales. Also, the listed “customers” do not exist, or did not actually purchase the goods in the amount and volume reported. • Cash-intensive businesses – Owners inflate the lawful cash receipts with their own criminal profits from their real activity, often adding between 10 per cent and 80 per cent to the proceeds. They then sell the business for a major profit, because the sales price is based upon the large recent sales history. After purchase, the buyer sees sales drop off dramatically. Investigative method – Again, compare wholesale vendors’ purchase receipts for goods with sales reported by subject. They will not match. • Lottery Winner Scheme – Subjects with criminal proceeds purchase large winning lottery tickets at a premium from the actual ticket holders, then report themselves as the winners. They often opt to take the smaller lump sum payments, instead of the long-term payout. Investigative technique – Has the “winner” ever won a lottery or possibly sweepstakes in other states? The odds of winning big twice are microscopic. Also, does the winner have a law-

FINANCIAL CRIME CONSULTANT WORLD-CHECK

ful occupation that requires him to be present at work every day? Many narcotics traffickers purchasing winning tickets cannot show a lawful occupation. The telephone records of “winner” may provide a link to the real winner, whose records of a financial windfall will confirm he was the original holder of the ticket. The original winner, when confronted with money laundering charges, should implicate the subject. • Loan method – The subject borrows money from a commercial bank overseas, secured by his own illicit cash collateral held by the bank and purchases or builds a business or real property. That business is later sold by the subject for a substantial profit. The overseas bank, never having received payment on the loan, liquidates the collateral, but the subject has effectively laundered his funds in the tax havens of the world. Investigative technique – Make enquiries at the overseas banks as to the collateral posted to obtain the loan, especially the source of funds and where it originated. We trust that this trade craft assists you in identifying and preventing money ■ laundering activity. Kenneth Rijock is believed to be the only former banking attorney-turned career money launderer who actively consults with law enforcement and the financial community. He has more than 25 years’ experience in the field of money laundering, as a practicing ‘laundryman’, financial institution compliance consultant, and trainer/lecturer to law enforcement and the intelligence services of both the United States and Canada. After serving as a banking lawyer in an international law firm, he spent the decade of the 1980s as a money launderer and advisor to narcotics trafficking organisations operating in North and South America. Whilst serving a federal prison sentence for racketeering and money laundering, he assisted with the first joint Swiss-American money laundering investigation of bankers and lawyers, which resulted in a major seizure of the proceeds of crime. Kenneth writes a daily AML column. For more information visit www.world-check.com

ANTI-MONEY LAUNDERING

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

5th & 6th June 2007, Sydney

Ensure you clear the implementation hurdles

BROUGHT TO YOU BY

Two day conference featuring insights from Australia, UK, Europe and the US Extensive seminar program examining topics including • KYC for wholesale, retail and funds • Developing an effective training program • criminal indicators • experiences in developing an AML program

SPONSORED BY KPMG Blake Dawson Waldron World-Check Fortent

One day training program Congress dinner

For sponsorship opportunities call Diana Zdrilic on 02 9779 7923 or email [email protected]

OPINION

Vendors are missing the main events A risk-based regime doesn’t lay down the laws, it expects you to find what risks are specific to your industry and adapt your program accordingly. But each industry still needs accessible, pertinent and up-to-date data on events and trends to help them – so why aren’t vendors providing it?

I

T IS A PUZZLE to this writer why one of the best opportunities available in the anti-money laundering and counter-terrorist financing industry is not being addressed by the existing vendors who already have offerings in this area. There are vendors providing transaction monitoring systems, scanning tools, list providers, know your customer (KYC) utility tools and KYC research services. But across the globe no vendor is comprehensively addressing what is a huge gap in the information needs of financial institutions subject to the latest round of AML/CTF laws. The gap in question is providing current information about the way money is laundered, packaged in a way that is useful to financial institutions and others who are regulated under AML/CTF laws. The absence of any worthwhile service provision in this space has caused this writer to question whether such information is needed at all in the management of AML/CTF since people have an uncanny ability to spot opportunity and exploit it wherever it occurs. The conclusion reached, supported by discussion with people working on AML/CTF implementations, is that the opportunity has not yet been seen probably because the movement to risk-based AML/CTF frameworks is new and leading edge. Under previous AML/CTF regimes such as in the United Kingdom, the focus until recent times was more towards prescriptive requirements designed by law makers and regulators to reduce money laundering and terrorist financing. Entities regulated by these requirements were not expected to be responsible for assessing their risks and managing those risks. Instead they were required to have in place a series of actions. Such entities could rely on the information made available by international bodies including the Financial Action Task Force (FATF) and disregard its shortcomings. A risk-based AML/CTF regime operates off a wholly different base, because it is not a matter of putting in place actions decided by the regulator or by the law makers. The old checklist or cookie cutter approach won't suffice under this new risk-based regime. A reporting entity under the new AML/CTF laws about to be passed by the Australian parliament has to assess the risk of its own products and services being used for money laundering and terrorist financing purposes. It is the criminal data needed to perform that risk assessment that gives rise to this as yet unrecognised commercial opportunity. Using a simplistic example, if you want to protect your home from all forms of criminal attack your first step is to determine what is known about how homes are attacked in your area. Your second step

12

DECEMBER 2006 / JANUARY 2007

By Joy M Geary AML/CTF ADVISER

is to know how these types of criminal attack (graffiti, arson, burglary, window breaking etc) manifest themselves. For example, graffiti generally appears on surfaces that are on the street boundary, not on external walls inside perimeter fences. Your third step is to identify the generic points of vulnerability relevant to each type of criminal attack, for example, roller doors on garages, perimeter fences or perimeter walls in the case of graffiti. Your fourth step is to then introduce protective measures to reduce the vulnerability you have identified existing in your home. This might involve spotlights and sirens activated by motion detectors on all perimeter walls. It might involve protective coatings on perimeter walls that allow graffiti to be removed easily without the need for re-painting. If you are on the 20th floor of an apartment block you don't even worry about graffiti because you have no points of vulnerability on the 20th floor. The processing of assessing ML and TF risk is no different. There is no point in starting at the third step, determining what are the points of vulnerability in your products, distribution channels and what might indicate your customer has the potential to launder money, unless you have completed the first step (what sort of money laundering take place which affects your industry segment) and the second step (how has this money laundering manifested itself in the use of specific financial products and services). The dilemma facing Australian financial institutions (and dare I suggest it, institutions overseas confronted with newly introduced risk based AML/CTF regimes) is that there is very little high quality material available about the first and second steps. Which probably explains why so many people have started at the third step. Agreed, there are some information sources 1 but they are usually presented in the format of a case study and they suffer from at least one of the following major disadvantages: • Incomplete; • Out of date (anything that is issued on an annual basis lacks utility against a fast moving and fluid crime such as money laundering); • Simplistic; • Often lack information about how a particular financial product was used; or • Not relevant to the jurisdiction or business segment in which the financial institution operates.  1

FATF-GAFI typologies and Egmont Case Studies are two examples.

ANTI-MONEY LAUNDERING

OPINION

IF YOU ARE ON THE 20TH FLOOR OF AN APARTMENT BLOCK YOU DON'T EVEN WORRY ABOUT GRAFFITI BECAUSE YOU HAVE NO POINTS OF VULNERABILITY ON THE 20TH FLOOR.

There are a range of vendors and consultants intent on succeeding in the AML/CTF arena, yet this opportunity does not appear to be on their radar. Vendors of transaction monitoring systems promote the fact that they provide rules for their systems. Presumably these rules are based on current information possessed by such vendors about the way criminals are known to use financial products and services to launder money because that is part of their sales message. This information usually comes to such vendors from their customers in the form of requests for rules or functionality. So we can conclude that vendors of transaction monitoring systems apparently have some current and quite detailed information, they just need to develop a new distribution mechanism to package it, plus expand their information capture mechanisms. List providers have established customer bases that already see them as providers of information. List providers have recognised business processes in gathering and handling information and in distributing it via the internet. They have the infrastructure, just need to expand to capture the required information and capitalise on the opportunity. Consulting firms promote their expertise, particularly in the area of assessing a reporting entity's risk of money laundering and terrorist financing. To provide these services they must have access to this type of information, otherwise how robust is their methodology? So it is fair to conclude that consulting firms should have current and quite detailed information, they just need to develop a new distribution mechanism to package it, plus expand their information capture mechanisms. The optimal service that financial institutions need to manage their AML/CTF responsibilities is one that provides information organised as follows: • Money laundering events organised by industry segment. Current information in relation to the current money laundering trends within funds management, organised by country, is available. • Money laundering events organised by product type. Current information in relation to the current use of credit cards for money laundering, organised by country, is available. • Detected money laundering events. • Money laundering trends by jurisdiction. • Money laundering events by crime type and criminal type. Money for jam, one might say. One approach might be for national governments to mandate that the numerous financial intelligence units must make available the necessary information that they possess, suitably cleansed, to approved information providers. Approved information providers then design their delivery mechanism and organisation of information to suit their market targets. The more FIUs serviced by one provider, the broader the information that becomes available for subscribers, many of whom operate in international markets and require a perspective broader than their own country. Financial institutions in Australia should be pressing the Australian government on this issue, requiring provisions in the new legislation which oblige the Australian Transaction Reports and

ANTI-MONEY LAUNDERING

Analysis Centre (Austrac) to gather information and make it available in a timely and effective medium. Undoubtedly, this will lead Austrac to the conclusion that this is a service ripe for outsourcing, providing the necessary controls are in place within Austrac to cleanse data prior to its provision to the information provider(s). The imposition of this obligation on Austrac might be the catalyst for vendors seizing this opportunity, to the benefit of all. Provision is also needed in the new laws to allow financial institutions to pass information between themselves regarding events of money laundering that they experience, in order to protect the overall integrity of the financial system. Competitive interests will act as natural controls ensuring that financial institutions will only pass on information in limited circumstances. Realistically, neither the Australian government nor Austrac can seriously expect Australian financial institutions to discharge their obligations under the proposed new laws in an effective manner unless they are given enough information to complete the first and second steps of their money laundering and terrorist financing risk assessment and they are permitted to communicate directly with each other. This challenge is being reflected in conferences and discussions throughout Australia on the difficulties of the risk-based ■ approach under the new laws. Joy M Geary is an AML & CTF adviser based in Australia. Joy can be contacted on: [email protected]

DECEMBER 2006 / JANUARY 2007

13

SPONSORED FEATURE

Change of culture required Wealth managers have long believed that money launderers will never target them, but true or not, they will have to comply. The change management exercise will be tough.

T

HE FINANCIAL SERVICES organisations that will struggle most with the introduction of antimoney laundering programs are those that may otherwise be least affected by it – the life companies and investment managers in the wealth management sector. British banking technology consultant Steve Lock says that when AML regulations were introduced in the UK in the mid-1990s wealth managers adopted the attitude that because they were low risk, AML was not really an issue for them. Lock is the AML, fraud and compliance domain expert at the software and consulting group Fortent and was in Sydney in November talking to local life companies and investment managers. He says: “When you look at a product like superannuation it is fair to say there is a low risk that it will be exploited by a money launderer. Any product that is a long term investment, with long-term benefits and very active involvement from external agencies such as the tax office and the industry regulator is not going to be attractive to a criminal. “Wealth management companies figure that if 80 or 90 per cent of their business is in superannuation they are not going to be troubled by money launderers. But there are products, such as immediate annuities and at call nonsuperannuation funds, where you can put money in and take it out soon after. That is where the risk lies. “Compared to banks, where there is a history of risk management being

taken seriously by senior management, wealth managers have no history and no culture of this type of risk management. They have no existing controls. They actually need to work harder to get it right.” Banks have been covered by the Financial Transaction Reports Act and had reasonably robust identification procedures in place. Compliance with the proposed KYC requirements is likely to require minimal changes to policies and procedures under FTRA. Wealth management firms face the prospect of revising and updating existing procedures to ensure they are robust enough to meet the new legislative requirements. This point was underlined in the submission made by the Investment & Financial Services Association, which represents superannuation fund managers and investment managers, to the Senate Legal and Constitutional Affairs Committee earlier this year, arguing for an extended amnesty period when AML/CTF becomes law. IFSA’s submission was based on the argument that the kind of risk assessment that underpins an anti-money laundering program is new to fund managers. IFSA Deputy CEO, John O'Shaughnessy says: “Where IFSA will stand firm is the need for a three-year transition period to the new regime. We have previously stressed that not all industry sectors have been subject to AML obligations in the past and therefore more time will be needed to implement the necessary AML/CTF systems and controls.”

The wealth management industry in Australia has a history of arguing that its products should be left outside the scope of legislation such as the Financial Transaction Reports Act. In 2001 the Australian government solicitor was asked to rule on the question of whether cash management trusts (CMTs) were covered by FTRA. The initial response of the AGS was that CMTs were covered but after taking submissions from the industry it changed its mind. It distinguished between a “basic” CMT, which had no cash deposit or withdrawal facilities, and more sophisticated version of the products that were more like bank accounts. Lock says one of the big problems in the UK was that a standoff developed between the wealth management companies and the intermediaries who sell their products. The wealth managers argued that the financial planners should be responsible for running the AML programs because they dealt with the customers. One of the core elements of an AML program is to “know your customer”, which involves having information systems in place that allow a financial institutions to identify the type of customer that is likely to pose a risk and the type of transaction that needs to be investigated. “That thinking caused a lot of problems,” says Lock. “There are plenty of situations where the investor can have a direct relationship with the super fund or investment manager as well as with the planner. If the wealth manager and the intermediary are not cooperating a money launderer can play them off very easily. “In the worst cases we saw in the UK we saw financial planners turning a blind eye to what they should have recognised as high-risk situations



14

DECEMBER 2006 / JANUARY 2007

ANTI-MONEY LAUNDERING

SPONSORED FEATURE

STEVE LOCK, FORTENT

Compared to banks ... wealth managers have no history and no culture of this type of risk management. They have no existing controls. They actually need to work harder to get it right

because they assumed the fund manager would look after it. In other cases there were life companies engaging in a bit of corporate bullying, demanding that the planners take on the bulk of the workload. The reality is that both parties need to have “know your customer” programs.” IFSA’s Senate submission called for greater clarity in the rules as they affected the different parties involved in a financial relationship when an investment product was sold through an intermediary. It cites inconsistencies in the way the AML/CTF Bill aligns the customer identification obligations between the intermediary and the fund manager. For example, the fund manager is specifically exempted from the identification obligations where the designated service arranged is the acceptance of payments to superannuation, annuities or retirement savings accounts. The submission says: “However, there are other circumstances in which the second reporting entity will, or may, not be required to identify the customer. These include pre-commencement customers of the second reporting entity, low-risk designated services exempt under the rules, where other exemptions allowed by Austrac apply, customers that have already been identified by the second reporting entity.

ANTI-MONEY LAUNDERING

“In principle, it should not be necessary for the licensee to identify the customer in these cases. On current drafting, however, the identification requirement nevertheless applies. IFSA accepts that there are difficulties with fully aligning these obligations because the first reporting entity will not always know whether a customer ID procedure is required to be conducted by the second reporting entity. “A pragmatic approach could be adopted such that the first reporting entity is required to conduct a customer ID procedure in all circumstances except where the second designated service is exempted, or partially exempted, from customer ID obligations (as is the case with superannuation).” Clearly, the issues of shared responsibility between wealth management companies and their intermediaries are not fully resolved. IFSA is also concerned about the way the AML/CTF Bill treats the relationship between wealth management companies and stockbrokers. IFSA believes that the bill has the unintended consequence of requiring fund managers who sell securities on an exchange to identify the person to whom they sell such securities. This will capture many thousands of daily transactions and seriously limit the speed with which such transactions take place. It also inappropriately covers the sale of securities through a stock exchange to a party that the fund manager never meets due to the way in which the stockmarket operates – with brokers acting as the agents of share owners and with the ASX operating the necessary clearing systems. “IFSA is seeking confirmation that these wholesale investment activities,

and any other activities of this nature, are not intended to be captured under the bill and that therefore appropriate exemptions will be provided.” Lock says he has found a greater willingness on the part of local wealth managers to engage with AML. “It is not the same as the UK situation but one worrying trend is that the risk management people don’t seem to have much access to senior management.” He also expects Australian wealth management companies to be a target for Asian criminals. “Successful criminals have investment portfolios just like anyone else who makes a lot of money, and in this region the best investment managers are based here. You will need some pretty sharp-eyed gatekeepers.” He says one useful management approach for wealth management companies putting together an AML program was simulation games involving senior management. “The first thing wealth management companies need to do is recognise that they have not spent time looking at this issue in the past. They need to look at the issue broadly – create scenarios in which they are the targets for money laundering. AML teams will find that senior management does not pay much attention to what they are doing. That is because it is a new area. They have to work hard to get it on the senior management agenda.” Lock says the experience in the UK has been that wealth management companies have not had to deal with attempt at money laundering as much as banks. “We had a case recently where a butchery was running a pension fund for its staff. The proceeds of cocaine smuggling by the business owners ■ was also going into the fund.”

We have previously stressed that not all industry sectors have been subject to AML obligations in the past and therefore more time will be needed to implement the necessary AML/CTF systems and controls JOHN O'SHAUGHNESSY, IFSA

DECEMBER 2006 / JANUARY 2007

15

COVER STORY

The game is up There is no doubt that mainland – including Australian - casinos play ball with the authorities and are keen to stamp out money laundering if and where they see it. But as Nick Kochan observes, the problem lies with the proliferation of online casinos where ID verification is slipshod at best and clients at several removes from scrutiny.

16

DECEMBER 2006 / JANUARY 2007

ANTI-MONEY LAUNDERING

COVER STORY

C

ASINO GAMING is mushrooming and with it the risk of the casino becoming a significant laundering vehicle. Driving this growth are two factors, both of which contain inherent concerns for the anti-money laundering (AML) community. First of all, increasing numbers of lesser-regulated countries have encouraged the growth of a casino sector in a bid to boost taxation revenues. The burgeoning of casinos in the poorer parts of Asia and Eastern Europe (almost every hotel in Kazakhstan, for example, has a casino in its lobby) presents a growing money laundering risk as most of these sectors have limited regulation and enforcement. Second, a number of developed countries are seeking to benefit from the surge in online casinos by developing new law and practice. They continue to wrestle with customer identification problems which have long bugged the online casinos. Problems with identification underpin some of the concerns of US states which have outlawed online gambling on the grounds that it could be unwittingly sold to under-age or criminal gamblers. Owners of online casinos who have entered the US have been arrested. Efforts have been stepped up in the developed jurisdictions – where casinos are also burgeoning – to reduce the risk of money laundering that casinos present. In Australia this takes the form of a new bill which was passed on 7 December 2006, and will receive Royal Assent in January. The Anti-Money Laundering and Counter-Terrorism Financing Bill 2006 contains a number of regulations,

Money laundering risk is all about the inherent risk of keeping the proceeds of crime from entering your organisation.

BRETT WEBBER, DELOITTE AUSTRALIA

whose details have not yet been promulgated for the management of AML risk in casinos. The Australian Casino Association has had extensive dialogue with the federal Attorney-General over the definitions of reportable events. The industry awaits eagerly the law’s details. The use of casinos as vehicles for money laundering is as old as money laundering and tax evasion itself. The notorious Meyer Lansky exploited loose regulation in offshore casinos in the 1920s when he mingled money (largely obtained by Al Capone from extortion) with that of casinos in Cuba and elsewhere, before having the casino wire on his funds to an onshore bank account. Lansky was the first to discover the casino’s value as a part of the process of layering – the use of money movements to deceive those following the paper trail. The casino can be used to intercede in the process of the funds movement as a way of legitimising funds. According to Brett Webber, a director at Deloitte in Australia, and an international expert in the field: “Depending on the jurisdiction, you might

The notorious Meyer Lansky exploited loose regulation in offshore casinos in the 1920s

put a dollar in, get 80c out, and when the law enforcement or tax authorities come knocking at your door, you say you got 80c from winning in the casino. You have a receipt or verifiable record to show where that came from.” There is a perception that casinos are inherently risky from an AML perspective, warns Webber. “Money laundering risk is all about the inherent risk of keeping the proceeds of crime from entering your organisation. That inherent risk is typically mitigated by the controls that the casinos have in place in the regulated jurisdictions.” Operators of onshore casinos scrutinise customers using tight know-your-customer checks and use cameras to observe staff and customers on the gaming floors. Each operator is licensed following a “fit-and-proper” test, and that licence is guarded jealously. According to one analyst, “The punter wants as little observation as possible. People holding the licence don’t want to lose their gaming licence and they impose stringent controls. For all the talk of casinos as dens of money laundering, they are heavily regulated by state agencies and the financial intelligence unit for good and proper reasons.” Casinos are pulled tightly into the AML net in developed jurisdictions. UK casinos are covered by the Proceeds of Crime Act 2002, which requires their owners and managers to monitor suspicious transactions. These transactions must be filed with the FIU. The 1985 Banking Secrecy Act in the US treats casinos as “non-bank financial institutions” and subjects them to the same suspicious reporting regime as financial institutions. Both countries have gambling authorities which also oversee daily practices at the casinos. 

ANTI-MONEY LAUNDERING

DECEMBER 2006 / JANUARY 2007

17

COVER STORY

 Australian dedicated enforcement authorities include the Casino Control Authority in New South Wales and the Australian Transaction Reports and Analysis Centre, which acts as both a regulator and specialist financial intelligence unit. Austrac oversees compliance with the reporting requirements of the Financial Transaction Reports Act 1988 by the gambling industry – among others.

that the customer to an online site need only be identified through his credit card. A valid credit card from a reputable supplier is sufficient they argue, as the credit card company will already have conducted its own check. But more stringent authorities would want the customer to be subjected to a full due diligence examination in line with know-your-customer regimes used in banks.

The regulation of online casinos, on the other hand, is in its infancy. A number of developed countries are waking up to its potential as a revenue earner and currently exploring regulatory regimes. Identification of the players remains the key concern.

Leslie Macleod Miller, the Australianborn legal adviser to the British Amusement Catering Trade Association (BACTA), contends: “You have been through certain checks to obtain the credit card in the first place, so some of the money laundering requirements have been met without a different requirement being imposed.’’

Webber says the inherent problem with online casinos is that “they may have difficulty performing proper customer identification processes if they are online”. “A guy may use a credit card, or electronic funds or a stored value card to send funds to the casino. You have the problem of unidentified customers performing transactions which are difficult to monitor and then the money is paid out to another account. That is why the casinos are so strongly monitored.” Different business practices present persistent bugbears for governments that seek to introduce online regulation. For example, there is debate over when the customer to an online casino must face an identity check. It is well established that the visitor to a bricks and mortar casino needs to be identified when he enters the casino and prepares to gamble. In legal terms this is usually referred to as “identification at the point of entry”. But the visitor to the online casino may take advantage of a free trial to see if he likes the system. Financial criminality arguably only happens when money is involved so identification is not required at the free-trial stage. The online industry argues that the customer should only have to be identified at the point when a financial transaction occurs. The process of online identification is also under discussion. The industry argues

18

DECEMBER 2006 / JANUARY 2007

Due diligence of online customers remains a bugbear for many in the AML sector. Frank Yu of Hong Kong’s Ion Global, an interactive web design agency, says: “Due diligence of online gambling is not as stringent as it is in other financial institutions. The online gambling site can be properly legitimate. But many fail in performing the due diligence of finding out who they are accepting money from and who they are giving money to.” Similar concern was expressed by Rick McDonnell, a one-time head of the Asia Pacific Group money laundering division, a part of the Financial Action Task Force (FATF). “Internet gambling is a vulnerable area. It is a risk.” One investigator told of a drugs baron who lived the life of Reilly in the West Indies. His bank account was in his home town and he wanted to pull together into a single account the profits from his drugs business which were scattered around the Caribbean and further afield. His solution was dangerously simple. He set up an online casino based in his West Indies island. He then gave each of his far-flung operatives a credit card and told them to use the cards to merrily gamble away a fixed sum on his casino. Their losses were clearly the casino’s gain, and he

Australia’s casinos USTRALIA HAS DECIDED to restrict its licensed online casino operators to the single operator, Lasseters (out of Alice Springs), that was providing online gaming services when Australia’s gaming legislation was passed in 1999. The law prohibits this (or any other) operator from promoting online services to Australian subjects. Online casinos owned by Australians, including a Brisbane-based listed company, provide casino servers to other jurisdictions.

A

Australia’s onshore operators play by the ball, say local observers. One said that Star City in Sydney is “prolific in providing suspicious activity reports (SARs) to the financial intelligence unit. Meantime, Publishing and Broadcasting Ltd, a listed company that owns Crown Casino, is known to report regularly how much money it has tracked against expectation in terms of winnings (from their side) and losses ■ (from the gamblers side).

Image from Lassiters home page www.lassiters.com.au



ANTI-MONEY LAUNDERING

COVER STORY

The fast flow of cash across the casino table or online system may superficially look tempting to the launderer with some doubtful money to offload. But the gambling industry’s long history of malfeasance has ensured that regulation is tight

 deposited them at the local bank. The Mafioso paid the credit card bills with his dirty money, so ensuring both the transfer of the earnings to his account and the removal of some compromising cash. “Online casinos are ready made for money laundering,“ says Michael Adlem, the head of security at Barclays Private Bank. “This criminal activity relies on the use of credit cards, and the only way it can be stopped is if Visa and Mastercard are excluded from the gambling arena. That would kill online laundering stone dead, but the credit card firms would resist it fiercely. For them, it is a money machine.” The issue of online regulation is becoming more pressing as more jurisdictions seek to take a share of the sector. Online reputable casino operators are predominantly based in Gibraltar and Malta, although a number use small Caribbean offshore jurisdictions. The UK and Italy, both of which once prohibited the online operators from their jurisdictions, have changed their thinking and want to entice them to their shores. The UK is preparing a Gaming Act which will provide a structure for their admission. The new act will revise all previous practice for the regulation of the gaming industry, both on and offline.

have to be spread across different gaming areas or different gaming days, or divided up and laundered across several Nevada or tribal casinos. The fast flow of cash across the casino table or online system may superficially look tempting to the launderer with some doubtful money to offload. But the gambling industry’s long history of malfeasance has ensured that regulation is tight. Uncertainty over controls of off-shore casinos present the weakest link in the casino system, but that door is also shutting with the entry of new and more respectable jurisdictions and their tighter law. One observer stated: “Casinos are not the best place to launder money. There is no doubt that some occurs. But if you really are going to launder money, there are much more efficient ways of doing it than putting it through ■ a casino.”

The act’s exact provisions have yet to be announced, but it is expected a more stringent regime for background checks into the backgrounds of casinos owners and their spouses will be required as part of the regime’s anti-money laundering requirements. The assets of the owners and spouses will also be subject to examination for evidence of unusual movements. The best model for casinos seeking to match international standards is provided by Nevada state law. This details many series of checks for casino operators seeking to excluded laundered funds. For example, the law shows how casinos can detect smurfing schemes. These involve multiple transactions, which are individually less than $10,000 (the point at which a US casino must report a cash transaction), but whose aggregate exceeds it. Nevada casinos are required to aggregate transactions by an individual within a 24 hour period. If the total exceeds $10,000, it must be reported. Similar controls apply to those engaged in transactions on blackjack tables and crap tables, as they may be handled by different staff. So efforts are made to ensure staff aggregate purchases by a single punter to check if they breach the $10,000 limit. One source in Nevada said that cash in amounts smaller than $10,000 may be conveniently laundered through any of the casinos. Larger amounts may also be laundered, but will

ANTI-MONEY LAUNDERING

DECEMBER 2006 / JANUARY 2007

19

FEATURE

Like red flags to a bull Lists of so-called “red flags” are often said to help detect money laundering and terrorist financing, but how do red flags really help and how can organisations create lists of their own? Emily Brayshaw and Julie Beesley from KPMG discuss the pros and cons of red flags in combating money laundering and terrorist financing and how to develop a list.

Red flags – what’s the use? A number of the leading international anti-money laundering and counter-terrorism financing (AML/CTF) bodies, including financial intelligence units (FIUs) and regulatory authorities, produce lists of common traits and transaction scenarios that criminals traditionally use when attempting to legitimise the proceeds of their nefarious deeds. Such lists are commonly known as ML/TF “red flags”. Many AML/CTF specialists are often sceptical about lists of red flags and whether they are really useful. After all, if a financial institution can access a list of “red flags” via a regulator’s or FIU’s website, what’s to stop an organised crime outfit’s laundryman from accessing the same information? Won’t that mean that the laundryman has exactly the same information as the bank that is trying to thwart him so that he can circumvent its systems? In addition, criminologists will attest to the fact that money laundering is a fluid crime. The methods by which money is laundered are constantly changing to take advantage of new financial products and channels and the thriving corruption in poorly regulated, developing nations. By the time a list of “red flags” or a paper on money laundering methodologies has been released, the methods discussed may be up to five years out of date: the laundryman has washed the cash and moved on.

Part of a risk-based approach The trend towards combating dirty money and terrorist financing through effective risk management has meant that financial institutions must be pro-active in identifying their

20

DECEMBER 2006 / JANUARY 2007

EMILY BRAYSHAW

exposure to ML/TF risk. Here’s where the lists of red flags come into play, as they can be used to: • train staff and raise awareness of ML/TF risk; • develop policies on how to mitigate ML/TF risk in a range of scenarios; • develop procedures on how to conduct customer verification procedures and ongoing customer due diligence, eg if a red flag is that a customer’s telephone has been disconnected, consider building in a mechanism into a customer identification program whereby select new customers receive a “courtesy” call upon opening an account; • develop scenarios to feed into transaction monitoring and reporting systems; and • identify potential ML/TF risk when considering whether to lodge a suspicious matter report. Remember, just because activities or transactions are suspicious does not mean that they are illegal – they may just require additional attention or due diligence. There will also be some criminals (albeit those who may be not too bright)

JULIE BEESLEY

who still attempt to launder money via the methods outlined by red flags or whose typical “red flag” behaviour will alert the financial firm to their activities. By pro-actively building red flags into an AML/CTF program as needed, such criminals can also be readily identified and their behaviour may be just the tip of the iceberg. Arguably, however, the real value in lists of red flags is their use as a starting point to get staff thinking about how money is laundered and how it could be laundered through their business and that is one of the cornerstones of the risk-based approach to combating ML/TF. The main reason that authorities are so keen to implement the risk-based approach is that “no-one knows your business like you do”. In other words, who is better placed than a firm’s employees to understand the products/services it offers, its customer base, its access channels and the markets in which it operates? If a firm combines this knowledge with a list of red flags, then it can start to identify the areas and/or methods which money launderers or terrorist financiers may use at the firm and to act to mitigate those risks.

ANTI-MONEY LAUNDERING

FEATURE

... if a financial institution can access a list of “red flags” via a regulator’s or FIU’s website, what’s to stop an organised crime outfit’s laundryman from accessing the same information?

Such lists can also be used as a starting point when developing scenarios that may drive rules in monitoring and reporting systems to help detect unusual transaction patterns and transactions which may be high-risk. This means that a pro-active firm can also develop its own, internal lists of red flags, which can be updated more easily and readily than those produced by AML/CTF authorities. This also has the advantage in that it can be kept and maintained more discretely than public lists.

Creating a tailored list of red flags At some stage, there is a very real chance that AUSTRAC may want to see that a firm is using red flags to help train staff, develop AML/CTF policies and procedures and identify suspicious matters. Certainly this trend exists among US regulatory authorities, which make no secret of the fact that they expect US financial institutions to use red flags. Having a sample list of red flags may make it easier for a financial institution to

ANTI-MONEY LAUNDERING

develop its own list. By way of a starting point, a simple Google search of “laundering red flags” produced a swathe of documents on the subject, including one from the US Federal Financial Institutions Examinations Council Bank Secrecy Act (BSA) Anti-Money Laundering InfoBase. This document can be found online at http://www.ffiec.gov/bsa_aml_infobase/pages_m isc/red.htm and contains lists of red flags for the following functions within the financial industry: • general ML/TF red flags; • cash management: branch and vault shipments; • deposit accounts; • lending; • monetary instruments; • safety deposit boxes; • wire transfers; and • other activities involving customers and/or bank employees. An AML/CTF compliance officer may also wish to organise a series of brainstorming sessions with other compliance colleagues

and parts of the business to develop internal lists further. It is also important to remember that a red flag may help to point to activities other than ML/TF. For example, a customer who uses unusual or suspicious identification documents that cannot be readily verified may not be a money launderer, but may be involved in identity crimes, such as identity fraud or identity theft. Another red flag, eg transactions involving foreign currency exchanges followed within a short time by funds transfers to high-risk location, may not necessarily be ML/TF, but may indicate that the customer is involved in some kind of fraud.

Red flags as a compliance tool Clearly, lists of red flags can be useful tools for a reporting entity when maintaining a riskbased approach to detecting and preventing ML/TF in the areas of staff training and awareness, transaction monitoring and reporting and developing AML/CTF compliance 

DECEMBER 2006 / JANUARY 2007

21

10 reasons why you should use Complinet to reduce risk: Up to date news through the International AML News service providing you with the latest Money Laundering issues and news with in-depth analysis from leading industry experts

2

Reference material, where available, on the rules relating to AML and CTF specific to your jurisdiction Client screening services to help reduce exposure to unacceptable clients and transaction activity

4 5 6 7 8 9 10

AML training – with over 50,000 training users worldwide Complinet can customise e-learning courses making them relevant to your organisation and jurisdiction Trusted supplier with 1300 corporate clients and 15,000 individual subscribers who access Complinet’s online services every day International reach with offices in London, New York and Dubai Free trials available for all services so you can try Complinet with no obligation for 14 days Topical and relevant conferences and events run in various locations and regions throughout the world that attract the world’s most knowledgeable speakers Excellent references and testimonials from the world’s leading financial institutions giving you peace of mind that you use the same service as your peers 70 per cent of the Global Fortune 500 Banks use Complinet.

Do you need more reasons to speak to us?

Of course not so call today on +44 (0) 870 042 6410 or email [email protected] and we’ll set you up with your free 14 day trial. Alternatively visit www.complinet.com and simply register online for your free trial.

FEATURE

 policies and procedures. There is a caveat, however. Austrac has already gone on the record in the press saying that risk management is a continuous process that is carried out on a dynamic basis. In addition, the draft AML/CTF rules state: “When determining and putting in place appropriate risk-based systems and controls, the reporting entity must have regard to the nature, size and complexity of its business and the type of ML/TF risk that it might reasonably face.”

In the current absence of guidance from the regulator, this could be interpreted to mean that just as firms will need to conduct ongoing ML/TF risk assessments as these risks evolve, so too will they be likely required to keep lists of red flags current. For example, it would be difficult for a reporting entity to demonstrate that it had trained its staff effectively on the latest ML/TF techniques that threatened its business by using a dated list of generic red-flags. Similarly, without regularly refreshing the scenarios used in transaction monitoring and reporting systems developed from tailored lists of red

flags, even the most sophisticated systems will rapidly become dated and virtually ineffective. Red flags, therefore, may be a blessing or a curse for a reporting entity. As with so many facets of a risk-based approach to countering ML/TF, real value lies in keeping lists of red flags fresh and in tailoring them to fit a reporting entity’s business. Without regularly-updated lists of tailored red flags a reporting entity may do itself a great disservice; the most comprehensive systems, training and procedures are only as effective as the information they contain. ■

A selection of customer-related ML/TF red flags Customers who provide insufficient or suspicious information • •

• • • •

A customer uses unusual or suspicious identification documents that cannot be readily verified. A business is reluctant, when establishing a new account, to provide complete information about the nature and purpose of its business, anticipated account activity, prior banking relationships, the names of its officers and directors, or information on its business location. A customer’s home or business telephone is disconnected. The customer’s background differs from that which would be expected on the basis of his or her business activities. A customer makes frequent or large transactions and has no record of past or present employment experience. A customer is a trust, shell company, or private investment company that is reluctant to provide information on controlling parties and underlying beneficiaries. Beneficial owners may hire nominee incorporation services to establish shell companies and open bank accounts for those shell companies while shielding the owner’s identity.

Other suspicious customer activity • •

•

•

•

Activity inconsistent with the customer’s business

•

•

•

•

• • •

•

The currency transaction patterns of a business show a sudden change inconsistent with normal activities. A large volume of cashier’s cheques, money orders, or funds transfers is deposited into, or purchased through, an account when the nature of the accountholder’s business would not appear to justify such activity. A retail business has dramatically different patterns of currency deposits from similar businesses in the same general location. Unusual transfers of funds occur among related accounts or among accounts that involve the same or related principals. The owner of a retail business does not ask for currency when depositing cheques, possibly indicating the availability of another source of currency. Goods or services purchased by the business do not match the customer’s stated line of business.

•

• • •

•

A customer frequently exchanges small-dollar denominations for large-dollar denominations. A customer frequently deposits currency wrapped in currency straps or currency wrapped in rubber bands that is disorganised and does not balance when counted. A customer purchases a number of cashier’s cheques, money orders, or traveller’s cheques for large amounts under a specified threshold. A customer purchases a number of open-end stored value cards for large amounts. Purchases of stored value cards are not commensurate with normal business activities. A customer receives large and frequent deposits from on-line payments systems yet has no apparent on-line or auction business. Monetary instruments deposited by mail are numbered sequentially or have unusual symbols or stamps on them. Suspicious movements of funds occur from one bank to another, and then funds are moved back to the first bank. Deposits are structured through multiple branches of the same bank or by groups of people who enter a single branch at the same time. Currency is deposited or withdrawn in amounts just below identification or reporting thresholds. The customer may visit a safe deposit box or use a safe custody account on an unusually frequent basis. Safe deposit boxes or safe custody accounts may be opened by individuals who do not reside or work in the institution’s service area despite the availability of such services at an institution closer to them. Loans are made for, or are paid on behalf of, a third party with no reasonable explanation.

Source: US Federal Financial Institutions Examinations Council Bank Secrecy Act (BSA) Anti-Money Laundering InfoBase

ANTI-MONEY LAUNDERING

DECEMBER 2006 / JANUARY 2007

23

THE AML RULES

A spanner in the regulatory works BY ALEXANDRA CAIN

W

HILE THE AML/CTF laws have now successfully passed through parliament, many banks and financial institutions are still scratching their heads about how they should comply with the new laws. This is because formal rules and guidelines about compliance obligations are yet to be issued by the Australian Transaction Reports and Analysis Centre (Austrac), the regulator charged with administering the new laws. An exposure draft of the rules was issued in July for public comment, but final rules won’t come through until 2007, leaving industry in the dark about what needs to be done to comply with even the most basic obligations of the new laws. Money laundering expert Joy Geary says Austrac’s draft rules “give a broad idea about what the final rules will look like – but we need much more certainty at this point.” Industry commentators are not expecting final rules to be issued by Austrac before the New Year, despite financial institutions having to comply with new obligations such as recording electronic funds transfers from the time the new legislation receives royal assent on January 1. Mallesons Stephen Jaques’ partner Ros Grady says: “I’m not expecting any of the new rules to be finalised before the end of March.” Although the federal government has indicated it won’t back down from the timetable it has set out for full compliance with the new rules, it has agreed to extend by a further three months the 12 month moratorium period during which Austrac won’t prosecute banks that are in breach of the new laws. The government is arguing this effectively extends the transition period for the new laws, but experts say this concession will have a limited effect if new rules have not been issued. “I’d like to see the transition period changed to 12 months from when the rules are finalised,” says Grady.

24

DECEMBER 2006 / JANUARY 2007

According to Joy Geary there are two key rules that everybody needs that won’t be available before the laws come into effect. These are the crucial ‘know your customer’ rules, which set out how banks should properly identify their customers, as well as the transaction monitoring rules. Geary argues that if the new customer identification rules are not available until, say, April 2007, entities caught by the new laws “will lose 25 per cent of the implementation period” that has been provided for these requirements. Another key issue, says Grady, is the lack of direction over what constitutes a “low risk service” under the new laws. There is provision in the draft bill for certain low risk services to be exempt from the identification

the rules, and says industry should get used to an ongoing program of amendments to the laws and be prepared to respond to changes as they evolve. “The rules will change fairly regularly – the legislation will change again in February; this is a normal procedure. It’s going to be an evolutionary process – this is just the end of the beginning,” he says. Commentators and the industry are counting on considerable consultation between industry and government during the transition phase, particularly in relation to the development of guidance notes to support the new legislation. Austrac has just issued its first guidance note but, rather than treating the directive as a guide, Geary says “everyone will

I’d like to see the transition period changed to 12 months from when the rules are finalised ROS GRADY, MALLESONS STEPHEN JAQUES

requirements of the new laws, yet there is no information about which services might fit this category, making it tricky for financial institutions to know how to comply. “You can’t assume you will get relief for low risk services – you just have to comply. It would make sense for Austrac to work out which services are designated as low-risk so organisations know how to pull together their full compliance program,” she says. Grady also says organisations are particularly nervous about how Austrac will apply its new powers because of the potential for it to issue fines of up to $11 million to corporates that fall foul of the new laws. In contrast to Grady and Geary’s views, PricewaterhouseCoopers’ partner Steve Ingram is less concerned over the tight timetable and the lack of defined rules to support the new AML/CTF laws. Ingram says he is comfortable with the evolutionary nature of the development of

regard this as what they have to do unless they have very good reason not to”. “This potentially becomes regulation by stealth. Austrac has broad powers to create this guidance, but it is not subject to government review,” she says. Geary says that it will be important for Austrac to work with industry to develop the guidance notes for the new laws to ensure they can be practically applied. Discussions are underway between Austrac and industry to establish new consultation frameworks and processes for 2007. A spokesperson for AUSTRAC said there will be ongoing consultation with industry on the development of the rules as the AML legislation is progressively introduced over the next couple of years. He said the draft rules would be amended to reflect the final legislation, but would not confirm a timetable for the ■ release of the final rules.

ANTI-MONEY LAUNDERING

FEATURE

Policing a virtual world How do you apply old-world tracking and policing techniques to a new world of virtual cash? How do you keep in touch with an online game where fantasy is the game, anonymity the aim? Charis Palmer asks how the needs of a growing internet user population can be squared with the information needs of regulators and law enforcers.

I

N THE VIRTUAL online community Second Life, players freely trade items valued in virtual currency, known as Linden dollars. Second Life has a growing base of more than 1 million users from over 100 countries who buy and sell everything from virtual real estate to virtual aeroplanes to fly them to a virtual holiday destination. Last year, Second Life set up its own currency exchange, the LindeX, which allows Second Life residents to buy and sell Linden dollars and exchange them for US dollars. And if Second Life residents are confused about how to manage their Linden dollars, they can always hope for an invitation to visit Stagecoach Island, the virtual island set up by US banking giant Wells Fargo. In between skydiving, hovercraft riding and clothes shopping, visitors to Stagecoach Island can learn how to manage their money by earning virtual interest on deposits and being rewarded with Linden Dollars for completing online financial-related quizzes. Second Life isn’t alone. All around the world virtual communities are popping up to cater for gamers who value their virtual possessions as highly as their real ones. In 2004, a 23-year old gamer known as “Deathifier” spent $US26,500 (real greenbacks) to buy a virtual island inside 

ANTI-MONEY LAUNDERING

DECEMBER 2006 / JANUARY 2007

25

FEATURE

 role-playing game Project Entropia. Deathifier says he regained his initial investment in less than one year by selling real estate on the island and has since made a killing charging gamers to “hunt” for Linden dollars on his virtual treasure island. Much has been written by psychologists about the motivations behind online role-playing games. The one constant theme is the desire by players to immerse themselves in a fantasy world. The desire to be someone else and act out their wildest dreams under the shield of their anonymous persona or “avatar” is all too strong. And while anonymity may be a key factor behind the popularity of virtual communities, it is the issue of anonymity that has the attention of regulators and law enforcers. How do they apply old-world tracking and policing techniques to a new world of virtual cash? In September, Australian High Tech Crime Centre director Kevin Zuccato asked an audience of IT executives: “What is to stop someone purchasing a block of virtual land in the game that is worth 1000 Linden dollars, but actually paying $2 million?” Zuccato lamented the difficulty of tracing the activities of criminals in virtual communities. “The transfer occurs automatically because you are just buying something from Second Life, no one knows the difference, no Austrac, no nothing.” In the buzzing trade of virtual assets for real cash, online auction house eBay plays a big role. One academic has even gone so far as to calculate the gross national product of online world EverQuest by aggregating eBay sales of virtual items and currency. A large chunk of payments on eBay are conducted using the auction house’s payments arm PayPal. PayPal operates in 103 countries

26

DECEMBER 2006 / JANUARY 2007

As stored-value cards gradually replace cash, the anonymity of low-value cash transactions could become a thing of the past

NIGEL WATERS, APF POLICY CO-ORDINATOR

and while it only officially launched its Australian operations in 2005, by November 2006 it had 3 million Australian accounts. One of the major drivers of PayPal’s success is the fact that sellers and buyers can remain anonymous, with no need for the buyer to reveal their bank account details to the seller. PayPal managing director Andrew Pipolo says while this anonymity is important, it is still critical for PayPal to identify both parties. “I think Australians like that added security to be able to shop without sharing their financial details, but it is important for us to know who you are and where you are.” Pipolo says while on the face of it PayPal would seem an easy target for money laundering because payments are online and occur instantly, the reality is PayPal has over 2000 staff monitoring transactions in what is a closed loop. “We see the transaction from both a buyer and a seller point of view instantly and that gives us an incredible advantage in terms of looking at the risk of each transaction.” PayPal is generally supportive of the new AML legisaltion and Pipolo says he envisages very little impact on the organisation. “Austrac are advocating a risk-based approach which is very consistent with how we already run our business.” Pipolo says PayPal already reports suspicious transactions to Austrac, and while he

says he is unable to discuss the amount of money laundering detected, fraud is a much bigger issue for the company. “The audit trail through a PayPal transaction is a bit like an elephant in a china shop. We see the transactions very clearly, we have proprietary risk tools, and so it’s not a particularly good approach from a money laundering perspective.” PayPal account holders must register a financial instrument, which Pipolo argues means the user would have gone through a 100-point ID check which PayPal then relies on. The organisation then deposits a small amount of money into the new user’s account and asks them to return the funds to PayPal to ensure the user has control of their linked bank account and isn’t fraudulently using someone else’s account. Random deposit checks are also conducted as part of an ongoing verification process. For regulators, the key difference between a payment method that is high risk, versus one that is less so, is whether anonymity exists. Recommendation 5 of FATF’s 40 Recommendations states: “Financial institutions should not keep anonymous accounts or accounts in obviously fictitious names.” However, FATF is clearly aware that new types of payment methods that bypass institutions are on the rise. Recommendation 8 says: “Financial institutions should pay special attention to any money laundering threats that may arise from developing technologies that may favour anonymity, and take measures, if needed, to prevent their use in money laundering schemes.” In October FATF released a report on new payment methods, arguing that many of the methods highlighted in the report raise concerns about money laundering and terrorist financing because criminals can adjust quickly to exploit new opportunities.

ANTI-MONEY LAUNDERING

FEATURE

The report discusses the trends and money laundering implications of prepaid cards, mobile payments, electronic purses or stored value cards, internet payments not based directly on a bank account and digital precious metals, all of which it says have anonymity as a potential risk factor. The concern over anonymity related to prepaid and stored value cards is likely to have major implications for the organisations that issue such cards, and a debate is already under way over just how far Australia’s AML legislation will go in demanding holders of such cards be identified. In its submission to the Senate Committee inquiry into the provisions of the AML and CTF Bill, the Australian Privacy Foundation has raised concerns over the possibility holders of low-value stored value cards, such as telephone cards and public transport smart cards, will be required to identify themselves. APF policy co-ordinator Nigel Waters says: “As stored-value cards gradually replace cash, the anonymity of low-value cash transactions could become a thing of the past – no doubt a welcome prospect for the taxation authorities, but hardly the proper function of a law supposedly focused on serious crime.” In Australia, prepaid cards have only just started to grow in popularity as institutions look for new ways to generate card revenue beyond credit card interchange fees. One of the first re-loadable prepaid cards to be launched is the bopo card, offered by payments processor Bill Express and managed by wholesale banking services provider Cuscal. Spokesperson Julie Sheather says: “One of the great strengths of the bopo card is that

it provides the convenience of a credit card without linking it to a transaction account and with access to only limited funds and – as a result – without the need for the usual identity and credit checks.” The bopo card can only be used to store up to $1000, with up to a maximum of $2000 able to be loaded to the card in any 30 day period. Sheather says although this falls under the AML threshold, activity on the cards is already being monitored. Sheather says: “AML requirements will be more relevant for bopo in the future, when an option is introduced which enables cardholders to increase this limit by providing additional identification as described in the product disclosure statement. This facility will continue to meet all EFT and the AML requirements before its introduction (and obviously is being reviewed in light of the AML bill introduced in the past month and any amendments which may occur during its passage through parliament).” Cuscal is a designated service provider under the new law, and therefore has an obligation to monitor and mitigate suspicious matters, such as loading up numerous cards under the $1000 threshold. The Australian Privacy Foundation says while it welcomes the setting of monetary thresholds for stored value cards “we are concerned that these thresholds can be changed, including reduced, by regulation”. The challenge for the financial services industry will be to work out how to meet the needs of a growing internet user population that values anonymity, and regulators and law ■ enforcers that are seeking to remove it.

The concern over anonymity related to prepaid and stored value cards is likely to have major implications for the organisations that issue such cards

ANTI-MONEY LAUNDERING

DECEMBER 2006 / JANUARY 2007

27

AML UPDATE

A legal perspective Blake Dawson Waldron’s AML experts look at the latest bill introduced into parliament and what it means in legal terms. Many of the criminal offences have been replaced by civil ones, and the fines for breaches are heavy. The upshot is, it’s time to begin planning.

T

HE Anti-Money Laundering and Counter Terrorism Financing Bill 2006 (Cth) (AML Bill) and the Anti-Money Laundering and CounterTerrorism Financing (Transitional Provisions and Consequential Amendments) Bill 2006 (Cth) (Consequential Amendments Bill) were introduced into the House of Representatives on 1 November 2006. Since that date, government has also released a replacement Explanatory Memorandum to the AML Bill and a draft version of the Anti-Money Laundering and CounterTerrorism Financing Rules that are proposed to apply in relation to: • the reporting of movements of physical currency and bearer negotiable instruments; and • the register of designated remittance services. A final version of the draft Anti-Money Laundering and Counter-Terrorism Financing Rules (rules) is yet to be released, and with much of the practical requirements of the

28

DECEMBER 2006 / JANUARY 2007

proposed new AML regime to be contained in the rules, it is not possible to know the extent of the practical ramifications of the proposed new AML regime. Nevertheless, it is apparent that there are some important differences between the AML Bill introduced to Parliament and the draft bill that was released for consultation in July 2006.

THE AML BILL This update highlights some of the significant elements of the AML Bill.

Phased implementation The AML Bill will be implemented over two years with a prosecution-free period that will expire 12 months after each section commences, provided reporting entities are using their best endeavours to comply. Obligations relating to the following matters begin the day after the AML Bill receives royal assent:

•

reports about cross-border movement of physical currency and bearer negotiable instruments; • electronic funds transfer instructions; • the register of providers of designated remittance services; • entering into transactions with residents of prescribed foreign countries; and • certain record-keeping requirements. Obligations relating to AML/CTF compliance reports and correspondent banking begin six months after royal assent. Obligations relating to identification procedures and AML/CTF Programs begin 12 months after royal assent whilst obligations relating to ongoing customer due diligence and the reporting of suspicious matters, threshold transactions and international funds transfer instructions begin 24 months after royal assent.

Many criminal offences replaced with civil penalties Many of the criminal offence provisions have been replaced with civil penalty provisions. The effect of this policy change is that breaches of those provisions of the AML Bill to which civil penalties apply can be more easily proven by the authorities as only the lesser civil standard of proof needs to be met. The AML Bill provides maximum penalties for breaches of civil penalty provisions of $11 million for companies and $2.2 million for individuals.

ANTI-MONEY LAUNDERING

AML UPDATE

Designated services The list of designated services in clause 6 has been amended. Whilst some designated services that appeared in the previous version of the bill have been removed, the descriptions of many other designated services have been amended and new designated services have been added. For example: • Items 37, 38 and 39 only apply to a “life policy” as defined. The definition exempts life risk insurance as well as other life insurance that falls within certain criteria. • Item 54 of clause 6 provides for a new designated service that can affect AFS Licensees – described as “in the capacity of holder of an Australian financial services licence, making arrangements for a person to receive a designated service (other than a service covered by this item)”. Item 54 is potentially far-reaching but its interpretation is open to argument and clarification is likely to be sought by industry bodies. Many parts of the AML Bill do not apply to reporting entities that provide this designated service – for example the requirements relating to ongoing customer due diligence, suspicious matter reporting, threshold transaction reporting and AML compliance reports do not apply in respect of item 54. One improvement is that a number of designated services, such as the provision of loans, guarantees, finance leasing and supplying goods, will only come within the ambit of the AML Bill when a reporting entity “carries on the business” of providing that service.

Designated business groups The definition of “designated business group” has changed from that found in the previous draft of the AML Bill, with the term now applying to a group of two or more persons, rather than a group of two or more companies. In order to be a member of a designated business group, each member of the designated business group must elect in writing to be a member, and no member of the designated business group can also be a member of another designated business group. The AML Bill leaves additional requirements to the rules and without an up-to-date version of the draft rules, it cannot be said how the definition of a designated business group will ultimately operate. For example, an election to be part of a designated business group must be made in accordance with the rules, each member of the designated business group must satisfy any conditions specified in the

ANTI-MONEY LAUNDERING

rules, and the designated business group cannot be of a kind that is, according to the rules, ineligible to be a designated business group. Importantly, if a reporting entity is part of a designated business group, the AML Bill provides that the reporting entity’s ongoing customer due diligence responsibilities, as well as other obligations (such as record keeping obligations), can be discharged by another member of its designated business group.

Anti-money laundering and counter-terrorism financing (AML/CTF) programs Changes have also been made to the requirement on a reporting entity to adopt an AML/CTF program. Under the AML Bill there are three types of AML/CTF programs: Standard AML/CTF programs, Joint AML/CTF programs and Special AML/CTF programs. A Standard AML/CTF program is to be adopted by individual reporting entities, whereas a Joint AML/CTF program is to be adopted by reporting entities in a designated

used to carry out the required customer identification procedures.

The Consequential Amendments Bill The Consequential Amendments Bill sets out amendments to be made to existing legislation. In particular, the Consequential Amendments Bill clarifies that the AML Bill, when enacted, will operate in parallel with the Financial Transaction Reports Act 1998 (Cth) (FTR Act). Many of the amendments to the FTR Act made pursuant to the Consequential Amendments Bill are aimed at avoiding duplication of obligations under the AML Bill and the FTR Act. Generally, this means that after the AML Bill has received royal assent, as obligations are imposed on a reporting entity under the new AML regime, the current corresponding obligations under the FTR Act will no longer apply to that reporting entity. In addition to amending the FTR Act (and many other acts), the Consequential

... the time to begin AML planning has definitely arrived business group. The Special AML/CTF program is a program that applies to a reporting entity in circumstances in which all of the designated services provided by the reporting entity are covered by item 54. Standard and Joint AML/CTF Programs are to comprise two parts: • Part A – which is designed to identify, mitigate and manage the reporting entity’s anti-money laundering counter-terrorist financing risk; and • Part B – which sets out the applicable customer identification procedures for customers of the reporting entity. Special AML/CTF Programs are to comprise only Part B.

Amendments Bill amends the Privacy Act 1988 (Cth) (Privacy Act) with the effect of regulating those small business operators that are also reporting entities under the new AML regime. This is to ensure that those small business operators comply with the Privacy Act for personal information collected by the small business.

Time to begin planning

Agents

On 8 November the Senate referred the AML Bill and the Consequential Amendments Bill to the Legal and Constitutional Affairs Committee for inquiry and report by 28 November 2006. Both Bills passed on December 7th, and with some obligations coming into force as soon as the day after the Bill receives Royal Assent, the time to begin AML planning has definitely arrived. ■

The concepts of internal and external agents, which were part of the previous version of the bill, have been abandoned in favour of the general law principles of agency. This change will provide reporting entities with less restrictions and more flexibility than under the previous version of the bill. The AML Bill specifically stipulates (at subclause 37(2)) that an agent may be

Stephen Cavanagh, Partner t > 02 9258 6070 e > [email protected] Phil Trinca, Partner t > 03 9679 3258 e > [email protected] Andrew Young, Senior Associate t > 02 9258 5881 e > [email protected]

DECEMBER 2006 / JANUARY 2007

29

REGIONAL REVIEW

Japan: keeping old traditions at bay Japan faces unique threats of money laundering that are as much a result of its cultural intricacies as its role as Asia’s primary financial centre. As Carl Fredriksen and Gary Gill from KPMG discover, the Yakuza, pachinko parlours and the Stalinist state of North Korea all play key roles in the Japanese world of money laundering and influence the country’s attempts to fight it.

30

DECEMBER 2006 / JANUARY 2007

ANTI-MONEY LAUNDERING

Major economy, major money laundering hub? Japan’s status as the world’s second-largest economy presents it as an attractive option for domestic and international money launderers and its abundance of financial activity bears the affliction of large-scale financial crime. As alluded to by the US Department of State’s 2006 International Narcotics Control Strategy Report (INCSR) in its country report for Japan, the scope and scale of this white-collar crime extends beyond the activities of opportunistic fraudsters to the highly sophisticated, organised crime operations which have become deeply ingrained into so many facets of Japanese society. The most widely recognised of Japan’s organised crime operations is referred to as “the Yakuza”. Though more of a collection of stand-alone operations than a co-ordinated single operation, Yakuza financial crime operations include loan sharking, illegal gambling and illicit conduct in relation to property and corporate activities. Another domestic predicate crime which contributes significantly to Japan’s money laundering problems is narcotics trafficking. Japan’s National Police Agency suggests that of an estimated US$10bn in annual income derived by Japanese organised crime syndicates approximately US$3.4bn is attributable to the trafficking of methamphetamines. A more prevalent predicate crime which is pervasive throughout all tiers of Japanese society, to varying extents, is illegal gambling. To put this risk into perspective it is important to understand that gambling in Japan is highly regulated by the government to the extent that casino operations are illegal, while gambling on horse racing is controlled by the Japan Racing Association. However, despite the Japanese government’s stance in banning certain categories of gambling, such as casinos, locating an underground casino in Japan is about as difficult as trying to locate a TAB in Melbourne on the first Tuesday in November. The Japanese government is mainly concerned about the lost tax revenue as a result of unreported income generated by such underground

gaming enterprises that is laundered back through the financial system masked under the guise of legitimate investments. A form of gambling known as pachinko is also extremely popular in Japan. Pachinko is a pinball-style poker machine which manages to circumvent government regulation in that players play for the chance to win prizes, rather than cash – the twist being that the essentially worthless prizes can be exchanged at adjoining businesses for cash. A more interesting facet to this attempt at legitimising this thinly veiled form of gambling is that a large portion of Japan’s pachinko parlours are owned by North Korean immigrants. Pachinko parlours may not technically be illegal, but evading tax on the proceeds derived from their operation certainly is. In addition, the North Korean owners of the pachinko parlours regularly remit funds to their families in the Stalinist state, which is facing international criticism in relation to allegations of smuggling weapons, drugs and counterfeit currency and most recently questionable pursuit of nuclear capability. When viewed in this light, Japan’s efforts to combat such activity have greater international ramifications than fighting domestic tax evasion.

Other obstacles to fighting money laundering Japan’s Achilles heel in bringing efficacy to legislative reforms has been bureaucratic corruption. Transparency International’s (TI) Global Corruption Perception Indices reflect this stagnancy, indicating that in the period 2001 to 2005 Japan’s ranking decreased from 21 to 24 in 2004 before returning to 21 again in 2005, with a corresponding increase in ratings from 7.1 to 7.3. Things are looking up, however. The 2006 TI index rated Japan in 17th place with a rating of 7.6. Such a rating belies global expectations of the government driving the world’s second largest economy and it also places it considerably lower than TI’s 2006 rating of regional

Photo by Becky Hogge, www.machine-envy.com

REGIONAL REVIEW

ONE OF JAPAN’S MANY PACHINKO PARLOURS

neighbours Singapore and Hong Kong, which scored 9.4 and 8.3 respectively. Political or bureaucratic corruption in any form ultimately leads to inefficiencies and difficulties in enforcing compliance with legislative requirements. In addition, recent events question whether Japan’s AML legislative reforms are being implemented to the extent required by reporting entities or whether the actual legislation does not pack quite as much punch as comparable jurisdictions. For example, earlier this year a Japanese financial institution was subject to financial sanctions by Chinese and US financial regulators following AML compliance breaches by foreign domiciled branches and subsidiaries. Following this, Japan’s regulators came under criticism from foreign counterparts for what was perceived to be a lax approach to enforcement of AML measures.

Steady progress and stronger reforms Each jurisdiction in the world faces at least some risks of money laundering, but in stark contrast to many countries the efforts of Japan’s financial regulators exhibit an acute awareness of the vital role Japan plays in combating regional and global money laundering. The Japanese parliament (the Diet) has steadily introduced a comprehensive suite of



ANTI-MONEY LAUNDERING

DECEMBER 2006 / JANUARY 2007

31

REGIONAL REVIEW

The Financial Action Task Force on Money Laundering’s (FATF) most recent mutual evaluation of Japan’s progress in combating AML was in 2004

 AML measures since the introduction of Japan’s anti-organised crime legislation in 2000, including suspect transaction reporting and customer identification requirements and the creation of the Japan Financial intelligence Office (JAFIO) – a financial intelligence unit operating under the auspices of Japan’s Financial Services Agency. The JAFIO has been instrumental in establishing information sharing memoranda with other countries, including Australia, and has provided procedural guidelines to Japanese reporting entities to assist with compliance and undertaking analysis of suspect transaction reports. In addition, Japan has also recently implemented improvements to its AML measures, including stricter customer identification requirements and a lowering of its cash transaction reporting threshold.

The Financial Action Task Force on Money Laundering’s (FATF) most recent mutual evaluation of Japan’s progress in combating AML was in 2004. The mutual evaluation acknowledged that Japan’s legislative coverage of the FATF’s 40 Recommendations and Nine Special Recommendations (the 40+9 Recommendations) was generally sufficient, but recommended improvements via the creation of better international cooperative mechanisms and a more cohesive system for administering and reviewing compliance with AML requirements. These comments appear to have been taken on board by the JAFIO and the Diet, with the JAFIO involved in continuing efforts to sign memoranda of understanding with other FIUs and the Diet developing legislation to streamline Japan’s AML compliance administration and ensure

full compliance with the FATF’s 40+9 Recommendations. The proposed changes will require AML compliance efforts from accountants, lawyers and jewellers, entities not previously captured under AML legislation. The draft AML Bill is expected to be introduced to the Diet in 2007. Japan’s commitment to ongoing legislative reform ensures that the country is well-placed to combat money laundering threats from organised crime, illegal gambling and pachinko. However, the recurring links between North Korea and Japan continue to remind Japan of the global ramifications of its AML efforts and that the international community will not tolerate lax regulation when it comes to issues such as financial dealings with jurisdictions of questionable character. ■

Don’t get taken to the cleaners

Claim your FREE subscription* to anti-money laundering magazine, the definitive source of information for the financial services sector on anti-money laundering and counter-terrorist financing. Call our subscription department today on 02 9776 7923

32

DECEMBER 2006 / JANUARY 2007

*subscription offer ends June 2007

ANTI-MONEY LAUNDERING

INSIGHT

The path to enlightenment

By Joe Garbutt SENIOR MANAGER, GROUP COMPLIANCE RISK, NATIONAL AUSTRALIA BANK LTD.

While the kind of heavy penalties handed down in the US and UK for poor controls and systems have not featured here, the Australian Transaction Reports and Analysis Centre’s stance on compliance post AML reform is yet to be determined. Here Joe Garbutt gives handy tips to ensure all compliance bases are covered.

I

T IS OBVIOUS to most that successful firms avoid regulatory fines, public censure and resultant reputational damage. Not that Austrac will necessarily copy other regulators but the UK’s FSA did fine four of the eight largest banks for AML compliance failures. The “final notices” of the enforcement cases at www.fsa.gov.uk are therefore a good read for future Australian AML/CTF compliance officers.

It has been said that Austrac will enforce against recalcitrant firms. We will doubtless see the outcome of this in due course.

How do we avoid getting near enforcement? There are no guarantees in life but you need to understand your position. Liken it to a road race – are you at the front, middle or back?

Don’t underestimate the cost and effort of facing enforcement of this magnitude. It is clear from the near £2m fine of Abbey that its chief executive personally spent considerable time responding to the enforcement.

If you are at the back, do something about it. In 2002 it became clear that the FSA’s expectations of industry performance on AML/CTF did not necessarily match the industry’s historical approaches, with enforcement action likely to follow quickly. In such circumstances rapid investment of effort – or a sprint forward – was needed.

There is relevance for Australian firms who may be considering spend on their AML/CTF change management programs to implement the bill.

Where are we in the road race?

Any firm that knowingly under-invests runs the risk of both the pain of enforcement and a financial cost that is likely to outweigh the alternative of having invested appropriately in the first place.

ANTI-MONEY LAUNDERING

Seek to understand what Austrac actually expects firms to do to implement its rules. What are the regulator’s views on a risk-based approach for your industry segment? Study any formal guidance or other material such as conference speeches.

Use opportunities to gain as much feedback as possible. For example, an approach that has worked well for me is to ask financial intelligence units whether they are content with both the quantity and quality of suspicious transaction reports. Gain a sense of where you are placed in the context of your peers. Understand peers’ new initiatives. It is hard to see AML/CTF as a truly competitive issue and information sharing on approaches and initiatives is of great benefit. Don’t panic in response to big spending peers. Solutions always need to be cost effective and the Australian regime is to be built around the risk-based approach. Equally, your firm cannot avoid expenditure where it is needed. Where CTF is deemed high risk (and not forgetting existing legislative requirements) some significant systems spend may be inevitable. Detecting terrorist financing has been expressed as being harder than finding a needle in a haystack. So you may not find it, however hard your firm tries. You must therefore be able to defend your firm’s systems, procedures and controls as adequate in the event of a terrorist attack where your firm had a role, such as processing payments, in the financing of the attack. If you have weaknesses identified by an Austrac inspection, compliance review or audit, remedy them quickly and comprehensively.



DECEMBER 2006 / JANUARY 2007

33

INSIGHT

 Many regulatory enforcement cases have followed directly as a consequence of failure to correct in this manner.

What should our relationship with the regulator be? • •

•

•

•

•

Work hard at your relationship with the regulator, as the framework allows. Listen to the regulator’s personnel, meet them and talk to them but don't bother them with low-level questions that you should be solving for yourself. Develop different contacts at the regulator so you know where to go to if you need help. If you have a relationship manager, provide the regulator’s manager with an excellent service, meeting information requests promptly, for example. Follow disclosure rules carefully and be open and honest about problems. Suggest to the regulator how you are going to fix your problems, so that it is able to influence your thinking whilst at the same time sees you are accepting your responsibilities for compliance. Consider wider stakeholders who may influence your reputation with the regulator. For example, avoid developing a reputation with law enforcement agencies for being unco-operative.

account opening accuracy and the length of time it took the AML unit to process suspicions. Measurement gives firms evidence as to how it is managing its risk-based approach and provides one of the major inputs to the AML/CTF governance committee. Developing a dashboard is a key compliance tool. Content can include: • Suspicion reporting levels, analysed by business unit and subject to trend analysis. • Volume activity from automated monitoring systems, and resultant suspicion reporting, again subject to trend analysis. • Account opening accuracy, again analysed by business unit and subject to trend analysis. • Specific case numbers around high-risk areas, eg politically exposed persons, sanctions. • Training statistics. • Any lessons from major cases. [Have due regard to security and legal requirements, and the fact that an individual case could potentially lead to enforcement action, as it has with the UK FSA]. • Results of compliance inspections or audits, including progress with the annual compliance plan. • Details of impending regulatory change or regulator activity.

How do we approach AML/CTF?

Is measuring enough?

If we want a good compliance record, we need to apply our compliance disciplines by: • Following our established mechanisms for regulatory change. • Making sure systems, processes, and training are embedded through the business. [Avoid the old trap of compliance being ring-fenced in the compliance department.] • Establishing appropriate governance and oversight mechanisms. • Ensuring compliance controls are monitored or inspected for effectiveness. • Establishing AML/CTF compliance breach reporting systems. • Developing and reinforcing an appropriate AML/CTF compliance culture throughout the firm.

No. The US President Theodore Roosevelt apparently saw his foreign policy as to “walk softly but to carry a big stick”. The application for the AML/CTF compliance officer is, I suggest, to walk softly but to carry a divining rod! This is because the AML governance committee or board will rely upon the dashboard for oversight but expect that data it contains is accurate. It is the job of the AML/CTF compliance officer, I suggest, to “divine” where it is inaccurate and correct it.

beneficial owners could be complex, lengthy and only one failure (such as a failure to verify an account signatory) in the, say, 10 or 20 account opening actions, could lead to an overall account opening failure. Similarly, consider lessons from the UK fine that included late reporting by the money laundering reporting officer – just because the AML/CTF unit is the specialist area, don’t overlook the need to verify its dashboard entries, as for all other submissions. Also, if your business is not managing change quickly enough or getting it right, call this out – that’s what being a compliance officer is all about.

Now can I rest? Again, no. If we remind ourselves that AML/CTF is one of the truly global compliance issues, we need to stay abreast of developments and deploy new solutions – apply the concept of continuous improvement of your risk-based approach to your AML/CTF compliance program. And let’s not overlook the financial crime angle. Sometimes the criminals seem to be winning the race and it can be hard to even keep them in view, so effort is surely needed.

Joe’s summary for a good compliance record • •

• •

• • • •

Account opening accuracy must be subject to thorough and independent compliance review. •

How do we measure? One common thread from the UK fines was that they were imposed for failing to meet compliance requirements that could be measured:

34

DECEMBER 2006 / JANUARY 2007

Are all the procedures that flow from account opening policy being followed? Opening a business account under the UK’s Joint Money Laundering Steering Group Guidance Notes regime where there were

Don't knowingly under-invest, it might cause pain and more cost later. Use the road race analogy to assess where you are. How fast does the regulator expect you to run? When you identify a problem, fix it. Work hard to develop a constructive relationship with the regulator that both parties benefit from. Apply tried and tested compliance disciplines to AML/CTF. Develop a dashboard as a key measuring tool. Independently verify the data you receive. Good compliance means a risk-based approach to fighting financial crime. Fighting is usually hard work. There is no steady state after which you can relax. Keep running! ■

Joe Garbutt is the senior manager, group compliance risk at National Australia Bank. The views expressed in the article represent Joe's personal opinions and he is not speaking for National Australia Bank Ltd. in this article.

ANTI-MONEY LAUNDERING

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

Anti-money laundering

are you ready?

AFMA and KPMG have joined forces to develop a training course for financial services' professionals. The course will equip professionals with the skills and knowledge necessary to understand the implications of the new anti-money laundering and counter-terrorism financing (AML/CTF) legislation. The one-day training course includes case studies, examples and activities designed to help you develop effective risk-based AML/CTF programs.

You will learn practical tips on how to; design customer and enhanced due diligence programs, establish internal monitoring and evaluation systems and build a culture of compliance. It will also help you understand post-reporting considerations.

One day public and in-house courses commence February 2007 in Sydney and Melbourne. For further information and a course syllabus contact Diana Zdrilic on 02 9776 7923 or [email protected]

kpmg.com.au Successful completion of the workshop and assessment will earn credit towards the nationallyrecognised Financial Services training package at Diploma level and contribute to on-going professional development requirements.

CASH REMITTERS

Outside the system? Both the more formalised cash remitting services and the informal network structure of informal cash remitters do not use detailed records and their network structure make these businesses difficult to regulate and oversee for money laundering activities. Michelle Hannan explains

C

ASH REMITTERS are often identified as being a high risk for undertaking money laundering activities, either with the remitter acting as the launderer or as a vehicle for laundering activities by other launderers or criminals. A recent case in October, as part of an Australian Crime Commission’s Task Force Gordian operation, resulted in the arrests of nine people in Sydney and Melbourne for alleged drug and money laundering offences. It is alleged that between December 2005 and October 2006 around $93 million from illicit drugs was laundered overseas. 1 In this case it appears that a large proportion of the funds had been laundered through a cash remitting service between Australia and Vietnam and Hong Kong and Cambodia on the directions of organised crime syndicates. This case highlights how significant amounts of money can be laundered outside the formal financial sector through avenues such as cash remitters or currency exchanges. However, the financial sector still needs to be aware of the potential money laundering activities of cash remitting services as the formal financial sector can be used as part of the process. Cash remitting agencies can be either formal or informal networks. Formal cash remitters are registered businesses and may operate through the formal financial sector or through a formalised network of other cash or currency remitters. The majority of the money transferred is for immigrants sending money to family overseas, or for travellers to receive money or to exchange currencies. Formal cash remitters may also use the financial system to undertake money transfers or currency exchanges if this is a cheaper or more efficient option.

Cash remitters, either formal or informal services, represent a high risk for money laundering activities due to the characteristics of the business.

Informal cash remitting services are more like alternative remittance systems (ARS). These services operate outside the formal financial sector and through an informal or loose network of other cash remitters or ARS operators. These networks can be based on family or ethnic-based relationships and again are often used by immigrants sending money back to families, especially where families may live in areas not serviced by the formal financial system or where the cost of using the formal financial system is prohibitive. It should be noted that where an established relationship or network exists between two remitters, cash may not physically move, rather a book entry is made with the outstanding total altered for each transaction and at an agreed time the balance outstanding will then be transmitted. Both the more formalised cash remitting services and the informal network structure of informal cash remitters do not use detailed records and their network structure make these  1 Sourced from the Australian Crime Commission’s website media releases

dated 27 October available on www.crimecommission.gov.au. 36

DECEMBER 2006 / JANUARY 2007

ANTI-MONEY LAUNDERING

CASH REMITTERS

businesses difficult to regulate and oversee for money laundering activities. This means that cash remitters have a number of conducive features for money laundering such as: • •

• •

Cash remitters accept and move large volumes of cash. They undertake currency and cash movements to countries that are difficult to reach, or often involved in drugs or organised crime activities, particularly in Asia. Minimal or no records or paper trail to follow. Operate using a network of relationships that are adaptable.

However, as one of the aims of money laundering is to integrate the funds within the formal financial sector to make those funds appear legitimate and therefore available for legitimate expenditure, cash remitters also use the formal financial sector to launder funds. Cash remitters, in particular the more formal cash remitters, may blend legitimately sourced funds with funds sourced from illegal activities, such as drugs. Cash remitters may use the formal financial system, in particular banks, to transfer money overseas or exchange currencies and, as this is their business and they may move quite large sums, then blending some illegitimately sourced funds with legitimate funds can and is undertaken quite easily. Under the new risk-based AML/CTF regime, where cash remitters undertake financial transactions through a bank, it will be the banks responsibility to identify if that activity potentially involves money laundering. This will require customers with registered cash remitting businesses being identified and the organisations’ risk assessment being applied, with the most likely outcome that this customer group will represent a high level of risk to the financial institution or potential money laundering activity.

Identifying the more informal cash remitting businesses or activities is more difficult, but should still be captured through the risk assessment process as these accounts can be identified through their transaction activities rather than their business or customer type. For instance, there will be more currency transactions than expected for the account type, particularly where those transactions are for currencies of countries with high risk of criminal activity, particularly drugs, such as Thailand. Those transactions will be for significant amounts and may occur quite regularly or with a sweeping transaction that clears the account. Informal cash remitters may operate as part of another business even with a registered name and separate business account or using a business front, such as a restaurant. In the case above a money transfer business operated through a clothing business. Again, a key indicator of potential money laundering activity will be where a customer account does not behave as expected. For instance, it would be irregular for a small take-away restaurant in Australia to transfer large amounts overseas or to exchange Australian dollars for Thai baht. Cash remitters, either formal or informal services, represent a high risk for money laundering activities due to the characteristics of the business. They also represent a high risk for the financial sector as both formal and informal cash remittance services can and do use the financial sector to move funds and exchange currencies from both legitimate and illegitimate sources. For financial institutions with cash remittance services for customers or where the banks’ services can be used to transfer money overseas or exchange currencies, there is a high risk of the financial institution being used as part of money laundering activities. It is a key component of any risk assessment methodology and process to identify not just high risk customer groups, such as cash remitters, but to also link this with identifying potential money laundering activi■ ties that either formal or informal cash remitters may undertake.

Reach out to the market

ADVERTISING SOLUTIONS Over 4,500 qualified industry practitioners, including 350 AML project managers from the retail, wholesale, funds management and insurance sectors, read Anti-money laundering magazine. To reach the industry’s key decision makers, contact our advertising team on 02 9776 7923

ANTI-MONEY LAUNDERING

COMING SOON – SERVICES DIRECTORY Are you a solution/service provider in the anti-money laundering, fraud and counter-terrorist financing sector? Don’t miss this opportunity to list your organisation in March’s annual services directory. For more information contact Diana Zdrilic on 02 9776 7923 or email [email protected]

DECEMBER 2006 / JANUARY 2007

37

PROFILE

Striking the balance When customer satisfaction is high on a bank’s agenda, then getting the balance between regulatory needs – and collecting the all-important important KYC information – is crucial, according to Alison Bright, ANZ Bank’s group anti-money laundering officer.

BY JOHN KAVANAGH

B

IG BANKS have a fixation with customer satisfaction. In recent years they have taken to citing customer satisfaction ratings in their financial results presentations. What the banks are targeting is a small group of satisfied customers who are so pleased with their bank they become advocates – they recommend the bank to others. New customer acquisition is hard to achieve in highly competitive markets such as banking, and customer advocacy is one sure way of doing it.

customers happy. A central part of the planning for ANZ’s AML program is to make sure the customer experience is not compromised. “We aim to make sure there is no negative impact for customers resulting from

the processes we are developing for AML,” says Bright. “When you are collecting more information about people you may meet some reticence. Our job is to strike the balance between regulatory compliance and customer needs.” 

The big challenge in the job is translating written obligations into practical applications

As part of this trend, the customer experience has become an important metric for measuring the performance of banking staff. Surprisingly, even managers working in back office and head office departments have customer satisfaction as a performance driver. Alison Bright, the senior manager regulatory compliance and group anti-money laundering officer at ANZ, does not escape from the rubric that everyone is working to make the

38

DECEMBER 2006 / JANUARY 2007

ANTI-MONEY LAUNDERING

PROFILE

We have conducted regular briefings over a number of years for senior management. We have used international standards as a benchmark and briefed senior management at each stage as we have introduced changes.

Bright says most of the members of her team have had experience working in customer-facing roles before moving into compliance. This helps give them a sense of the customer issues. She has been with the bank 12 years and before moving into the compliance department was a relationship manager in institutional banking. “I have degrees in law and economics and when the compliance position came up I thought it would be a good combination of my tertiary qualifications and banking experience. It is very important to have had that relationship management experience.” Bright estimates that between one and five per cent of the bank’s customers will fall into a risk category. The bank will need to know more about these people, where their money comes from and how they are using it. While the percentages are low, for a bank with millions of customers it is still a large number. The Anti-Money Laundering and Counter-Terrorism Financing Bill does not require banks to update their profiles of existing customers, and for customers who do not fall into a risk category the information-gathering requirement is not very different from the present 100 points system. But things will be different for the one to five per cent. “We will avoid an intrusive scoring system,” says Bright. “We have not finalised our approach but we will do as much as we can to embed the AML program in the business process through the product approval process and procedural design.” Bright says one of the good things ANZ has done is start building awareness

ANTI-MONEY LAUNDERING

Alison Bright SENIOR MANAGER REGULATORY COMPLIANCE AND GROUP ANTI-MONEY LAUNDERING OFFICER, ANZ

within the bank early. “Even though we did not know the specifics we could see what was emerging with AML overseas and we knew it was coming here. Three years ago we started building awareness through a staff education program. We will make adjustments and introduce more specific training programs as the implementation date gets closer.” For Bright those training programs, starting at an early stage, are an indicator of management’s commitment to the process. “We have conducted regular briefings over a number of years for senior management. We have used international standards as a benchmark and briefed senior management at each stage as we have introduced changes.”

Bright says there is strong backing for the AML/CTF Bill in its present form. “The view here is that risk-based is better then prescription. But it is still challenging. You have to get the risk assessment right and need regular engagement with the regulator and other industry participants. Over the longer term customer feedback will also be a factor in determining if you have got the balance right. ”The big challenge in the job is translating written obligations into practical applications. We ask ourselves how to make the compliance process work efficiently in a banking environment. There is a lot of ■ problem solving in this job.”

DECEMBER 2006 / JANUARY 2007

39

CASE NOTES

When food is not the only thing on the menu Could that brilliant Thai take-away restaurant be a front for something less tasty? Michelle Hannan asks the questions some banks may need to ask when checking out banking activities.

Y

OUR CUSTOMER HAS a number of personal deposit accounts with your bank along with a business cheque account for a Thai restaurant. The restaurant has particularly good takeaway Thai food and has been operating for nearly five years. It is time for you to review their business account to see if they need any other banking services that your organisation can offer. Firstly, you look back over their account activity and see a weekly pattern where the owners make a large deposit on Monday of the weekend takings (as Thai takeaway is popular over the weekend). However, there also appears to be significant deposits every Wednesday from an account called Thai Finance and held with your bank at another branch. Whilst these deposits are significant they differ sufficiently week to week to suggest they are associated with some form of business undertaking. Every month, an amount equal to the month’s Wednesday deposits is exchanged into Thai baht and transferred at the end of the month to an account held at an international bank in Thailand in the name of another company. The name of this company suggests it is associated with financing activities. You think maybe the owners of the restaurant may have family or other business interests in Thailand, but it is a bit strange so you decide to investigate the company making the deposit to try and get a clearer picture of the transaction activity. You ask the restaurant manager who makes the next Monday deposit about the family's business interests in Thailand and she says that she does not think that they have any, but she appears ill at ease and leaves the branch very quickly, avoiding further questions. The account details for Thai Finance held by your bank indicate that the owners of the restaurant are also the owners of Thai Finance. However, when you then check these details with the Australian Securities and Investment Commission, you find that the Thai Finance business is not officially registered as either a company or business name, although the restaurant is registered. This was not detected on account opening.

Possible explanations 1) A legitimate explanation could be that the restaurant manager does not know everything about the owners of the Thai take-away restaurant and that they do have business interests in Thailand. The Thai Finance account might be being used simply as a way of keeping track of funds they are sending to Thailand.

40

DECEMBER 2006 / JANUARY 2007

2) An alternative explanation could be that the owners of the Thai take-away are using the shop as a front for an informal cash remittance operation. The funds being passed through the restaurant account are either to settle their outstanding remittances with their connection in Thailand or the deposits and withdrawals through the restaurant account are part of a laundering operation.

Questions you should consider 1) How do you establish more about the relationship between the restaurant and the Thai Finance accounts than is known from the above facts? Do you question the owners? 2) How do you establish more about the relationship between both the restaurant and the Thai Finance accounts held in Australia and the account in Thailand? Do you do a company search in Thailand? Do you ask the bank in Thailand – where the Thai baht monthly payment is sent to – about their customer? 3) What additional information do you have available within your organisation regarding the owners of the restaurant, their accounts and their account activity? 4) Should you close the Thai Finance account unless the owners can explain satisfactorily what the account is for and provide evidence of the correct registration of a business name or company in accordance with Australian law? 5) Do you know enough to regard the operation of these accounts as suspicious under section 41 of the proposed AML/CTF Bill? 6) Should both the restaurant account and the Thai Finance account be classified as high risk accounts and treated accordingly? 7) How should future transactions through both accounts be treated in the future to manage and mitigate any possible future risk of these ■ accounts being used for money laundering activity?

ANTI-MONEY LAUNDERING

six steps to implementation

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

AML legislation.

The Government’s new anti-money laundering (AML) legislation is upon us. At KPMG, we can help you assess clearly and pragmatically the impacts for your business. Our team of AML professionals offer deep knowledge and practical experience in helping financial services organisations, just like yours. We can help you assess the money laundering and financing of terrorism risks faced by your business – and more importantly how to address them. Our team can assist in the design and implementation of new policies and processes, systems selection and integration advice and staff training. We have worked with leading financial institutions, globally and in Australia, in areas such as money laundering and terrorist financing risk reviews and developing AML processes, policies, training and technology. It all translates into more focused, up-to-date and relevant advice for your business. So when it comes to understanding the new AML legislation, contact the professionals in the know – KPMG Forensic. For more information please contact Gary Gill on +61 2 9335 7312 or [email protected]

kpmg.com.au

In-depth knowledge working for you.