How to Technologically Enhance Money Laundering – to make it harder to trace illicit cash.

Technology enhanced money laundering

We’ve noticed that despite our target audience being the financial compliance industry, when we post with a heading to attract criminal attention, it gets read more!

So welcome to this post. In it we will discuss the steps that criminals take to use technology to hide their assets.

Firstly, a basic understanding of Placement, Layering and Integration are needed, you can find that here if you do not understand these three steps.

In the main, technology aids steps two and three. It helps criminals to layer their asset with repeated levels of trade of one sort or another. It then helps them to ‘cash out’ in the integration stage.

We do not make a distinction between a money launderer (professional) or a criminal (commits the predicate offence) other than simply. Similarly, with something like 150 definitions of an organised criminal or their enterprise, this post sets out to use the terms colloquially, inasmuch as any one of the three can act in any capacity so it’s fair to call them all criminals.

Europol define organised crime, not on a personal level as to state the activity of a single individual, but as to the commodities, groups and hubs that make up an OCG (Organised Criminal Gang). In the UK, the definition (loosely termed) relates to activity of a group rather than an individual or specific crime type. It more relates to criminals acting as groups at level two and above (above ‘street’ level crime and cross regional/international).

Money laundering is characterised as a secondary offence to the predicate offence that generated the illicit funds. It is a dynamic and flexible process with launderers actively adapting to fluctuating situational conditions. It is these dynamics that make it difficult to define, describe and prosecute. The levels of convictions are pitifully low globally and this is one area FATF are starting to push with the move to ‘Outcome’ based mutual evaluations at the national level.

As in our post describing the links between Nations that are high on the Corruption index and Bitcoin pricing, the links between laundering and regions that have lax controls and high levels of corruption are sought out by organised criminal groups to layer their transactions to conceal the real origin of the revenue. A research paper into Money Laundering has described it as the third largest industry globally, only oil and agriculture generate more revenue, this indicates just how professional the ‘sector’ is and the sometimes insurmountable odds the industry, regulators and prosecutors face.

Indeed it is these odds, and a nascent belief that the financial sector is inextricably and on occasion corruptly linked to OCGs that is forcing the political agenda to get tougher with sanctions and fines for firms that transgress and get caught. Certainly there are more huge fines than there are ‘bellies against the charge desk’ as I used to say in a former career.

I am going to deliberately steer away from the more obvious routes to launder money. This site covers the more obvious routes in other posts (search for money laundering in our search box and posts will come up). Instead I hope to show you more nuanced methods that a ‘professional’ launderer would use and hopefully point to ways for firms to identify those efforts.

It is obvious that the nearer the point to the actual criminal predicate offence, the more risk there is to laundering cash. The further the cash is layered, actually or digitally, the harder it is for an investigator to track the asset backwards. This is especially true of asset that moves across borders. It is also evident that the regulated sector, spends most of its time trying to detect this first placement into the system. Defeat the placement stage and the professional launderer has the odds stacked in his favour.

The key to laundering is therefore, the successful first step. To conceal it the launderer needs a Trojan horse. Digital transactions and cryptography along with ‘straw-men’ hide the identity of the original criminal. Again, in nations that have a large populous of poor communities, people are prepared to have their identity used as a placement vehicle; this influences the regional choices of OCGs. There are also cases showing more ‘middle class’ white collar workers prepared to lend their identities to support business transactions involving laundering transactions further into the layering process – this includes allowing legitimate business be used to clean money. It is these reasons that money laundering causes capital flight from an economy, investors fearful of the instability and risk attached to the market.

The Trojan Horse

Photocopier

A simple use of technology, a photocopier. Used in high value sales around the globe to prove the outlet checked the identity of the person purchasing- especially when paying in cash. It is a simple task to obscure the image of a passport, make it too dark or otherwise unidentifiable to help the launderer evade any future scrutiny. Purchasing gold, jewels and other high value goods.

Intelligent Deposit Machines

These machines were used to great effect in Australia where a gang used them to launder tens of millions of AUD. Enabling placement and movement of cash through the machines even when the banks were closed. The gang used a network of the machines at lower than threshold amounts to avoid suspicion.

e-commerce and mobile payments

OCGs setting up online storefronts that trade in transactions and not goods to help the launder layer his transactions in what appear genuine stores. No goods are actually moved. This problem is set to get worse as more fintechs operate in this space with a ‘less than conservative approach’ to regulations. One that shall remain unnamed even switched off its transaction monitoring for several months because it was alerting too much (!!)

Virtual World

An International internet payment provider was suspected of laundering on an industrial scale. Implicated were digital currency exchanges, precious metal dealers and more. The OCG had effectively infiltrated the entire system to move large sums in apparent legitimate trade.

Online Betting

An OCG used online betting and internet payment system to launder the proceeds of narcotic dealings. The gang used the two services to receive transactions and then move the funds offshore. In an investigation, it was found that two of the enterprises had the same registered physical address (our intelligence system would flag this as the transaction processed – even across institutional business lines). The gang transferred revenue acting as a remittance service and this disguised the origin of the transaction when the bank conducted the transactions. The gang also used the accounts to simply store funds, making passwords widely known so multiple members could draw on the accounts.

Sales Registers and CCTV

A nightclub had CCTV all over its premise except in the VIP lounge for ‘privacy reasons’. That lounge was then used to till up huge sums of cash transactions as ‘revellers’ purchased $800 champagne in huge quantities. Not so elaborate but an easy way to place cash into the legitimate system through bogus purchases of high value goods/services.

An old colleague of mine filmed a car wash over aperiod of several months to prove vehicles were indeed never washed there, helping to secure the conviction for the predicate offence and ML.

Elaborate ways to facilitate the first stage of money laundering are constantly evolving. As we have stated this is the most risky part of laundering. Not only because it’s the first and easy to trace back to the predicate offence, but also because policy focuses compliance agent attention on this first stage through transaction monitoring and identity checks.

Placement of the cash is the most risky stage of laundering

It is also likely the algorithms being adopted through machine learning technology are focusing on this ‘thick edge’ of transactions. At the front of the process. The more involved and professional launderer will adopt moving and flexible processes to move the money many times over, using no set pattern and through many jurisdictions, transaction types and institutes. This way, unless the whole financial sector had one Ai system, the individual systems in each firm will fail to spot the patterns of transactions/behaviour.

Other technologies are also being used by OCGs. From encrypted communications to virtual services and products and the darknet facilitating on a huge scale the market-place for many OCGs and their gang members.

It is safe to say that criminal gangs have business processes very similar to legitimate businesses. They use highly skilled financiers and skilled business people to move money and assets around as we have discussed previously in our post about cyber crime and money laundering.

This post only details a few examples of ‘how’ criminals use technology. It explains ‘why’ they use it. There is a much bigger study currently ongoing to identify the methods regulators, policy-makers and the industry can use to identify how to combat the professional OCG by understanding their methods. Unfortunately, my experience in these matters tends to lean me towards the opinion that this will be mostly wasted effort. The reason I say this is because;

  1. OCGs will know the models adopted before they are launched – they will almost certainly have informed people on the inside.
  2. The policy-setters will take far too long through bureaucratic channels to put something live.
  3. OCGs will adapt and change and this requires not a look to the past but an accurate prediction of the future to enable swift machine learning from new sets of learning data.

Here at CYW we are developing a networked system that will, for the first time, link the institutes intelligence together. With over 300 metrics to monitor from outside the sector, we will merge data and intelligence to pass it at the speed of transactions to enhance red flags and reduce false positives.

This is essentially providing public level enforcement typologies to the private sector to provide more effective and efficient means to stop transactions and put the onus on the criminal to prove it is innocent. It is our view this is the only way the industry can proceed to force change, cause reductions in criminal use of the financial system and increase the amount of seizures being made. stand alone transaction modelling, even with machine learning functionality, will be hampered by the lack of full data as money moves outside their dataset and comes back in again through different entitites/routes. The firm would have no way of tracking it outside of their own institute.

If you think this post is worthy of a like or a share we would really appreciate you taking the time to do so. We need more readers to influence the agenda.

Thank you.

60 Best Money Laundering Research Papers, Books and web links.

60 BEST ANTI-MONEY LAUNDERING AND COUNTER TERRORISM FINANCING RESOURCES GLOBALLY

Research into money laundering goes deeper than reading ACAMS or Linkedin. Here we have provided links to the 60 Best Money Laundering Research Papers, books and web articles.

In the coming weeks we will be blogging about these articles and what they mean to the industry. Stay tuned and register with the site (bottom of the page) if you want to get our posts via your inbox (sent once a month only – no spam!)

We would really appreciate you sharing this resource if you find it useful – it took a long time to research!! Thank you. Simply use one of the sharing links or copy the web address and post about it.

NB: Scroll left and right for small screen views

Title & LinkAuthor & Link to BibliographyDescription
(scroll to left to read)
Money launderingM Levi, P Reuter – Crime and Justice, 2006 – journals.uchicago.eduTechniques for hiding proceeds of crime include transporting cash out of the country, purchasing businesses through which funds can be channeled, buying easily transportable valuables, transfer pricing, and using “underground banks.” Since the mid-1980s …
 Dirty money: The evolution of money laundering counter-measuresWC Gilmore – 1999 – ncjrs.govThe first chapter provides an overview of the problem, as it notes that estimates of money from criminal activities range from 300 to 500 billion US dollars annually, money that is available for laundering. Such quantities of money, often linked with organized crime …
How big is global money laundering?J Walker – Journal of Money Laundering Control, 1999 – emerald.comKnown incidents of money laundering involving large amounts of money generated from crime are of tremendous public interest and are consequently given wide publicity. A wide range of national and international agencies have attempted to quantify organised crime …
 Macroeconomic implications of money launderingPJ Quirk – Washington, Fondo Monetario Internacional, WP, 1996 – elibrary.imf.orgThis paper reviews the main analytical, empirical, and policy issues related to the macroeconomic implications of money laundering. The paper discusses, first, how money laundering can be measured, given that it is unobservable, and reports cross-section …
 Chasing dirty money: The fight against money launderingP Reuter – 2005 – books.google.comOriginally developed to reduce drug trafficking, efforts to combat money foundering have broadened over the years to address other crimes and, most recently, terrorism. In this study,[the authors] look at the scale and characteristics of money laundering, describe and …
 Money laundering: a new international law enforcement modelG Stessens – 2000 – books.google.comThis book gives a broad analysis of the legal issues raised by the international fight against money laundering. It offers an extensive comparative research of the criminal and preventive law aspects from an international perspective. Stessens portrays money laundering as a …
Money laundering: muddying the macroeconomyPJ Quirk – Finance and Development, 1997 – search.proquest.comIMF staff went to a small island country to assess economic developments. As they walked around the capital, they noticed a surprisingly large number of small banks (more than 100 in a country of less than 100,000 people). A year later, it was revealed that many of these …
Money laundering and its regulationM Levi – The Annals of the American Academy of Political …, 2002 – journals.sagepub.comThis article examines definitions of” money laundering” and the conceptual and actual role its regulation plays in dealing with drug markets. If laundering is prevented, incentives to become major criminals are diminished. It identifies and critiques three aspects of harm …
Money laundering: the economics of regulationD Masciandaro – European Journal of Law and Economics, 1999 – SpringerEconomic research has not yet systematically undertaken the analysis of the existing interactions between criminal economy and financial markets. The present work belongs to a research field increasingly interested in such issues and focuses on the economic analysis of money laundering …
Money laundering: some factsF Schneider, U Windischbauer – European Journal of Law and Economics, 2008 – SpringerThis paper tackles the quite difficult topic of money laundering. After defining money laundering, and after explaining the three stages (steps), placement, layering and integration, the paper tries a quantification and estimation of the volume and development of …
Money laundering and the international financial systemV Tanzi – 1996 – ideas.repec.orgThe IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues …
Measuring Global Money Laundering:” The Walker Gravity Model”J Walker, B Unger – Review of Law & Economics, 2009 – degruyter.comMeasuring global money laundering, the proceeds of transnational crime that are pumped through the financial system worldwide, is still in its infancy. Methods such as case studies, proxy variables, or models for measuring the shadow economy all tend to under-or …
Money laundering—a global obstacleB Buchanan – Research in International Business and Finance, 2004 – ElsevierOne of the biggest obstacles to maintaining an effective operating international financial system is money laundering. A global phenomenon and international challenge, money laundering is a financial crime that often involves a complex series of transactions and …
An inquiry into money laundering tools in the Bitcoin ecosystemM Möser, R Böhme, D Breuker – 2013 APWG eCrime …, 2013 – ieeexplore.ieee.orgWe provide a first systematic account of opportunities and limitations of anti-money laundering (AML) in Bitcoin, a decentralized cryptographic currency proliferating on the Internet. Our starting point is the observation that Bitcoin attracts criminal activity as many …
 Black finance: the economics of money launderingD Masciandaro, E Takats, B Unger – 2007 – books.google.com” The recent dramatic wave of terrorist attacks has further focussed worldwide attention on the money laundering phenomena. The objective of this book is to offer the first systematic analysis of the economics of money laundering and its connection with terrorism finance …
 Critical reflections on transnational organized crime, money laundering and corruptionME Beare – 2003 – books.google.comTransnational crime, organized crime, money laundering and corruption are four concepts that have gained and continue to gain an international and domestic profile. Is the information given to the public concerning these concepts distorted by the vested interests of …
 The amounts and the effects of money launderingB Unger, M Siegel, J Ferwerda, W de Kruijf… – Report for the Ministry of …, 2006 – ftm.nl0.4. The amount of money laundered is sizeable 0.5. Where is the criminal money being laundered and placed? 0.6. The Netherlands are a transit country of crime and criminal money 0.7. What are the effects of money laundering? 0.8. The long term dangers of money  …
The consequences of money laundering and financial crimeJ McDowell, G Novis – Economic Perspectives, 2001 – ncjrs.govMoney laundering is seen as critical to the effective operation of transnational and organized crime. However, money laundering effects a country’s economy, government, and social well-being. This article briefly reviewed both the economic and social costs of money laundering …
 Money laundering: A guide for criminal investigatorsJ Madinger – 2011 – books.google.comMany changes have occurred in the twenty-five years that have passed since the enactment of the Money Laundering Control Act of 1986. The law has been amended, new underlying crimes have been added, and court decisions have modified its scope. The Act remains an …
 The hawala alternative remittance system and its role in money launderingPM Jost, HS Sandhu – 2000 – peacepalacelibrary.nlThe components of hawala that distinguish it from other remittance systems are trust and the extensive use of connections such as family relationships or regional affiliations. Unlike traditional banking or even the’chop’system, hawala makes minimal (often no) use of any …
The fight against money launderingH Geiger, O Wuensch – Journal of Money Laundering Control, 2007 – emerald.comPurpose–To provide an economic view on the costs and benefits of anti‐money laundering (AML) efforts. Design/methodology/approach–Based on a international, comparative study conducted in Switzerland, Singapore and Germany, the authors outline the impact of AML …
Bitcoin and money laundering: mining for an effective solutionD Bryans – Ind. LJ, 2014 – HeinOnlineTechnology forges ahead at a rapid pace, whether we like it or not. Criminals recognize this inevitability and use technological improvements to advance their craft,’committing crimes from half a world away in real time. Meticulous criminals also use technological …
Corruption and money laundering: a symbiotic relationshipD Chaikin, J Sharman – 2009 – Springer
 Financial havens, banking secrecy and money-launderingJA Blum, M Levi, RT Naylor, P Williams – 1998 – amnet.co.ilThe major money laundering cases coming to light in recent years share a common feature: criminal organizations are making wide use of the opportunities offered by financial havens and offshore centres to launder criminal assets, thereby creating roadblocks to criminal …
A typological study on money launderingP He – Journal of Money Laundering Control, 2010 – emerald.comPurpose–The purpose of this paper is to make objective descriptions on various money‐laundering techniques and to put forward countermeasures in order to combat money laundering more effectively and efficiently. Design/methodology/approach–This paper …
 Reference guide to anti-money laundering and combating the financing of terrorismPA Schott – 2006 – elibrary.worldbank.orgThis second edition of the Reference Guide is a comprehensive source of practical information on how countries can fight money laundering and terrorist financing. Aimed at helping countries understand the new international standards, it discusses the problems …
 Money laundering policyPC Van Duyne – Fears and Facts, 2003 – petrusvanduyne.nlIt is difficult to argue about the nature of smells. Some of them do not even have names. But one kind of smell has certainly been nominated and changed in our appreciation: the ‘moral smell’of money. Today the adage ‘money does not smell’does not apply any more. Now we …
Responding to Money LaunderingE Savona – 2005 – books.google.comResponding to Money Laundering has its origin in the International Conference on Preventing and Controlling Money Laundering and the Use of Proceeds of Crime: A Global Approach organised by ISPAC, the International Scientific and Advisory Board of the United …
 Dirty money: the evolution of international measures to counter money laundering and the financing of terrorismWC Gilmore – 2004 – books.google.comThis is the third edition of this publication which explores key issues in the fast evolving field of money laundering and terrorist financing, and which has been restructured so as to fully reflect the high international priority given to tackling the financing of terrorism since …
Money laundering and globalizationP Alldridge – Journal of law and society, 2008 – Wiley Online LibraryThe article traces the various imperatives generated by the combination of the money laundering panic of the late 1990s with the advent of globalization. If there is to be an attempt legally to regulate laundering, it (laundering) must be a relatively serious offence …
Money launderingN Morris-Cotterill – Foreign Policy, 2001 – JSTORFrom Moscow to Buenos Aires, money laundering scandals sap economies and destabilize governments. Policymakers blame crime cartels, tax havens, and new techniques like cyberlaundering. But dirty money long predates such influences. Without unified rules …
The economics of crime and money laundering: does anti-money laundering policy reduce crime?J Ferwerda – Review of Law & Economics, 2009 – degruyter.comAnti-money laundering policy has become a major issue in the Western world, especially in the United States after 9-11. Basically, all countries in the world are more or less forced to cooperate in the global fight against money laundering. In this paper, the criminalization of …
 Dirty dealing: the untold truth about global money laundering, international crime and terrorismP Lilley – 2003 – books.google.comPraise and ReviewsEntertaining, well written and well presented.JOHN MULQUEEN, The Irish TimesPaints an alarming picture of the power and scale of todays crooked and corrupt financial world. Lilley has done his homework.THE IODS DIRECTOR MAGAZINESChoice of …
System and method for analyzing and dispositioning money laundering suspicious activity alertsBJ Kloostra, C Dalvi, BN Behm – US Patent App. 12/258,784, 2009 – Google PatentsA system and method for analyzing, dispositioning, recording, reviewing, and managing potentially suspicious financial transactions. In some cases, the system models the steps taken by a subject matter expert to reach a conclusion so that a novice can follow similar …
A theory of “Crying Wolf”: The economics of money laundering enforcementE Takáts – The Journal of Law, Economics, & Organization, 2011 – academic.oup.comThe article shows how excessive reporting, called “crying wolf”, can dilute the information value of reports and how more reports can mean less information. Excessive reporting is investigated by undertaking the first formal analysis of money laundering enforcement …
Power and discourse in policy diffusion: Anti-money laundering in developing statesJC Sharman – International Studies Quarterly, 2008 – academic.oup.comTwenty years ago not a single country had a policy against money laundering; currently, over 170 have very similar anti-money laundering (AML) policies in place. Why have so many countries with so little in common adopted the same policy so rapidly? This extensive …
 Global financial crime: terrorism, money laundering and offshore centresD Masciandaro – 2017 – books.google.comThe scope for financial crime has widened with the expansion and increased integration of financial markets. Money laundering, terrorism financing and tax crime have all changed in both nature and dimension. As new technologies reduce the importance of physical …
AI fights money launderingJ Kingdon – IEEE Intelligent Systems, 2004 – ieeexplore.ieee.orgThe bank had approached Searchspace, formed by re- searchers from the Intelligent Systems Lab at University College London in 1993. It applies adaptive and learning- systems approaches to a range of business and finance tasks. However, until then, we had principally developed …
 Transnational criminal organizations, cybercrime, and money laundering: a handbook for law enforcement officers, auditors, and financial investigatorsJR Richards – 1998 – books.google.comWRITTEN BY A LAW ENFORCEMENT PROFESSIONAL FOR OTHER LAW ENFORCEMENT PERSONNEL IN THE TRENCHES This book examines the workings of organized criminals and criminal groups that transcend national boundaries. Discussions …
Trade-based money laundering and terrorist financingJS Zdanowicz – Review of law & economics, 2009 – degruyter.comMoney laundering can be defined, generally, as the process of concealing the existence, illegal source, or application of income derived from a criminal activity, and the subsequent disguising of the source of that income to make it appear legitimate. Deception is the heart of …
The tenuous relationship between the fight against money laundering and the disruption of criminal financeMF Cuéllar – J. Crim. L. & Criminology, 2002 – HeinOnlineThis article examines the fight against money laundering as a case study of the separation between an enforcement system’s objectives and performance. To launder money is to hide its illegal origin. The fight against money laundering is supposed to disrupt laundering in its …
 Detecting money laundering and terrorist financing via data miningJS Zdanowicz – Communications of the ACM, 2004 – dl.acm.orgThe use of international trade to move money, undetected, from one country to another is one of the oldest techniques used to circumvent government scrutiny. Either overvaluing imports or undervaluing exports can achieve this transfer. If an imported prod- uct is overvalued, the foreign …
Money laundering regulation: the micro economicsD Masciandaro – Journal of Money Laundering Control, 1998 – emerald.comThe analysis of the interactions between the criminal economy and the financial markets has not yet been systematically studied by the economists. This study belongs to a current research interested in this area, ie the economic analysis of money laundering. The work is …
Money laundering: The crime of the’90sGR Strafer – Am. Crim. L. Rev., 1989 – HeinOnlineIn the Money Laundering Control Act of 1986,’codified at sections 1956 and 1957 of Title 18 of the United States Code, Congress for the first time attempted to define and prohibit a category of activity known colloquially as” money laundering.” During an election year frenzy …
Applying data mining in investigating money laundering crimesZ Zhang, JJ Salerno, PS Yu – Proceedings of the ninth ACM SIGKDD …, 2003 – dl.acm.orgIn this paper, we study the problem of applying data mining to facilitate the investigation of money laundering crimes (MLCs). We have identified a new paradigm of problems—that of automatic community generation based on uni-party data, the data in which there is no direct …
Turnover of organized crime and money laundering: some preliminary empirical findingsF Schneider – Public choice, 2010 – SpringerAfter a short literature review, the paper quantifies the turnover of organized crime with the help of a MIMIC estimation procedure for the years 1995 to 2006 for 20 highly developed OECD countries. The volume of turnover from organized crime was US-270billionintheyear1995forthese20OECDc …
Money laundering: an international challengeLA Barbot – Tul. J. Int’l & Comp. L., 1995 – HeinOnlineIn the words of South American drug barons,” dirty money is best passed through clean hands.” 1 Money laundering is often defined as” the process by which one conceals the existence, illegal source or illegal application of income, and then disguises that income to …
Money laundering and its regulationA Chong, F Lopez‐De‐Silanes – Economics & Politics, 2015 – Wiley Online LibraryThe recent wave of terrorist attacks has increased the attention to money laundering activities, and the role played by the regulatory frameworks controlling feeder activities. We investigate empirically the determinants of money laundering and its regulation in close to …
 Money laundering: a concise guide for all businessD Hopton – 2009 – books.google.comWorldwide, anti-money laundering regulations and legislation have become one of the weapons of choice of governments that are fighting global terrorism and criminality. In this updated edition of Money Laundering, Doug Hopton explains how The Money Laundering  …
Virtual money laundering: the case of Bitcoin and the Linden dollarR Stokes – Information & Communications Technology Law, 2012 – Taylor & FrancisThis paper presents an analysis of the money laundering risks of two virtual currencies, the Linden dollar, the in-world currency of the interactive online environment Second Life, and Bitcoin, an experimental virtual currency that allows for the transfer of value through peer-to …
 Anti-Money Laundering: international law and practiceWH Muller, CH Kalin, JG Goldsworth – 2007 – books.google.comAnti-Money Laundering is the definitive reference on money laundering and practice. First an outline will be given of the general approach taken by supra-national organisations like the United Nations and the European Council. Next the approach taken by international …
 Crime, illicit markets, and money launderingP Williams – Managing global issues: Lessons learned, 2001 – carnegieendowment.orgPhil Williams organized crime is perhaps best understood as the continuation of commerce by illegal means, with transnational criminal organizations as the illicit counterparts of multinational corporations. During the 1990s, transnational organized crime—and the …
 Criminal finance: The political economy of money laundering in a comparative legal contextK Hinterseer – 2002 – books.google.comLike it or not, money launderers are major players in the world’s economy. Their strategies constrain national economic policies and undermine financial institutions. With the advent of secure transfer technologies, and with the help of modern financial theories of derivatives …
A comparative guide to anti-money launderingM Pieth, G Aiolfi – 2004 – academia.eduMoney laundering is the process by which criminals attempt to conceal the source and ownership of the proceeds of their illicit activities; if successful, the criminal maintains control and access to these funds when and where he chooses. The efforts to combat this …
 Money launderingFAT Force – Policy Brief July 1999, 1999 – bahamasb2b.comThe goal of a large number of criminal acts is to generate a profit for the individual or group that carries out the act. Money laundering is the processing of these criminal proceeds to disguise their illegal origin. This process is of critical importance, as it enables the criminal to …
Money Laundering: The Scope of the Problem and Attempts to Combat ItS Sultzer – Tenn. L. Rev., 1995 – HeinOnlineMoney laundering is the process of taking the proceeds of criminalactivity and making it appear legal. Money laundering has been called the” lifeblood” of crime because, without cleansing the profits of crime, the criminal enterprise cannot flourish. While drug money  …
Money laundering law: Forfeiture, confiscation, civil recovery, criminal laundering and taxation of the proceeds of crimeP Alldridge – 2003 – Bloomsbury Publishing
Money laundering and financial means of organized crime: some preliminary empirical findingsF Schneider – Paolo Baffi Centre Research Paper, 2008 – papers.ssrn.comAfter giving a short literature review, the paper tries a quantification of the volume of money laundering activities, with the help of a DYMIMIC estimation procedure for the years 1995 to 2006 for 20 highly developed OECD countries. The volume of laundered money was 273 …
Money‐Laundering: Estimates in FogPC Van Duyne – Journal of Financial Crime, 1994 – emerald.comThe paper examines certain problems in determining the extent of money‐laundering. The author first discusses the methodological problems inherent in assessing its volume. He then discusses two methods to estimate the extent of money‐laundering. One method is …

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AML-Resources U to Z

AML Resources U to Z

A to EF to JK to OP to TU to Z

Bring yourself up to date with this useful list of AML resources and help documents. We design training packages for your staff, the below is just a small section of our knowledge base. It is important to consider your requirement for bespoke training aligned to your risk.

See our training page to book some training

U

  • United Nations Convention Against Corruption
  • United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances
  • United Nations Convention for the Suppression of the Financing of Terrorism
  • United Nations Convention Against Transnational Organised Crime and the Protocols.

V

W

  • SEC Rules on Whistle-blowing
  • Wolfsberg Private Banking Principles. – The Principles were initially formulated in 2000 (and revised in 2002) to take into account certain perceived risks associated with private banking. Such risks continue to warrant appropriate levels of attention, no less today than ten years ago. Regulators continue to expect strong anti-money laundering standards, robust controls, enhanced client due diligence and suitable AML policies and procedures. The Wolfsberg Principles detail the groups considerations. –
  • Wolfsberg Guidance on Sanction Screening

X

Y

Z

A to EF to JK to OP to TU to Z

AML-Resources K to O

AML Resources K to O

A to EF to JK to OP to TU to Z

Bring yourself up to date with this useful list of AML resources and help documents. We design training packages for your staff, the below is just a small section of our knowledge base. It is important to consider your requirement for bespoke training aligned to your risk.

See our training page to book some training

K

L

M

N

  • New Zealand – Audit of AML/CTF programs and risk assessments

O

  • OECD – Standard for Automatic Exchange of Financial Account Information in Tax Matters
  • Organised Crime – United Nations Convention Against Transnational Organised Crime and the Protocols.-

A to EF to JK to OP to TU to Z

AML-Resources F to J

AML Resources F to J

A to EF to JK to OP to TU to Z

Bring yourself up to date with this useful list of AML resources and help documents. We design training packages for your staff, the below is just a small section of our knowledge base. It is important to consider your requirement for bespoke training aligned to your risk.

See our training page to book some training

F

G

H

I

J

A to EF to JK to OP to TU to Z

AML-Resources P to T

AML Resources P to T

A to EF to JK to OP to TU to Z

Bring yourself up to date with this useful list of AML resources and help documents. We design training packages for your staff, the below is just a small section of our knowledge base. It is important to consider your requirement for bespoke training aligned to your risk.

See our training page to book some training

P

  • PEPs. FATF guidance on PEPs –
  • POLICY – An Anti-Money Laundering and Terrorist Financing Policy is the document that guides all AML activity and helps your organization guide staff. It is a critical document that should detail a lead from the top of the organization. Below we provide three institutional policies for you to peruse contrast and compare (the first is a Real Estate policy, the second/third are banking policies) . We make no comment on the quality. We provide this service for you to reassure you, your policy will meet the required regulatory rigour.
  • AML/CTF Policies and Procedures template – Seek our advice before using this. –

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R

  • Real Estate Policy Template. NB: Seek advice this is a guide only.
  • Risk Assesment and AML/CTF program audits – New Zealand
  • Risk Assessment – BSA/AML Example – for a bank. We do not warrant the quality of this document. –

S

  • Securities Exchange Commission Rules on Whistle-blowing
  • Guidance on Sanction Screening from Wolfsberg –

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  • Standard for Automatic Exchange of Financial Account Information in Tax Matters OECD
  • Template for AML program for a small firm – US centric NB- We do not warrant the quality of this document. You must seek our advice.
  • Template for AML/CTF Policies and Procedures – Seek our advice before using this. –
  • Template for Real Estate AML/CTF Policy. NB: Seek our advice this is a guide only.
  • Terrorism. United Nations Convention for the Suppression of the Financing of Terrorism –
  • Transparency International Exporting Corruption Report
  • Company Trusts. FATF guidance on Company formation agents and Trusts – A risk based approach to their work and the risk they face in the climate to remove hidden Beneficial Ownership. For a summary and the full report go here, or download the full report.

A to EF to JK to OP to TU to Z

HOW BANK HAPOALIM CONSPIRED WITH US CITIZENS TO HIDE $7.6 BILLION FROM THE IRS

Bank Hapoalim Tax evasion Scandal

Hiding US citizen cash in offshore accounts is uncovered and punished.

Israel’s Largest Bank, Bank Hapoalim, has admitted to conspiring with US taxpayers to hide $7.6 billion and has agreed a fine of $875 million for its sins.


Bank Hapoalim (Switzerland) and Bank Hapoalim B.M. (Israel) agree to pay nearly $875 Million and an entry of criminal charges against Bank Hapoalim B.M. for conspiring with U.S. taxpayers and others to hide more than $7.6 billion in more than 5,500 secret Swiss and Israeli bank accounts and the income generated in these accounts from the Internal Revenue Service (IRS).

The money will be paid to the U.S. Treasury, the Federal Reserve, and the New York State Department of Financial Services. It is the second-largest recovery by the DOJ in connection with its investigations into offshore U.S. tax evasion by foreign banks.

Manhattan U.S. Attorney Geoffrey S. Berman said:

“Israel’s largest bank, Bank Hapoalim, and its Swiss subsidiary have admitted to not only failing to prevent but to actively assisting U.S. customers to set up secret accounts, to shelter assets and income, and to evade taxes. The combined payment approaching $1 billion reflects the magnitude of the tax evasion by the Bank’s U.S. customers, the size of the fees the Bank collected to provide this illegal service, and the gravity of the illegal conduct.”

Principal Deputy Assistant Attorney General Richard E. Zuckerman said:

“The Department of Justice continues to aggressively prosecute banks and other financial institutions that help U.S. taxpayers conceal their income and assets in offshore bank accounts. Today, Bank Hapoalim is being held accountable for its conduct – it has admitted to its crimes and will surrender all fees it earned, repay the United States for lost tax revenue, and pay a substantial fine.”

IRS-CI Chief Don Fort said:

“Offshore tax evasion is a top priority for IRS Criminal Investigation and we are wholeheartedly committed to bringing offenders to justice. Today’s resolution serves as proof that financial institutions engaging in tax fraud face dire criminal and financial consequences for their behavior.”

BHBM and BHS have agreed to fully cooperate with further investigations into hidden bank accounts. Assuming BHBM’s continued compliance with its agreement to identify hidden accounts, the US Government has agreed to defer prosecution of BHBM for a period of three years, after which time the charge against BHBM will be dismissed.

BHBM is Israel’s largest bank and operates primarily as a retail bank with approximately 250 branches throughout Israel and more than 2.5 million accounts.

In addition to retail banking services, BHBM offered private banking services for onshore and offshore customers through its retail branches and its Global Private Banking Centre.

BHBM also wholly owned Poalim Trust Services Ltd. (BVI entity), which provided trust formation and management services. Outside Israel, BHBM owned BHS, a Swiss subsidiary that provided private banking. BHS is headquartered in Zurich and at times during the prosecution period had branches in Geneva, Luxembourg, and Singapore.

BHBM also had branches in New York, Miami, the Cayman Islands, the United Kingdom, and Jersey. It is likely investigations into entities in those jurisdictions will/are being conducted.

From at least in or around 2002, and continuing until at least 2014, the Bank conspired with employees, U.S. customers, and others to:

(1) defraud the United States with respect to taxes;

(2) file false federal tax returns; and

(3) commit tax evasion.

Employees of BHBM and BHS assisted U.S. customers in concealing their ownership and control of assets and funds held at the Bank, which enabled those U.S. customers to evade their U.S. tax obligations, by engaging in the following conduct:

  • Assisting U.S. customers with opening and maintaining accounts in the names of pseudonyms, code names, trust accounts, and offshore nominee entities;
  • Opening customer accounts for known U.S. customers using non-U.S. forms of identification;
  • Enabling U.S. taxpayers to evade U.S reporting requirements on securities’ earnings in violation of the Bank’s agreements with the IRS;
  • Providing “hold mail” services for a fee, avoiding any correspondence regarding the undeclared account being sent to the U.S.;
  • Offering back-to-back loans for U.S. taxpayers to enable them to access funds in the United States that were held in offshore accounts at the Bank in Switzerland and Israel; and
  • Processing wire transfers or issuing checks in amounts of less than $10,000 that were drawn on the accounts of U.S. taxpayers or entities in order to avoid triggering scrutiny.

At least four senior executives of the Bank, including two former members of BHS’s board of directors, were directly involved in aiding and abetting tax evasion of U.S. taxpayers.

The Bank is now required to cooperate fully with ongoing investigations and affirmatively disclose any information it may later uncover regarding U.S. accounts. The Bank is also required to disclose information consistent with the Department of Justice’s Swiss Bank Program relating to accounts closed between Jan. 1, 2009, and Dec. 31, 2019. The agreements provide no protection from criminal or civil prosecution for any individuals. A worrying three years for anyone who was involved in this as the US authorities seek to recover taxes and prosecute those evading tax.

Both the penalty and fine amounts for BHBM take into consideration that the Bank, after initially providing deficient cooperation through an inadequate internal investigation and the provision of incomplete and inaccurate information and data to the US Government, thereafter conducted a thorough internal investigation, provided client-identifying information, and cooperated in ongoing investigations and prosecutions.

The Bank further implemented remedial measures to protect against the use of its services for tax evasion in the future.

The time it took to complete this investigation allowed the executives at the helm of the bank and aware of this scandal to avoid prosecution, something that has to change to motivate executives to ensure proper processes and to prevent criminality.

How to Assess and Manage Risk in Retail Banking

Retail Banking

How to assess and manage AML and TF risk in Retail Banking

For the purpose of this post, retail banking means the provision of banking services to natural persons and small and medium-sized enterprises. Examples of retail banking products and services include current accounts, mortgages, savings accounts, consumer and term loans, and credit lines.

Due to the nature of the products and services offered, the relative ease of access and the often large volume of transactions and business relationships, retail banking is vulnerable to terrorist financing and to all stages of the money laundering process. At the same time, the volume of business relationships and transactions associated with retail banking can make identifying ML/TF risk associated with individual relationships and spotting suspicious transactions particularly challenging.

Banks should consider the following risk factors and measures alongside those set out in our general risk management post.

Risk factors

Product, service and transaction risk factors

The following factors may contribute to increasing risk:

  • The product’s features favour anonymity;
  • The product allows payments from third parties that are neither associated with the product nor identified upfront, where such payments would not be expected, for example for mortgages or loans;
  • The product places no restrictions on turnover, cross-border transactions or similar product features;
  • New products and new business practices, including new delivery mechanisms, and the use of new or developing technologies for both new and existing products where these are not yet well understood;
  • Lending (including mortgages) secured against the value of assets in other jurisdictions, particularly countries where it is difficult to ascertain whether the customer has legitimate title to the collateral, or where the identities of parties guaranteeing the loan are hard to verify;
  • An unusually high volume or large value of transactions.

The following factors may contribute to reducing risk:

  • The product has limited functionality, for example in the case of:
    • A fixed term savings product with low savings thresholds;
    • A product where the benefits cannot be realised for the benefit of a third party;
    • A product where the benefits are only realisable in the long term or for a specific purpose, such as retirement or a property purchase;
    • A low-value loan facility, including one that is conditional on the purchase of a specific consumer good or service; or
    • A low-value product, including a lease, where the legal and beneficial title to the asset is not transferred to the customer until the contractual relationship is terminated or is never passed at all.
  • The product can only be held by certain categories of customers, for example pensioners, parents on behalf of their children, or minors until they reach the age of majority.
  • Transactions must be carried out through an account in the customer’s name at a credit or financial institution that is subject to AML/CFT requirements that are not less robust than those required by Directive (EU) 2015/849.
  • There is no over-payment facility.

Customer risk factors

The following factors may contribute to increasing risk:

  • The nature of the customer, for example:
    • The customer is a cash-intensive undertaking.
    • The customer is an undertaking associated with higher levels of money laundering risk, for example certain money remitters and gambling businesses.
    • The customer is an undertaking associated with a higher corruption risk, for example operating in the extractive industries or the arms trade.
    • The customer is a non-profit organisation that supports jurisdictions associated with an increased TF risk
    • The customer is a new undertaking without an adequate business profile or track record.
    • The customer is a non-resident. Banks should note that Article 16 of Directive 2014/92/EU creates a right for consumers who are legally resident in the European Union to obtain a basic bank account, although the right to open and use a basic payment account applies only to the extent that banks can comply with their AML/CFT obligations and does not exempt banks from their obligation to identify and assess ML/TF risk, including the risk associated with the customer not being a resident of the Member State in which the bank is based.
    • The customer’s beneficial owner cannot easily be identified, for example because the customer’s ownership structure is unusual, unduly complex or opaque, or because the customer issues bearer shares.
  • The customer’s behaviour, for example:
    • The customer is reluctant to provide CDD information or appears deliberately to avoid face-to-face contact.
    • The customer’s evidence of identity is in a non-standard form for no apparent reason.
    • The customer’s behaviour or transaction volume is not in line with that expected from the category of customer to which they belong, or is unexpected based on the information the customer provided at account opening.
    • The customer’s behaviour is unusual, for example the customer unexpectedly and without reasonable explanation accelerates an agreed repayment schedule, by means either of lump sum repayments or early termination; deposits or demands payout of high-value bank notes without apparent reason; increases activity after a period of dormancy; or makes transactions that appear to have no economic rationale.

The following factor may contribute to reducing risk:

  • The customer is a long-standing client whose previous transactions have not given rise to suspicion or concern, and the product or service sought is in line with the customer’s risk profile.

Country or geographical risk factors

The following factors may contribute to increasing risk:

  • The customer’s funds are derived from personal or business links to jurisdictions associated with higher ML/TF risk.
  • The payee is located in a jurisdiction associated with higher ML/TF risk. Firms should pay particular attention to jurisdictions known to provide funding or support for terrorist activities or where groups committing terrorist offences are known to be operating, and jurisdictions subject to financial sanctions, embargoes or measures that are related to terrorism, financing of terrorism or proliferation.

The following factor may contribute to reducing risk:

  • Countries associated with the transaction have an AML/CFT regime that is not less robust than that required under Directive (EU) 2015/849 and are associated with low levels of predicate offences.

Distribution channel risk factors

The following factors may contribute to increasing risk:

  • Non-face-to-face business relationships, where no adequate additional safeguards – for example electronic signatures, electronic identification certificates issued in accordance with Regulation EU (No) 910/2014 and anti-impersonation fraud checks – are in place;
  • Reliance on a third party’s CDD measures in situations where the bank does not have a long-standing relationship with the referring third party;
  • New delivery channels that have not been tested yet.

The following factor may contribute to reducing risk:

  • The product is available only to customers who meet specific eligibility criteria set out by national public authorities, as in the case of state benefit recipients or specific savings products for children registered in a particular Member State.

Measures

Where banks use automated systems to identify ML/TF risk associated with individual business relationships or occasional transactions and to identify suspicious transactions, they should ensure that these systems are fit for purpose in line with the criteria set out in our generic risk assessment post. The use of automated IT systems should never be considered a substitute for staff vigilance.

Enhanced customer due diligence

Where the risk associated with a business relationship or occasional transaction is increased, banks must apply EDD measures. These may include:

  • Verifying the customer’s and the beneficial owner’s identity on the basis of more than one reliable and independent source.
  • Identifying, and verifying the identity of, other shareholders who are not the customer’s beneficial owner or any natural persons who have authority to operate an account or give instructions concerning the transfer of funds or the transfer of securities.
  • Obtaining more information about the customer and the nature and purpose of the business relationship to build a more complete customer profile, for example by carrying out open source or adverse media searches or commissioning a third party intelligence report. Examples of the type of information banks may seek include:
    • The nature of the customer’s business or employment;
    • The source of the customer’s wealth and the source of the customer’s funds that are involved in the business relationship, to be reasonably satisfied that these are legitimate;
    • The purpose of the transaction, including, where appropriate, the destination of the customer’s funds;
    • Information on any associations the customer might have with other jurisdictions (headquarters, operating facilities, branches, etc.) and the individuals who may influence its operations; or
    • Where the customer is based in another country, why they seek retail banking services outside their home jurisdiction.
  • Increasing the frequency of transaction monitoring.
  • Reviewing and, where necessary, updating information and documentation held more frequently. Where the risk associated with the relationship is particularly high, banks should review the business relationship annually.

Simplified customer due diligence

In low-risk situations, and to the extent permitted by national legislation, banks may apply SDD measures, which may include:

  • For customers that are subject to a statutory licensing and regulatory regime, verifying identity based on evidence of the customer being subject to that regime, for example through a search of the regulator’s public register;
  • Verifying the customer’s and, where applicable, the beneficial owner’s identities during the establishment of the business relationship in accordance with Article 14(2) of Directive (EU) 2015/849;
  • Assuming that a payment drawn on an account in the sole or joint name of the customer at a regulated credit or financial institution in an EEA country satisfies the requirements stipulated by Article 13(1)(a) and (b) of Directive (EU) 2015/849;
  • Accepting alternative forms of identity that meet the independent and reliable source criterion in Article 13(1)(a) of Directive (EU) 2015/849, such as a letter from a government agency or other reliable public body to the customer, where there are reasonable grounds for the customer not to be able to provide standard evidence of
  • Identity and provided that there are no grounds for suspicion;
  • Updating CDD information only in case of specific trigger events, such as the customer requesting a new or higher risk product, or changes in the customer’s behaviour or transaction profile that suggest that the risk associated with the relationship is no longer low.

Pooled accounts

Where a bank’s customer opens a ‘pooled account’ in order to administer funds that belong to the customer’s own clients, the bank should apply full CDD measures, including treating the customer’s clients as the beneficial owners of funds held in the pooled account and verifying their identities.

Where there are indications that the risk associated with the business relationship is high, banks must apply EDD measures as appropriate.

However, to the extent permitted by national legislation, where the risk associated with the business relationship is low and subject to the conditions set out below, a bank may apply SDD measures provided that:

  • The customer is a firm that is subject to AML/CFT obligations in an EEA state or a third country with an AML/CFT regime that is not less robust than that required by Directive (EU) 2015/849, and is supervised effectively for compliance with these requirements.
  • The customer is not a firm but another obliged entity that is subject to AML/CFT obligations in an EEA state and is supervised effectively for compliance with these requirements.
  • The ML/TF risk associated with the business relationship is low, based on the bank’s assessment of its customer’s business, the types of clients the customer’s business serves and the jurisdictions the customer’s business is exposed to, among other considerations;
  • The bank is satisfied that the customer applies robust and risk-sensitive CDD measures to its own clients and its clients’ beneficial owners (it may be appropriate for the bank to take risk-sensitive measures to assess the adequacy of its customer’s CDD policies and procedures, for example by liaising directly with the customer); and
  • The bank has taken risk-sensitive steps to be satisfied that the customer will provide CDD information and documents on its underlying clients that are the beneficial owners of funds held in the pooled account immediately upon request, for example by including relevant provisions in a contract with the customer or by sample-testing the customer’s ability to provide CDD information upon request.

Where the conditions for the application of SDD to pooled accounts are met, SDD measures may consist of the bank:

  • Identifying and verifying the identity of the customer, including the customer’s beneficial owners (but not the customer’s underlying clients);
  • Assessing the purpose and intended nature of the business relationship; and
  • Conducting ongoing monitoring of the business relationship.

What is a Politically Exposed Person?

What is a Politically Exposed Person?

What is a politically exposed person
What is a politically exposed person

This post will give a definition for a PEP and answer what is a politically exposed person. It also provides details of red flags that indicate a PEP is acting criminally. There is also a detailed guide from FATF.

PEPs are governed by the recommendations of FATF, recommendations 12 and 22 specifically.

FATF recommend enhancing due diligence when dealing with a PEP in financial transactions or account dealing.

An individual is a PEP if he is or has been entrusted with a prominent function. Many PEPs hold political positions that can be abused for the purpose of laundering stolen funds or other predicate offences such as corruption or bribery. A PEP includes politicians/councillors, senior police, business and military people. Checks with the relatives and associates of PEPs is also recommended to prevent second person related offences.

Because of the risks associated with Politically exposed people, FATF recommends additional Anti-Money Laundering or Counter Financing of Terrorism measures with PEPs. The measures are to prevent offences not criminalise PEPs specifically.

It is a fundamental principle of managing PEPs that institutes know who their customers are. Institutes need data to identify PEPs, be they domestic or foreign. Intelligence systems exist globally to help identify who is and who is not a PEP. However, these databases are not sufficient to comply with the PEPs requirements.

Institutes should find ways to share data throughout the industry to help identify customers as they conduct business with the institute.

The below list identifies many of the ‘red flags‘ that indicate a PEP is abusing their position of trust.

Politically Exposed Persons – Red Flags

  1. The determination that a customer is a PEP is not an aim in itself but forms part of the process that enables financial institutions and DNFBPs to assess the different types of higher risks related to PEPs. Determining that a customer is a PEP does not absolve financial institutions and DNFBPs of further ongoing due diligence specifically tailored to the fact that the client is a PEP.
    Being a PEP does not prejudge a link to criminal activities, or equate to being a criminal and / or subsequent abuse of the financial system. Similarly, the fact that a person is a domestic/international organisation PEP does not automatically imply that he/she poses a higher risk. Financial institutions and DNFBPs need nevertheless to be aware of the risks that a PEP may abuse the financial system to launder illicit proceeds, and financial institutions and DNFBPs need to be aware of the red flags / indicators that can be used to detect such abuse.
  2. The list of red flags below is relevant to detect those PEPs that abuse the financial system, and does not intend to stigmatize all PEPs.
  3. PEP red flags are not an exhaustive list and are complementary to the usual ML red flags that a reporting entity may be using. The methods of those PEPs that engage in illicit activity change and therefore indicators of their activity will do so as well. Also, there may be other red flags that should be considered as equally important in a particular country or region.

Detecting Misuse of the financial system by PEPS – Red Flags and Indicators for suspicion.

A. PEPS ATTEMPTING TO SHIELD THEIR IDENTITY:

PEPs are aware that their status as a PEP may facilitate the detection of their illicit behaviour. This means that PEPs may attempt to shield their identity, to prevent detection. Examples of ways in which this is done are:

  • Use of corporate vehicles (legal entities and legal arrangements) to obscure the beneficial owner.
  • Use of corporate vehicles without valid business reason.
  • Use of intermediaries when this does not match with normal business practices or when this seems to be used to shield identity of PEP.
  • Use of family members or close associates as legal owner.

B. RED FLAGS AND INDICATORS RELATING TO THE PEP AND HIS BEHAVIOUR:

  • Use of corporate vehicles (legal entities and legal arrangements) to obscure i) ownership, ii) involved industries or iii) countries.
  • The PEP makes inquiries about the institution’s AML policy or PEP policy.
  • The PEP seems generally uncomfortable to provide information about source of wealth or source of funds.
  • The information that is provided by the PEP is inconsistent with other (publicly available) information, such as asset declarations and published official salaries.
  • The PEP is unable or reluctant to explain the reason for doing business in the country of the financial institution or DNFBP.
  • The PEP provides inaccurate or incomplete information.
  • The PEPs seeks to make use of the services of a financial institution or DNFBP that would normally not cater to foreign or high value clients.
  • Funds are repeatedly moved to and from countries to which the PEPs does not seem to have ties with.
  • The PEP is or has been denied entry to the country (visa denial).
  • The PEP is from a country that prohibits or restricts its citizens to hold accounts or own certain property in a foreign country.

C. THE PEP’S POSITION OR INVOLVEMENT IN BUSINESSES:

The position that a PEP holds and the manner in which the PEP presents his/her position are important factors to be taken into account. Possible red flags are:

  • The PEP has a substantial authority over or access to state assets and funds, policies and operations.
  • The PEP has control over regulatory approvals, including awarding licences and concessions.
  • The PEP has the formal or informal ability to control mechanisms established to prevent and detected ML/TF.
  • The PEP (actively) downplays importance of his/her public function, or the public function s/he is relates to associated with.
  • The PEP does not reveal all positions (including those that are ex officio).
  • The PEP has access to, control or influence over, government or corporate accounts.
  • The PEP (partially) owns or controls financial institutions or DNFBPs, either privately, or ex officio.
  • The PEP (partially) owns or controls the financial institution or DNFBP (either privately or ex officio) that is a counter part or a correspondent in a transaction.
  • The PEP is a director or beneficial owner of a legal entity that is a client of a financial institution or a DNFBP.

D. RED FLAGS AND INDICATORS RELATING TO THE INDUSTRY/SECTOR WITH WHICH THE PEP IS INVOLVED:

A connection with a high risk industry may raise the risk of doing business with a PEP. Under FATF Recommendation 1, competent authorities, financial institutions and DNFBPs are required for determining which types of clients may be higher risk. For this, financial institutions and DNFBPs will also be guided by national guidance or risk assessments. Which industries may be at risk depends on the risk assessments and varies from country to country, and on other industry safeguards that may be in place. Examples of higher risk industries are:

  • Arms trade and defence industry.
  • Banking and finance.
  • Businesses active in government procurement, i.e., those whose business is selling to government or state agencies.
  • Construction and (large) infrastructure.
  • Development and other types of assistance.
  • Human health activities.
  • Mining and extraction.
  • Privatisation.
  • Provision of public goods, utilities.

E. BUSINESS RELATIONSHIP / TRANSACTION, PURPOSE OF BUSINESS RELATIONSHIP:

Red flag and indicators can also relate to the specific business relationship or transaction:

  • Multiple STRs (sometimes called a SAR) have been submitted on a PEP.
  • (Consistent) use of rounded amounts, where this cannot be explained by the expected business.
  • Deposit or withdrawal of large amounts of cash from an account, use of bank cheques or other bearer instruments to make large payments. Use of large amounts of cash in the business relationship.
  • Other financial institutions and DNFBPs have terminated the business relationship with the PEP.
  • Other financial institutions and DNFBPs have been subject to regulatory actions over doing business with the PEP.
  • Personal and business related money flows are difficult to distinguish from each other.
  • Financial activity is inconsistent with legitimate or expected activity, funds are moved to or from an account or between financial institutions without a business rationale.
  • The account shows substantial activity after a dormant period; or over a relatively short time; or shortly after commencing the business relationship.
  • The account shows substantial flow of cash or wire transfers into or out of the account.
  • Transactions between non-client corporate vehicles and the PEP’s accounts.
  • A PEP is unable or reluctant to provide details or credible explanations for establishing a business relationship, opening an account or conducting transactions.
  • A PEP receives large international funds transfers to a gaming account. The PEP withdraws a small amount for gaming purposes and withdraws the balance by way of cheque.
  • A PEP uses third parties to exchange gaming chips for cash and vice versa with little or minimal gaming activity.
  • A PEP uses multiple bank accounts for no apparent commercial or other reason.

F. PRODUCTS, SERVICE, TRANSACTION OR DELIVERY CHANNELS:

The FATF Recommendations contain examples of products, industries, service, transaction or delivery channels, which are of a higher risk, irrespective of the type of customer. These examples are:

  • Private banking.
  • Anonymous transactions (including cash).
  • Non-face-to-face business relationships or transactions.
  • Payments received from unknown or un-associated third parties.

If these industries, products, service, transaction or delivery channels are used by PEPs, then this adds an additional risk factor (depending on the nature of the PEP). In addition to the examples already listed in the FATF Recommendations, there are other products, industries, service, transaction or delivery channels that can become additionally vulnerable when used by PEPs.
Examples of these are:

  • Businesses that cater mainly to (high value) foreign clients.
  • Trust and company service providers.
  • Wire transfers, to and from a PEP account that cannot be economically explained, or that lack relevant originator or beneficiary information.
  • Correspondent and concentration accounts.
  • Dealers in precious metals and precious stones, or other luxurious goods.
  • Dealers in luxurious transport vehicles (such as cars, sports cars, ships, helicopters and planes).
  • High end real estate dealers.

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G. COUNTRY SPECIFIC RED FLAGS AND INDICATORS

The FATF Recommendations contain examples of higher risk country or geographic risk factors, irrespective of the type of customer. Additionally, the following red flags and indicators relating to countries can be taken into account when doing business with a PEP:

  • The foreign or domestic PEP is from a higher risk country.
  • Additional risks occur if a foreign or domestic PEP from a higher risk country would in his/her position have control or influence over decisions that would effectively address identified shortcomings in the AML/CFT system.
  • Foreign or domestic PEPs from countries identified by credible sources as having a high risk of corruption.
  • Foreign or domestic PEPs from countries that have not signed or ratified or have not or insufficiently implemented relevant anti-corruption conventions, such as the UNCAC, and the OECD Anti-Bribery Convention.
  • Foreign or domestic PEPs from countries with a mono economies (economic dependency on one or a few export products), especially if export control or licensing measures have been put in place.
  • Foreign or domestic PEPs from countries that are dependent on the export of illicit goods, such as drugs.
  • Foreign or domestic PEPs from countries (including political subdivisions) with political systems that are based on personal rule, autocratic regimes, or countries where a major objective is to enrich those in power, and countries with high level of patronage appointments.
  • Foreign or domestic PEPs from countries with poor and/or opaque governance and accountability.
  • Foreign or domestic PEPs from countries identified by credible sources as having high levels of (organised) crime.

If you need to train your staff on recognising a PEP or putting measures in place to mitigate risk, contact us to provide you with a bespoke training package.