anti-money laundering

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anti-money
laundering
JUNE / JULY 2007
COMBATING MONEY LAUNDERING IN FINANCIAL SERVICES
PEP BUSINESS
The offshore affront
Why you are exposed to
reputational risk
12 DECEMBER
A compliance date to remember
Cold trails in hot climates
PATRIOT POLITICS
The US long arm reaches Macau
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EDITOR’S LETTER
PEPs remain a very foreign affair
By Adam Courtenay
EDITOR
T
HE POLITICALLY exposed person
(PEP) is a relatively new term that
has become prominent in AML
circles in the past few years, and it is worth
looking at. While there is still some debate
as to who qualifies as a PEP, I would have
thought that a PEP could come from
anywhere – ie any publicly accountable
official in the executive, legislative,
administrative, military, or judicial branches
of a government, whether they are or were
elected officials, could be a PEP.
Accepted wisdom is that banks
and institutions should check their
significant private banking client
relationships and carry out background
checks on these PEPs, including
determining sources of wealth. The
ultimate goal is to make it harder for
persons in public office to abuse their
positions of power by taking bribes or
engaging in other corrupt activity.
However, the FATF recommendation
on which we have based our laws only
specifies the foreign ones, so it does not
cover all potential PEPs. As yet, to my
knowledge, there has been no specific
guidance as to whether Australian reporting
entities should differentiate between
foreign PEPs and local ones.
ANTI-MONEY LAUNDERING
Some countries have begun to question
this. I recently read a precis of Canadian law
by Canadian law firm Fasken Martineau
DuMoulin. The firm says the FATF still
insists that reporting institutions “should
only treat people as though they are
‘politically exposed’ if they are foreigners”.
“Although the Canadian consultation
paper of 2005 suggested that the new requirements were to affect domestic politically
exposed persons, the newly amended law still
only relates to foreigners,” writes the firm.
The US says much the same. Article 312
of the Patriot Act released after 9/11 pertains
to the tracking of foreign PEPs. The US
Financial Crimes Enforcement Network
has publicly backed this up, stating that
Article 312 refers only to “senior foreign
political figures”.
A few months ago, a British colleague
of mine spoke with Chip Poncey, a senior
official in the US State Department’s
financial crime and anti-terrorist unit.
Poncey said the Americans “were not
taking any prisoners” in future when it
came to dealing with international PEPs.
The US will continue to spend money on
supporting emerging countries with financial
aid, but they don’t want to see their tax
dollars going straight into the deposit
accounts of the heads of state or their
family and their associates.
So if a foreign PEP (and the definition
of this is structured very widely) is found
running an account at a bank, then the
Americans will bring extreme political
pressure on that bank to justify their actions,
for fear of being prosecuted for facilitating
the laundering of corrupt money.
Can the US really decide unilaterally to
target a legitimate foreign bank and bring
charges against it in the US because it has
one of these PEPs on its books?
Poncey says it is exactly what it will
do if they suspect that the US dollars being
moved through a PEP’s account might be
the proceeds of corrupt business activity,
or state looting or bribes.
They will use their extraterritorial
powers under their legislation to bring
prosecutions based on the fact that moving
those dollars between banks and accounts
will have contravened US law.
So there it is – it’s about foreigners –
or foreigners to the US, to be more exact.
But one cannot help but think that this is
one FATF recommendation with an agenda
quite foreign to us.
■
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JUNE / JULY 2007
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CONTENTS
FEATURES
12
GOLD STANDARD
14
AFMA CONGRESS REVIEW
16
John Cassara explains why gold remains
the most popular form of currency for
terrorist financiers
A rundown of the AFMA Congress – where
some of Australia’s and the world’s AML
experts explained the latest trends, laws,
typologies and thinking
18
AS EASY AS IBC
22
A DATE TO REMEMBER
Ask tax and fraud investigators what is likely
to confuse and obfuscate a money trail and
the likely answer is an offshore company,
finds Adam Courtenay
June 12 is meant to be the first
trigger point for AML programs but
it came and went with little effect
DOING BUSINESS WITH PEPS
World-Check’s chief executive David Leppan
explains how a few high-profile bad eggs
can wreck a business
REGULARS & CONTRIBUTORS
6
LONDON CALLING
30
BY HELEN O’GORMAN
The UK’S Seriously Organised Crime Agency
has very little to yell about
8
BY BRENT ROBENS AND GARY GILL
The AML landscape of South Korea is changing
and the country is keen to be seen to be doing the
right thing. But there are likely to be some future
bumps in the road
IN EUROPINION
BY JULIE BEESLEY
There is a chink in the Czech armour
and it’s all about gambling
REGIONAL REVIEW:
SOUTH KOREA
33
PATRIOT GAMES
BY ZOË LESTER
10
INSIDE STORY
If the US believes a bank is tainted, that’s enough
to guarantee it becoming an international pariah.
The Banco Delta Asia affair so clearly illustrates
this despite no evidence of wrongdoing
BY KENNETH RIJOCK
Why financial intelligence units should be
part of every big institution’s AML effort
11
OPINION
37
BY ROWAN BOSWORTH-DAVIES
BY JOY GEARY
These days, nobody wants to know how the
criminals tick. This, coupled with minimal
standards of training in criminology, means
the crooks are still going free
Austrac’s self-assessment questionnaire is
all about helping entities to help themselves
25
CROOK BUSTERS
LEGAL UPDATE
BY STEPHEN CAVANAGH
Explaining the ins and outs of designated
business groups and how they can be deployed
to improve the compliance effort
ANTI-MONEY LAUNDERING
38
RISK TRIGGERS
BY MICHELLE HANNAN
Why listed managed funds appear to have
slipped through the AML radar
JUNE / JULY 2007
3
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NEWS REVIEW
June 12 trigger point ushered in
Australia’s AML/CTF laws reached their
second trigger point on June 12, ushering in
new correspondent banking obligations and
bringing in regulation on money laundering
and terrorism financing for several so-called
“high-risk” industry sectors.
Money lenders, casinos and bullion dealers
have now officially become part of the AML
regime from this trigger point, and these newly
regulated entities will have another six months
to prepare for some of the tougher provisions
which relate to customer identification and
their AML programmes.
The Australian Transaction Reports and
Analysis Centre (Austrac) said that the correspondent banking provisions would increase the
compliance obligations on domestic financial
institutions and that from June 12, a reporting
entity would need to carry out “a preliminary
assessment of the risk that the relationship may
involve money laundering or the financing of
terrorism” before providing banking services to
a financial institution located in another country.
“It may then be necessary for the financial
institution to carry out further investigations
before entering into the correspondent
banking relationship. Civil penalties apply
for breaches of these new correspondent
banking provisions,” Austrac stated.
Austrac chief executive Neil Jensen said
that the implementation of the correspondent
banking obligations was “another important
step in creating an environment that is hostile
to money laundering and terrorism financing”.
Austrac also announced that on June 12
that reporting provisions would come into
effect and confirmed that the initial compliance
reporting period will be December 13, 2006 to
December 31, 2007. The deadline for lodging
the first compliance report under the
AML/CTF Act will be March 31, 2008.
OECD: Asia is the
world’s counterfeiter
Austrac had originally advised that the
compliance reporting period would cover
December 13, 2006 to mid-June 2007 and
that it would expect reports to be lodged by
mid-September 2007.
In a note on its website, Deloitte said that
while December 31 was still seven months
away “it was very evident that many reporting
entities have considerable work to perform to
adequately respond to the statutory obligations
of the tiered implementation timetable”.
“Organisations and boards signing off on
AML/CTF compliance reports need to act now
and assess the regulatory and operational
impact of Austrac’s future supervisory and
regulatory strategies,” the firm said.
Austrac chief executive Neil Jensen said
these dates were determined in consultation
with industry to allow industry “sufficient lead
time to make adequate preparations and put in
place systems and structures to assist reporting
entities in meeting their new obligations”.
What exactly is to be included in a compliance report is still unclear, but the regulator
intends to hold consultative forums later this
month, during which it would “provide information and indicative questions on what will need
to be included in the first compliance report”. ■
See pages 22-24
EDITORIAL
PRODUCTION AND DESIGN
EDITOR:
Adam Courtenay
[email protected]
CREATIVE DIRECTOR:
Jo Fuller
CONTRIBUTING EDITOR:
Emily Brayshaw
SUB-EDITORS:
Siobhan Brahe, Pauline Buckland,
Karen Barrett, Jennifer Strong
REGULAR CONTRIBUTORS:
Nick Kochan, John Kavanagh,
Alexandra Cain
A report issued in June by the Organisation
for Economic Co-operation and Development
says counterfeiting and piracy of goods is
occuring in nearly all economies, but Asia
is emerging as the biggest pirating region.
The report says data provided by customs
indicates that fake products – ranging from
watches and designer clothing to pharmaceutical products, food and drink, medical equipment, toys, tobacco and automotive parts – had
been intercepted from close to 150 economies,
including 27 of the OECD’s member countries.
The report says the $US200 billion that
the goods would have fetched in the market is
more than the gross domestic product of about
150 economies.
The figure excludes counterfeit and pirated
items produced and consumed domestically or
those distributed via the internet. If these were
included, the cost could be several hundred
billion dollars more, the report says.
The report suggests that the high profitability of many counterfeiting and piracy
activities in some cases exceeds the profitability of illegal drug trades, and even involves the
Mafia in some countries.
“Low-risk detection and relatively light
penalties have provided counterfeiters and
pirates with an attractive environment for
illegal activities.”
“The groups involved in counterfeiting
and piracy include mafias in Europe and the
Americas, and Asian triads which are also
involved in heroin trafficking, prostitution,
gambling, extortion, money laundering
and human trafficking.”
PRODUCTION MANAGER:
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PHOTOGRAPHY:
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ANTI-MONEY LAUNDERING MAGAZINE IS PUBLISHED SIX TIMES A YEAR BY
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4
JUNE / JULY 2007
ANTI-MONEY LAUNDERING
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NEWS REVIEW
Interpol created the Intellectual Property
Crime Action Group in July 2002 to help
combat the problem, and noted a “disturbing
relationship” of counterfeiting and piracy
with terrorist financing, with intellectual
property crime becoming the preferred
method of financing some terrorist groups. ■
US officials blacklisted Banco Delta Asia
– barring US financial institutions from
handling its funds – under authority granted
by Section 311 of the USA Patriot Act 2001.
It is not clear under what legal authority
the US government made an exception
and permitted allegedly dirty funds to flow
■
through the US financial system.
See pages 33-35
THE UNITED STATES has resolved a protracted dispute with North Korea by releasing
$US20m in funds that it froze in 2005, when
officials accused Macau’s Banco Delta Asia
of laundering dirty money for Pyongyang.
This brings to an end months of bickering
regarding how the funds would be released; it
also puts pressure on North Korea to honour a
February agreement to begin powering down its
Yongbyon nuclear reactor, the suspected source
of the country’s atomic bomb-making material.
Banco Delta Asia reportedly has remitted
more than $US20m from dozens of accounts
following instructions from scores of North
Korean account holders. Although US officials
have refused to say how the money was transferred, it is believed that it moved through the
New York branch of the Federal Reserve and
Russia’s central bank to a Russian bank where
the North Korean government holds accounts.
Although the freeze on the funds was first
lifted earlier this year, Pyongyang refused to
accept the money as cash. It insisted that the
funds be wired internationally through the
US to a bank in a third country. It appears
that North Korea’s demands had two principle
aims: to demonstrate that the funds were
“clean”, despite US accusations, and to allow
North Korea to reconnect to the international
banking system.
US officials, eager to persuade North
Korea to meet its nuclear disarmament commitments, in May tried to persuade Wachovia
Bank to accept and pass along the funds. The
US government still has not officially given
the funds a clean bill of health, however, so
Wachovia, like all US banks, appears to have
chosen to steer clear of the funds. Even the
Russian bank that finally agreed to accept the
funds reportedly demanded written assurances
from US authorities that it would not face
sanctions for its actions.
The long-term implications of the US
decision to allow the movement of ostensibly
dirty funds remains to be seen. The authority
with which US officials blacklist foreign institutions has no doubt been eroded by this affair.
ANTI-MONEY LAUNDERING
Image courtesy ACWAP and ID Photographics
North Korea gets its
‘dirty’ money back
Keelty: successful case
Keelty hands over
tax fraud proceeds
AUSTRALIAN AND LEBANESE police have
shared more than $1 million worth of confiscated proceeds of crime from tobacco excise
fraud, following the successful prosecution of
a Melbourne-based crime syndicate.
Mick Keelty, the Australian Federal
Police commissioner, presented a cheque
worth $683,500 ($US576,000) to Riad
Salameh, the governor of the Central Bank of
Lebanon, in a ceremony in late May.
Between July 1999 and September 2001,
a Melbourne-based crime syndicate sold
93 million cigarettes in Australia. The syndicate
bought the cigarettes duty free using the internet
and claimed that they were for foreign suppliers
before it diverted them back inland to sell them
through a number of outlets in Melbourne.
In this way, the syndicate evaded paying
taxes worth approximately $14.9m. The syndicate transferred some of these criminal proceeds
to Hong Kong, Belize and Lebanon. The AFP
investigation led to the arrests of eight people.
“The Lebanese authorities played a key
role in the identification, restraint and forfeiture of the criminal proceeds. Co-operation
between countries in criminal investigations is
vital and I am pleased that Lebanon was able
to assist in this case,” said Keelty.
In an unrelated case, the AFP were
reported last month to have seized documents
in connection with allegations that Taj Din
al-Hilali, Australia’s mufti, gave charity funds
to supporters of Al Qaeda and Hezbollah in
Lebanon last year. The police have impounded
paperwork from the Lebanese Muslim
Association, an organisation based in Sydney
which is connected to Sheik Hilali, and have
questioned Tom Zrieka, its president.
Investigations are apparently also set to
include LMA-affiliated organisations which
have raised charity donations. Police also
reportedly contacted Keysar Trad, a confidant
of Sheik Hilali’s, who is in Lebanon. The
LMA, along with other Australian Islamic
organisations, apparently raised $70,000 after
the Israel-Hezbollah war in Lebanon last year.
The organisations told donors that the money
was for war victims.
■
Bank of Tokyo
rapped over controls
BANK OF TOKYO MITSUBISHI, the
world’s largest bank by assets, has been hit by
an order to improve its business following
accusations of lax compliance and internal
controls in its overseas operations and its
domestic investment trust sales business.
The Japanese Financial Services Agency,
the financial regulator, ordered the bank’s
management to state its commitment to compliance with laws and regulations in overseas
businesses following several cases in which
local and expatriate managers were found
to have violated local laws and regulations
relating to money laundering in the US.
The JFSA cited cases of bribery in
Shanghai and embezzlement at other branches
as examples of failures in internal controls.
The regulator also ordered the bank to
strengthen internal controls overseas and in
Japan, to clarify the responsibilities of those
responsible for the problems that gave rise
to the penalties and to submit a businessimprovement plan by July 11.
The JFSA’s move against the core banking
unit of Mitsubishi UFJ Financial Group is the
second such regulatory action in Japan against
it this year. It is a severe embarrassment for the
bank and could cut into profitability this year
as it moves to improve compliance measures.
In February, the regulator ordered BTMU
to suspend lending to new corporate customers
for seven days, refrain from opening new
business locations for six months and
strengthen internal controls as punishment for
doing business with a convicted embezzler.
The JFSA’s move follows an order
issued to BTMU by US authorities in January
to strengthen compliance and internal
controls to prevent money-laundering.
That move triggered the latest JFSA order. ■
JUNE / JULY 2007
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NEWS
LONDON CALLING
Not so seriously
organised
By Helen O’Gorman
COMPLINET REPORTER
The Serious Organised Crime Agency wants to tout its achievements
to the world but the figures tend to speak for themselves
T
HE SERIOUS Organised Crime
Agency (SOCA), the UK's latest
addition to its anti-mafia and antimoney laundering arsenal, celebrated its
first birthday this year by keeping its promise
(and concomitant legal obligation) to publish
an annual performance report. The carefully
managed release of the report directed the
media to SOCA’s relative successes and
away from the targets it had not met.
Cash seized
Target
Actual
(£ million)
(£ million)
6
3.3
(from 70 cases)
Cash forfeited
Restraint orders
Court-enforced orders
3
40
8
2.3
27.2
4.3
(220 orders)
Although the actual figures may not yet
live up to SOCA’s claims of superpower
status, the results are expected to align more
closely with targets over the next few years.
Vernon Coaker, the UK undersecretary of
state for police, security and community
safety, assured the awaiting media: “In the
future you should judge us by whether we
meet our targets.”
SOCA’s annual report certainly sets out
its focus for the coming years: to stem the
flow of cocaine into Europe and ultimately
into the UK. Since April 2006 SOCA has
helped to seize 74 tonnes of cocaine from
European waters en route to Spain, Portugal,
the Netherlands and the UK. This haul
represents 20 per cent of the cocaine that
would otherwise have hit European markets
6
JUNE / JULY 2007
and represents a cost of £125 million
($301 million) to the Columbian cartels.
In previous years law enforcers have seized
between 40 and 60 tonnes of the “white stuff”
before it hit the streets.
Although heroin seizures during SOCA’s
first year amounted to only 1.5 tonnes, inroads
made into the secret world of “hawala” tend
to support claims that the clandestine money
transfer network favoured by Asians around
the world is exploited by heroin traffickers to
launder dirty cash. An estimated 90 per cent of
the world’s heroin comes from Afghanistan
and the money is apparently laundered through
the hawala system. A raid on three “hawaladars”, carried out in October 2006, has provided investigators with significant intelligence
on suspected trafficking routes in Central Asia.
A list of 80 suspects has been compiled by
investigators in Afghanistan alone.
The report briefly mentions intelligence
supplied by reporting officers preparing
have arrested nine people for a range of
offences, including money laundering,
the possession of firearms, burglary and
immigration offences. SOCA’s proceeds of
crime unit is preparing a report dedicated to
the suspicious activity reports regime which
will be published in October.
Although the report alludes to progress
in human trafficking and armed robbery,
none of the typologies discussed these crimes
which are equally, if not more damaging, to
the people involved. SOCA’s “we’re going
after the money” mantra may instil the
agency’s aim into the public’s consciousness
in the short term and cartels may close down
or shift business interests elsewhere. But as
long as Bolivian, Colombian and Peruvian
farmers keep producing the coca leaf,
someone will turn it into cocaine and
generate money from crime.
A recent court ruling on SOCA levied
a damning indictment of the state’s decision
ALTHOUGH THE ACTUAL FIGURES MAY NOT YET LIVE UP TO SOCA’S
CLAIMS OF SUPERPOWER STATUS, THE RESULTS ARE EXPECTED
TO ALIGN MORE CLOSELY WITH TARGETS OVER THE NEXT FEW YEARS
suspicious transaction reports (“STR”) in a
series of typologies which support the joint
money laundering steering group’s view
that due diligence and size do not matter.
One apparently insignificant STR led to the
arrest of a man suspected of drug trafficking,
and the seizure of a property portfolio worth
£1.5 million and a quantity of an unspecified
drug. On the basis of another STR which only
identified one person fully, police officers
to form this turbo powered agency: “In
setting up the SOCA, the state has set out
to create an Alsatia – a region of executive
action free of judicial oversight. Although
the statutory powers can intrude heavily,
and sometimes ruinously, into civil rights
and obligations, the supervisory role which
the court would otherwise have is limited
by its primary obligation to give effect to
Parliament's clearly expressed intentions.” ■
ANTI-MONEY LAUNDERING
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you on all aspects of the AML legislation and equip your
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Our approach is simple – we cut through the complexity of
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L A W Y E R S
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NEWS
IN EUROPINION
A chink in the
Czech armour
Julie Beesley
Why is the casino industry booming everywhere except
Western Europe? Julie Beesley explores the state of play
and latest trends in the Eastern Czech gaming industry
in an attempt to find out.
E
UROPEAN CASINO INDUSTRIES
today are not much different than
they were a quarter of a century ago.
The European legislative models for casinos
range from state-owned monopolies in
Sweden, Finland, Austria and the Netherlands,
to the so-called “invisible” clubs in the UK.
Other EU countries also have
highly-taxed private sector or private/public
sector partnerships, as well as regional
franchise operations.
Business in most Western European
casinos does not even faintly resemble the
dynamic growth occurring in Australasia,
North America or South Africa. However,
their Central and Eastern Europe cousins
in the Czech Republic, Estonia, Latvia,
Lithuania, Ukraine and Russia appear to
be experiencing a boom. Perhaps this is
because they appear to have more in common
with the highly competitive (and loosely
regulated) casinos of Nevada and the
Mississippi than their closer cousins in
France, Spain, Italy, Switzerland or Germany.
This may change as parts of Eastern Europe
are bringing in new regulation, but it will
not be without challenges.
After years of limited regulation, the
Czech government’s Finance Ministry
is now taking the first steps to crack down
on gambling at a time when the industry
is booming.
The director of the State Supervision
of Gaming and Lotteries (SDSHL), a
department of the Finance Ministry in
charge of monitoring gaming establishments,
maintains that after years of benevolence
“a major turning point has come, a true start
of the process of state supervision”.
8
JUNE / JULY 2007
However, while the proposed gambling
laws will require bigger casino operators to
be checked for organised-crime links, the
smaller “hernas” – as they are known – will
not have to face such scrutiny.
Hernas are smaller, stripped-down
pubs that carry betting machines, but
are not allowed to hold live games. As of
1 September 2006, there were around 3500
herna bars, in addition to 5000 other places,
such as gas stations and restaurants, with
gaming machines. In comparison, there
are 178 casinos nationwide, 48 of which
are in Prague.
communities are already petitioning the Finance
Ministry to have more say in the licensing and
regulating of slot machines.
On top of this, the Czech gambling
industry is taking off, in a new, high-tech
direction. Casinos and herna bars are quickly
adopting flashy, eye-catching video gambling
machines, often referred to in the industry
as ‘video lottery terminals’ (VLTs).
Players like them because they are fun
and offer a quick thrill. Operators like them
because they are cheap to run and extremely
profitable. The government likes them
because their technology (which can monitor
“... THE CZECH GAMBLING INDUSTRY IS TAKING OFF,
IN A NEW, HIGH-TECH DIRECTION.”
In parts of Prague, many hernas are
reportedly empty much of the time. This
emptiness has naturally raised suspicions that
money laundering is their source of success,
not gambling.
Plans are under way by the SDSHL to
overhaul regional monitoring by replacing some
400 part-time inspectors with 126 full-time
ones. SDSHL oversees the country’s casinos
and certain types of gaming machines.
However, herna bars do not fall under the full
jurisdiction of the SDSHL. Authorities only
licence certain gaming machines in these establishments, not the establishments themselves.
Therefore, in any given herna bar, you can have
electronic roulette and dice machines under
SDSHL regulation, while the slot machines are
under the regulation of local authorities. Local
pay outs) reduces the risk of money laundering or tax evasion, and because operators must
pay a 10 per cent cut of the machines’ income
back into government coffers. VLTs are the
fastest-growing sector of the gambling
industry, the Czech Finance Ministry says.
The growing popularity of these machines
is a trend throughout Europe. “They earn most
of the money,” a local Czech gambling expert
said. “And money controls an industry.”
Video gambling may help the SDSHL
clean up a corrupt business sector, but
while herna bars remain largely unregulated,
a chink exists in the Czech Republic’s
regulatory armour.
■
Source: The Prague Post
Contact: [email protected]
ANTI-MONEY LAUNDERING
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AML-JUNJUL-10insid.qxd
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INSIDE STORY
Intelligence
from within
Internal financial intelligence units can conduct quick and efficient
spot research on subjects ranging from suspicious activities of
existing customers to examining unusual foreign documents,
says Kenneth Rijock
A
DEVELOPMENT gradually gaining
global acceptance is the introduction
of in-house financial intelligence
units (FIUs)in financial institutions. Here we
examine this trend, and discuss whether it
constitutes a possible solution to some of
compliance’s most important and difficult
professional and political problems. After
learning just how much an FIU can contribute
to the compliance function, you may wonder
why every bank does not have one in place.
First of all, what is the function of an
in-house FIU? Typically, financial intelligence
units undertake the following duties:
•
•
•
•
•
perform enhanced due diligence
investigations of high net-worth
prospective clients, whether they be
individuals or business entities. Generally
FIU investigators have extensive research
experience, and therefore skills exceeding
those of the best compliance staff.
assist with the preparation of information
for the multitude of reports required
under current laws and regulations by
Austrac and other agencies.
quick and efficient spot research on
subjects ranging from the suspicious
activities of existing customers to
unusual foreign documents.
training junior compliance staff on
investigative techniques for customer
identification programs.
liaise with regulators, law enforcement
and government prosecutors, both
officially and unofficially, when and
as necessary.
In short, an FIU within a bank will
greatly increase the efficiency of the
10
JUNE / JULY 2007
By Kenneth Rijock
FINANCIAL CRIME CONSULTANT
WORLD-CHECK
Of critical importance is that the FIU
director is outside the ordinary chain of
command and reports directly to the bank’s
board. Why is this important? Senior bank
staff do not have the ability to “pull rank”
on them, or to influence or intimidate
rank-and-file compliance staff who lodge
valid objections to prospective clients.
AFTER LEARNING JUST
HOW MUCH AN FIU CAN
CONTRIBUTE TO THE
COMPLIANCE FUNCTION,
YOU MAY WONDER WHY
EVERY BANK DOES NOT
HAVE ONE IN PLACE
compliance department by assisting
compliance staff to accomplish their tasks
efficiently and with fewer errors.
The best FIUs are composed of older,
retired, law enforcement or regulatory
executives who usually have several decades
of hands-on practical experience in the field
of financial crime. Some FIU directors also
come from the intelligence services or the
military. They all have been in the ‘trenches’,
and have learned about financial crime
operations through both education and
on-the-job training. In short, if anything,
they are overqualified, an attribute often
missing in the financial crime field.
Not that the typical leader of a financial
intelligence unit would take verbal abuse
from ranking bank officers; most are
hard-bitten veterans of difficult tours of duty
in government service, and do not scare
easily. The fact that most are receiving
substantial government pensions also adds
to their independence. They are not frightened
of being fired, which enables them to act
correctly and professionally in the face of the
pressures often brought to bear on them to
approve prospective high net-worth clients
who represent unacceptable risk to the bank.
In short, one wonders why every
financial institution has not taken a cue
from the fact that the biggest American
banks have built financial intelligence units
alongside their compliance departments.
While budgetary considerations are always
a factor, if the FIU identifies and interdicts
a major money laundering or other financial
crime at a bank, management will quickly
learn that the cost of its operation is well
■
worth it.
Kenneth Rijock is a financial crime consultant
for World-Check. Rijock is believed to be
the only practising American compliance
professional who has previously been both a
banking attorney and career money launderer.
His financial crime analysis articles can be
found daily at http://www.world-check.com.
ANTI-MONEY LAUNDERING
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OPINION
A call to action
– we hope
Joy Geary explains what the self-assessment questionnaire
has been released to do. That is to help reporting entities
close gaps, see shortfalls and in short – to help themselves
By Joy M Geary
AML/CTF ADVISER
A
USTRAC HAS JUST RELEASED its self assessment for
reporting entities falling within the reach of the AML/CTF
Act. If it is clever enough, this self assessment will be the
“call to action” necessary for many reporting entities that have yet
to grasp the scale of effort ahead of them.
Reporting entities are not obliged to complete the self assessment
and if they do, they are not required to lodge it with Austrac, although
they may do so if they wish. The value of the self assessment for
reporting entities is that it should provide them with an understanding
of Austrac’s expectations. These expectations will shift over time as
we pass through the different implementation phases and then into
business as usual
Reporting entities are currently in a difficult position. They finally
have an act and most of the AML/CTF Rules that they need. However,
they know that after the self assessment there are at least three more
key groups of material coming their way during 2007:
1. Austrac guidance material (to be released progressively)
2. Industry-prepared guidance material
3. Austrac Regulatory Guide (to be released progressively from
September 2007).
This additional material would not be necessary if it was self evident
what reporting entities needed to do. The plan to release more material
during 2007 suggests that both Austrac and the financial services industry
believe that it is far from clear to most reporting entities what they
need to do. If we assume that this material will be relevant to the
implementation plans of most reporting entities, then it is disappointing
that it is scheduled to be released almost concurrently with the dates
in the implementation obligations schedule.
However, this article is more interested in discussing the benefits
of Austrac self assessment rather than the significant practical
difficulties reporting entities face fulfilling their obligations under
the act and rules at the same time as Austrac publishes more and
more information about its expectations.
A self assessment is a common tool in project management and
regulatory management, allowing gaps to be identified and then fixed.
For reporting entities, the Austrac self assessment is the first real
glimpse of what the regulator is actually looking for. To successfully
act as a “call to action”, rather than just to broadly repeat the wording
of the act and rules, the self assessment must:
• provide missing information about regulatory expectations by
giving reporting entities a clear picture of the activities to be
included in their implementation planning
• detail project management characteristics in the areas of sponsorship,
planning, resourcing and funding that indicate that the AML/CTF
activities are well managed.
ANTI-MONEY LAUNDERING
On completion of the self assessment, users should feel one of
two emotions, either:
• comfortable with where they are because they have scored well
on the self assessment, or
• concerned because the self assessment has suggested a range of
requirements they have not thought of and which change the scale
of the work to be done.
The Austrac self assessment does well in many areas. However,
in some key areas it misses the opportunity to educate by guidance.
Examples of gaps include:
• details of the many components that would make up a reasonable
Part A of an AML/CTF program
• details that would satisfy Austrac that the AML/CTF policy was
designed to identify, manage and mitigate laundering and terrorism
financing risk
• contents that Austrac expects to see in an AML/CTF procedures
manual (the manual is not required by the rules but does reflect
good practice internationally)
• information to be provided to the board of a reporting entity to
enable them to fulfill their oversight role.
It would be helpful for those reporting entities currently struggling
with project implementation if the self assessment offered guidance in
the form of simple questions such as:
• do you have an implementation plan that is substantially complete?
• is your AML/CTF implementation work fully funded with an
approved budget?
• do you have all the people and skills you need to complete your
implementation?
• have you completed an inventory by product type, listing the know
your client information you currently collect?
• have you completed an inventory of staff roles so that you can plan
and fund the required role-based training?
These sorts of simple and direct questions would guide and challenge reporting entities that have not yet started to consider what they
will do to comply with the act. Obviously the questions in the self
assessment would change as the different dates of the staggered implementation are passed.
There is no doubt that Austrac will use the self assessment in
its review meetings with reporting entities, so it is irrelevant whether
a reporting entity has put itself on notice of gaps in its AML/CTF
implementation by completing the self assessment. It is the publication
of the self-assessment by Austrac that has the power to put reporting
■
entities on notice; not its completion by a reporting entity.
Joy M Geary is an independent consultant and the developer of the
AML Master Templates. Contact: [email protected]
JUNE / JULY 2007
11
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GOLD AND LAUNDERING
Image © istockphoto
Terrorism’s
gold standard
Gold is still the prefered tool of terrorist
financiers and national currencies — no matter
how tradeable — will never be as effective,
says John Cassara
I
N MAY 2004, in one of the very few
public pronouncements by al-Qaeda in
which reference was made to finance,
Osama bin Laden offered a reward for anyone
killing coalition force commanders. The
reward offered was an amount of gold.
In 2005 cartoons of the prophet
Muhammad were printed in a Danish newspaper. The resulting publicity caused outrage
in the Muslim world. In February 2006 the
Taliban offered 100 kilograms of gold for
anyone killing the individuals responsible for
the “blasphemous” cartoons.
Why is gold popular
with terrorists?
•
•
•
•
•
•
•
12
Gold is available to terrorist organisations
as part of their diversified financing
arrangements.
Terrorists are primarily from countries
where gold is an intrinsic part of the culture.
In times of uncertainty and civil strife, gold
is often better than national currencies.
Gold can act as a better insurance policy,
hedge against devaluations, bribe currency and source of transportable wealth
than currency.
Zakat (charitable contributions) is one
of the five pillars of Islam. The financial
reference point which is used to
determine Zakat is called Nisaab.
Nisaab is often calculated in gold for
historic, cultural and religious reasons.
In the Muslim world, gold plays a large
role in personal and Islamic finance.
With the creation of the Islamic golden
dinar, gold’s prominence in the Muslim
world will grow further.
Gold is an informal value transfer system
and plays an important role in other
underground systems such as hawala.
JUNE / JULY 2007
•
Gold is an international medium of
exchange that is generally immune to
traditional financial intelligence reporting
requirements, asset freezes, sanctions,
and designations.
As Osama bin Laden once said, al-Qaeda
has recognised the “cracks in the Western
financial system”.
In 1989 Operation Polar Cap, the
largest money laundering investigation in
history, involved the laundering of over
one billion dollars of narcotics proceeds
through the buying and selling of real
and fictitious gold. In January 2007 in
one of the largest drug-related money and
value seizures in history, the Colombian
national police discovered more than
$US80 million ($95 million) in cash and
gold in private residences and businesses,
buried in the ground and stashed in private
safes. Over the years there has been a
myriad of gold-related money laundering
cases around the world.
Why is gold popular
with launderers?
•
•
•
•
•
•
•
•
•
Gold has been a haven of wealth since
antiquity.
Gold is a readily acceptable medium
of exchange anywhere in the world.
Gold is both a commodity and a
de facto bearer instrument.
Gold’s value is relatively predictable.
The weight and quality of gold
can be assured.
Depending on need, the form of gold
can be altered.
Gold offers easy anonymity.
Gold brokers can “layer” transactions
that further confuse the paper trail.
Gold is easily smuggled.
•
Gold is readily susceptible to false
invoicing and other fraudulent schemes.
• E-gold can now be used by
money launderers.
The gold industry is important in both
Australia and the US. When I was assigned to
the US Department of Treasury’s Financial
Crimes Enforcement Network (FinCEN), in the
years surrounding 9/11, I was literally given a
gag preventing discussion of the misuse of gold
by terrorists and money launderers.
In contrast gold dealers in Australia
have had a long history supporting Australia’s
anti-money laundering and counter-terrorist
financing efforts. Under the Financial
Transaction Reports Act 1988, bullion
dealers are required to:
• verify the identity of customers when
they open an account or enter into a
bullion transaction
• keep transaction records
• report any suspicious transactions to
the Australian Transaction Reports and
Analysis Centre (Austrac).
There are similar requirements in the
recently enacted AML/CTF Act. As part of
the AML/CTF reform agenda, a further round
of consultations will commence shortly with
jewelers and others in the precious metals
and stones industry.
I am heartened that Australia recognises
gold’s importance in this area and I applaud
the efforts of both government and industry in
working together to find workable solutions
for updating reporting requirements for
gold “reporting entities.”
■
John Cassara is a former CIA case officer
and treasury special agent and author of
Hide & Seek: Intelligence, Law Enforcement
and the Stalled War on Terrorist Finance;
Potomac Books, 2006. Mr. Cassara can
be reached at www.JohnCassara.com
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Page 14
AML CONFERENCE
Beating the launders
at their own game
Launderers exist to leverage off the good intentions and
bona fides of an industry, and you need to think like them
to beat them. These were some of the messages coming
from AML’s inaugural congress in June
S
TRANGE BEDFELLOWS always
make for interesting conferences, and
Anti-Money Laundering magazine’s
inaugural congress was no exception.
Delegates were first treated to an address
from a senator followed by a former US money
launderer, who was in turn followed by the
head of the country’s financial intelligence unit.
From the outset, delegates appeared to take
the change in tempo and style in their stride.
The conference was opened by
Senator David Johnston, the Minister for
Justice and Customs, who told delegates that
Australia’s financial industry was envied
throughout the region for its “high fidelity”.
He said that the system was open to abuse
as criminals in the region sought to “leverage”
off the confidence people and business had in it.
“If Indonesia could just get its corporate
governance right and its economic systems
headed in the right direction, it could become
another ‘China-type’ evolution,” Johnston said.
14
JUNE / JULY 2007
“The growth of their economies bring
big pluses for us – but they also bring with it
negatives – nefarious criminals in South-East
Asia who want to leverage off a financial
system which has a great deal of fidelity.”
Johnston said that after 18 months,
reporting entities should have significantly
tightened up their risk profiles. “But I do want
to hear if we are too prescriptive – that’s not
the intention. We want a model that interacts
with existing security systems and becomes
part of the furniture and part of the natural
way of doing business,” he said.
The minister was followed by Kenneth
Rijock, a financial crime consultant for
World-Check and a renowned ex money
launderer, who gave a frank account of his
life in the 1980s working as a US attorney
during the week, and an island-hopping
money launderer on weekends.
Rijock’s main message to the congress
was that senior compliance personnel had to
think like the launderers, who were constantly
looking for new targets of opportunity.
“In the field of money laundering you’re
only limited by your imagination,” said
Rijock. “I can take any legitimate activity,
tweak it and you may not recognise it unless
you’re paying attention.”
Rijock said that despite the huge resources
being put into anti-money laundering and
counter-terrorism financing, it was still
possible to evade the long arm of the US law.
“If I was smuggling cash out of US,
I’d take it to an East Caribbean tax haven, it
would then go to a place like Panama where
they have bearer shares and from there it
would then be transferred to Taiwan.
“Then I’d get the money sent to Western
Europe, form a bogus company and there
would be nobody in US law enforcement
who could run around the globe and find
my trail,” he said.
Rijock pointed to areas where launderers
were now seeking leverage. He mentioned the
US secondary market for life assurance – where
policies can be easily switched over to new beneficiaries and then sold on – as well as hedge
funds, which were lightly regulated in the US.
“Hedge funds are a grey area and they
like to use offshore jurisdictions,” he said.
“If I want to use hedge funds – I’d get
some professional to form offshore companies
and invest through them as I know that compliance in hedge funds is not what it should be.
“Or maybe I’d form my own hedge fund.
That will give me an extra level of protection
and I can take out huge fees which will all
be clean,” he said.
Austrac chief executive Neil Jensen
reminded delegates that the congress was being
held on an auspicious date, just a day after
the correspondent banking and compliance
reporting requirements had come into effect.
Jensen reminded delegates that Austrac
had tabled a number of AML/CTF rules in
parliament as well as producing guidance
notes. “None of the rules we tabled were disallowed which is fantastic,” said Jensen. “It’s
always a worry that they may be disallowed
somewhere along the line. We seem to have
all of that right.”
The rules and guidance notes were
accessible on the regulator’s website, as was
the self assessment questionnaire, which had
been issued in late May. He also mentioned a
regulatory guide, which would be available
in the fourth quarter of the year.
“This will draw everything together –
the legal issues, the rules, the guidance notes
and some of the aspects of the self assessment
questionnaire and will put it all in one place,”
he said.
ANTI-MONEY LAUNDERING
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Page 15
AML CONFERENCE
www.ngxsolutions.com
Minimise the impact of
financial crime and
reduce your compliance
costs
Jensen said the self assessment questionnaire had within it
nearly 200 questions, which would cover many of the issues reporting entities would be concerned with relative to the legislation.
“You can then evaluate yourself – are you compliant, largely
compliant, partially compliant or non compliant? It’s ongoing –
you can put in a range of information, you can refer it to your board,
the chief executive or the head of compliance. You can use it to
guide yourself.”
Questioned by one delegate as to whether there was an
obligation to fill in the questionnaire, Jensen replied that there
was no compulsion, although when Austrac conducts compliance
visits it will ask if it had been completed.
“We didn’t want to make it obligatory but to provide a resource
that will assist you to understand what the requirements are and get
you compliant at the earliest possible time.
“We would like to know that you have gone through the process
and that you will have the answers that we’d like to hear,” Jensen said.
The subject of correspondent banking also featured strongly
at the congress and delegates were treated to a detailed speech on
current best practice from KPMG senior manager, Nigel Gerryn.
Gerryn reminded delegates that in any international wire
transfer the client of a correspondent bank was almost certainly
unknown to the originating bank. All the originator bank could
do was rely on the correspondent bank’s credibility, he said.
“You don’t get to logistically conduct due diligence on the other
party, so you’re totally reliant on the correspondent bank to ensure
that those risks are being mitigated.
“All those questions that you ask your customers, how do you
get those answers, if not through the correspondent?” asked Gerryn.
In evidence of this, the congress heard from Serena Moe, a
director of Deloitte Financial Advisory Services in the US, who
detailed the problems that occurred in what is now termed the
ABN Amro Order. In 2004 it was discovered that the bank was
illegitimately sending through wire transfers from Iran, thereby
violating the US’s Iranian Transactions Regulations and the
Libyan Sanctions Regulations.
“ABN Amro’s overseas branches modified payment instructions
on wire transfers so that all references to the originating bank –
Bank Melli Iran – were removed,” said Moe.
Asked to speak about the UK compliance experience, David
Leppan, the chief executive of World-Check, told delegates that one
of the most difficult aspects for institutions was “retro KYC”.
“You may not know that HSBC has 120 million customers,”
said Leppan. “Can you imagine the task of going back and doing
KYC checks on 120 million people?”
“It’s the skeletons in the catacombs that are waiting to come
out, not just the skeletons in the closet.”
Leppan said the solution to knowing your customer “did not
start today”.
“You must go back and look at all the clients you’ve had on
your books for years and that’s a massive task – and you’ll need
money, resources and people to do it.”
Leppan said banks, law firms and insurance companies still
tended to have disorganised databases with clients spread without
structure throughout the company.
“How will you know the customers if you don’t know where
they are,” he asked.
■
When you implement an AML system into your environment, the level of suspicious transactions generated is
likely to overwhelm your investigation team. You will need
to capture data from numerous sources, in a variety of
formats; you will have to evaluate that data for accuracy,
and provide a secure environment in which to carry this
out; you will have to generate detailed reports to comply
with stringent compliance obligations; and you will have to
do all this under significant time constraints.
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ANTI-MONEY LAUNDERING
15
[email protected]
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CORRUPTION
Doing business
with PEPS
At the heart of the PEP issue is risk — reputational risk. And it
only takes a few high profile bad eggs to bring a bank to its knees,
as Riggs Bank found out, says World-Check’s David Leppan.
A
POLITICALLY EXPOSED PERSON
(‘PEP’) appears to have become
the “two headed monster” of the
financial and trust community. There really
is nothing wrong in doing business with a
PEP but that all depends on who the PEP is.
Knowing what risk lies in store for your entity
is key to doing business with such influential
and often wealthy individuals. As the practitioner, you certainly want to survive the PEP
experience and live to tell the tale!
“Politically exposed person” – three
words that send a shudder down the spine
of the most hardened private banker or
trust adviser. But why? What is so dreadfully
sinister about a PEP? The answer may be
nothing … or everything.
A PEP can be and often is, a highly
prized client with whom your entity will
gladly do business for many years. A “clean”
PEP is transparent about their wealth, their
position (or exposure to someone in a high
position) and their requirements. A “dirty”
PEP will go out of their way to conceal not
only their identity but also the source of their
wealth. A problem may arise simply due
to the position that person holds, the country
they hold the position in and/or their
relationship to the ruling government.
The most common forms of PEP
concealment include the use of family
members or associates to gain access to the
banking system and the use of companies,
trusts, charities or any other like vehicles.
As the financial community becomes
better at identifying PEPs and keeping the
dirty PEPs out of their entities, the trust
community will face an increased risk that
PEPs will seek to conceal their identities and
ill-gotten gains using trust structures.
16
JUNE / JULY 2007
AFTER MORE THAN
160 YEARS AS THE
MOST PRESTIGIOUS
PRIVATE BANK IN
THE UNITED STATES
OF AMERICA, RIGGS’
FALL FROM GRACE
TOOK ONLY A FEW
TUMULTUOUS YEARS.
At the heart of the PEP issue lies risk;
not necessarily compliance or regulatory risk
but rather, I would argue, reputation risk.
And reputation risk not just for the entity you
represent but indeed for you personally.
In the last few years we have witnessed
the damage a badly managed PEP relationship
or policy (or indeed lack thereof) can cause.
Consider the high profile case involving
Riggs Bank. Riggs acted as banker for both
General Pinochet (and tried to conceal this
relationship) and Equatorial Guinea’s
president since 1979, brigadier-general
Teodoro Obiang Nguema Mbasogo. After
more than 160 years as the most prestigious
private bank in the United States of America,
Riggs’ fall from grace took only a few
tumultuous years. The financial cost of
non-compliance at Riggs is estimated at
around $US200 million ($244 million)
plus which included fines and shareholder
settlements of around $US59 million and legal
and consulting fees of $US35 million.
The clearest indicator of the bank’s lost
reputation though is seen in the decline in the
value of Riggs’ shares. On June 15, 2004,
Riggs’ shareholders (as part of a merger deal)
accepted an offer by PNC of $US24.25 per
share. Then on 10 February 2005 they accepted
a renegotiated price of $US20 per share;
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CORRUPTION
Riggs tried to conceal
its links with General
Augusto Pinochet
© AP Image
representing a fall of approximately 20 per cent
in Riggs’ share price in just eight months.
Instead of achieving the $US779 million
sale price, the shareholders finally accepted
approximately $US643 million.
The reputational damage did not stop
there. Consider now the consequences to
management of exposure to career or personal
reputation risk.
During a two year period the bank’s:
• chief executive officer Robert Allbritton
resigned (March 2005)
• chief legal officer Joseph Cahill was
replaced (December 2004)
• chief operating officer and executive vice
president (and former managing director
of Riggs Europe) Robert Roane was
suspended (September 2004)
• former chief bank examiner and executive
vice president R. Ashley Lee was put on
paid leave (August 2004).
• In addition the manager of Riggs’ African
and Caribbean division Simon Kareri
was fired and ultimately charged with
27 counts, ranging from money laundering to fraud (June 2005).
ANTI-MONEY LAUNDERING
Indeed this disastrous end to what was
a highly respected bank cannot solely be put
down to a dirty PEP or two, but is rather
attributable to a lack of compliance culture.
At all times the bank was aware of who they
were acting as banker for and paid the price
for how they chose to deal with them.
As far as trusts are concerned, we have
an array of examples of well known PEPs
registering and indeed using such vehicles
to manage their wealth.
Pakistan’s former prime minister Benazir
Bhutto has more than 20 such offshore
vehicles. Her husband Asif Ali Zadari and/or
her lawyer Jens Schlegelmilch, a German
national (reportedly based in Switzerland)
act as directors of many of these.
A handful of trusts and corporations
can also be linked to payments made to the
European bank accounts of Vladimiro Illich
Lenin Montesinos Torres (known to most
of us as Vladimir Montesinos), former
presidential advisor and chief of the Peruvian
National Intelligence Service under Alberto
Fujimori, who himself currently awaits
extradition to Peru from Chile.
It is important to stress that offshore
vehicles are not the only vehicles used to
conceal the identities and questionable wealth
of PEPs. Industry is prone to a false sense of
security when carrying out due diligence on
or dealing with an onshore company, trust,
foundation or charity in comparison to the
equivalent offshore vehicles. The registration of
a company in most onshore jurisdictions carries
little or no know your client (‘KYC’) requirements on the beneficial owners or even the
company directors. The knowledge a company
is registered in the United Kingdom, the United
States or in the EU as opposed to some small
tax haven island nation, for some reason,
would appear to make us think it must be
above board. Think again and be forewarned.
So, with all the pitfalls how does one still
do business with PEPs? The answer is quite
simply – with great care!
Some tips
•
•
•
•
•
•
•
•
•
•
•
Having identified a PEP, determine
your risk – consider the country and
its government, the person’s position
and their potential exposure to corruption
and bribery.
Understand that it might be an “exposed
person” you are looking for and not
an actual “office holder”.
Understand the PEP’s business
requirements of your entity.
Carry out regular reviews of all
customers and even more regular reviews
of all PEPs.
Have a well thought-out and even better
executed KYC and PEP policy and
culture throughout your organisation.
Carry out KYC and enhanced due
diligence on trusts, companies, charities
and foundations in the way you do so
with individuals.
Treat onshore and offshore vehicles in
the same manner.
Ensure you are fully aware of and have
carried out KYC on all signatories on all
accounts but especially PEP accounts.
Ensure you have carried out KYC on
all credit card and additional credit card
holders.
No single person in your organisation
should have total control over PEP
customers or PEP matters. Ensure
counter-signatories on everything
PEP-related.
And finally, plan ahead for the end of
a PEP relationship. Realise that PEPs
have a hidden “expiration date” that
will not be evident to you or even to
themselves. A PEP can go from good
guy to bad guy in a day and you don’t
want to be the last one standing behind
the throne of a deposed leader!
■
David Leppan is the chief executive and founder
of World-Check. www.world-check.com
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TAX EVASION
The offshore affront
Ask fraud and tax investigators what obscures the money trail and the chances are it’s a company
or trust structure from a low-tax jurisdiction. Adam Courtenay looks at why these vehicles can
so easily be abused.
I
F THERE IS a single business entity that
has come to signify the problem of
money laundering around the world, it is
the offshore front company, also known as the
international business company (IBC).
It is an entity that looks, feels and sounds
legal, yet its activities may be otherwise.
These entities number well into the millions
and are offered, in some form or another, by
thousands of professional service providers
around the world, primarily from offshore,
low-tax locations.
They are companies, in the way most
people understand them, in name only – they
18
JUNE / JULY 2007
can often be formed within 24 hours after a
mere telephone call. The beneficiaries of the
entity are often unknown (or unknowable),
the shareholders elusive and the directors often
lawyers living in the place of registration and
appointed by the clients’ lawyers. The client,
the director and the shareholders can exist at
one remove from each other and never know
the other existed.
Many Caribbean and South Pacific tax
havens offer cut-price IBCs. Individuals tend
to prefer the confidentiality, minimal reporting
requirements and cost-effectiveness offered in
the Caribbean; it has also been popular to
weave together IBCs and trusts in complex
tax-minimising structures. Such structures are
prevalent in the common law jurisdictions of
the Bahamas, the BVI, the Cayman Islands
and the Turks & Caicos Islands. But just
about every offshore centre offers them.
The IBC abuses have several common
denominators. A series of multiple financial
transactions through an offshore centre, use
of nominees or other middlemen to manage
these transactions, and an international network of shell companies – even a specialised
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TAX EVASION
“off-the-shelf” variety that have been known
to become dormant as soon as the series of
transactions are completed.
Obtaining information from some
offshore jurisdictions on the true owners or
beneficiaries of foreign registered business
entities appears to be the primary obstacle
in investigating transnational laundering and
tax evasion activity.
It is not surprising that the Australian
government has earmarked over $300 million
– and the combined might of five different
criminal agencies – in its attempt to source
the assets and secure convictions against
alleged tax evaders. But it knows it will be
an uphill battle.
Offshore jurisdictions, most notably
Switzerland, refuse foreign tax requests
because tax evasion is not a crime in their
statutes. Often the information requested
is not maintained in any official registry.
In some cases, information on legal entities
may be protected by strict banking
secrecy and unavailable even to domestic
regulatory authorities.
Chris Dickson, a former director of the
UK’s Serious Fraud Office, says that he had
been forced to drop possible prosecutions
because Caribbean islands have failed to
enact laws to allow company documents to
be viewed before a criminal hearing.
“It’s a chicken and egg situation,” he says.
“We can’t charge the person until we have
the information from the island; but the island
won’t give us the information until he is
charged. We can’t charge anybody unless
we have the evidence.”
Requests for mutual assistance can
take up to two years, only for the police
to find that they will simply be handed
an “opaque” company account, with
untraceable directors of a company or trust.
What happens? The crooks go free.
In the internet age, it has never been easier
for even moderately wealthy people to have
their own offshore account or their own tax
haven-based “walking” trust – one that “spirits”
assets away to other jurisdictions if enquiries
are made of it. These can be easily opened at
the touch of a keyboard.
The “benefits” of
offshore companies
The usual reason for creating an offshore
company has been to provide certain “fiscal
advantages”. Since tax evasion schemes and
money laundering operations often appear to
use similar techniques, many money laundering experts believe that the quest for optimal
ANTI-MONEY LAUNDERING
fiscal advantages is frequently a cover used
for moving criminally derived funds.
There are some generally agreed benefits
of offshore companies. These are related to:
• Taxation: business may be structured
so that profits are realised in ways that
minimise their overall tax liability.
• Simplicity: unless it is a regulated
business such as a bank or other
financial institution, some jurisdictions
make it relatively simple to set up
and maintain companies.
• Reporting: the level of information
required by the registrar of companies
varies from jurisdiction to jurisdiction,
but is, in many places, extremely light.
tax avoidance cases, the funds usually move
to a single offshore location where they are
sheltered from the home country’s tax
authorities. In cases involving criminally
generated funds, the tendency is for the funds
to move rapidly through a number of offshore
locations in an attempt to layer the funds.
However, there are exceptions, and tax
evasion cases have been known to move
through multiple offshore vehicles.
What are the red alerts? Anthony Travers,
a senior partner at Caymans-based law firm
Maples & Calder, says the real problem
is whether offshore companies issue an
unlimited power of attorney. If they do,
be even more wary.
IN ONE RECENT INVESTIGATION, TENS OF MILLIONS OF DOLLARS
WERE WIRED AROUND THE US USING A STORE FRONT IN CALIFORNIA.
ONLY ONE BANK THOUGHT THE WIRE TRANSFERS WERE SUSPICIOUS
AND FILED A REPORT.
•
•
•
Asset protection: it is possible to organise assets and transactions in such a way
that assets are shielded from future liabilities, but offshore companies aren’t always
the preferred instruments. The Swiss and
Germans commonly use trust-like structures known as “stiftungs” and “anstalts”,
and many offshore jurisdictions specialise
in asset protection trusts. These are far
more expensive to set up and arrange than
offshore companies but considerably
harder to crack.
Anonymity: by carrying out transactions
in the name of a private company, the
name of the underlying principal may
be kept out of documentation.
Capitalisation: offshore jurisdictions tend
not to impose “thin-capitalisation” rules on
companies (except for regulated entities
such as banks and insurance companies),
allowing them to be formed with a purely
nominal equity investment.
What to look out for
In fairness, IBCs are supposed to abide by the
law of their jurisdiction, some of which now
have AML laws in place. However, what is
considered a predicate crime may differ – eg
tax evasion may not be included.
How can bankers dealing with international corporations check the integrity of
an offshore-based corporation and the source
of its funds?
One of the common differences between
pure tax avoidance and laundering is that in
“This necessarily means that the nominee
directors have no idea whatsoever of what’s
happening within the company,” he says. “An
unlimited power of attorney is an absolute
flag which should place you on red alert.”
Tax avoidance investigators often say the
weak point among banks has been their failure
to scrutinise wire transfers. In one recent
investigation, tens of millions of dollars were
wired around the US using a store front in
California. Only one bank thought the wire
transfers were suspicious and filed a report.
Most banks did not check where the
transfers came from – often there were huge
sums sent by tiny, unlisted companies, yet
few banks found this suspicious.
“Internal auditors and compliance officers
must look at wire transfers, check the pattern
of transfers and look for unusual amounts and
requests from customers who you wouldn’t
normally expect to be sending and receiving
them,” says Nigel Morris-Cotterill, an AML
expert and adviser based in Malaysia.
If a bank is willing to do loans business
with entities from low tax jurisdictions, the
bank is unlikely to know the identity of the
people behind the corporation moving money
from the bank’s accounts and replacing it with
a different asset – the laundered money.
Simple due diligence is required, he says.
Martin Kenney, head of Dublin-based
asset recovery firm, Interclaim, says that when
a “corporate secrecy jurisdiction” is used to
create a corporate entity to borrow money,
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TAX EVASION
you need to ask why. Kenny says it’s the first
sign of impending fraud.
“What are they hiding? Who are these
people? How do I know they are who they
say they are? Why do they choose to go
somewhere that conceals their identity?
A man will come in and say: ‘Look, I own
this company’.”
But Kenney asks how we can know if he
is the beneficial owner or the nominal owner?
Is he a lawyer acting for somebody else?
“You are dealing in secret information and
someone tells you: ‘This is the truth – take my
word for it’. If you want to lend money on
that, go ahead. If you think it’s prudent to do
that with someone else’s money, go ahead.”
As Kenney says, if you believe that you
should know more about your borrowers –
and if the deal is structured so that you are
not allowed to get that additional information,
then do not bother transacting.
“I suggest to you that you don’t have to
do that deal,” he says.
“You have to look at these vehicles in
terms of enhanced customer due diligence and
Offshore Oz
S
INCE THE ADVENT of the Wickenby
tax investigation, there have been a
number of so-called tax avoidance
schemes which have come to light. The most
recent, according to the Australian Securities
and Investments Commission, is the case of
the tax haven company Leominister, which
has allegedly been “warehousing” shares in
the biotech firm, Novogen.
Leominister, which is Novogen’s sixthlargest shareholder, has failed to respond to
tracing notices issued by ASIC in an attempt
to find the owner of a parcel of Novogen
shares. ASIC last month obtained a freeze on
the shares and has applied to the NSW
Supreme Court for the holding to be vested in
the regulator. Leominister, which is registered
in the British Virgin Islands, was not represented at the hearing despite notices to appear.
20
JUNE / JULY 2007
ongoing due diligence,” says Gary Gill,
a forensic partner at KPMG in Sydney.
“If a high net-worth individual comes
along to your bank and wants to open an
account and they have corporations in
offshore banking havens, the Channel
Islands etc, a red flag immediately goes
up. There may be legitimate things there,
but there will be other stuff as well.”
“Under those circumstances you
should immediately – under any
risk-rating model you construct –
put those people in the higher
risk category. That goes for
offshore bank accounts as well.”
The level of sophistication of
these entities can go from the sublime
to the ridiculous. At its most simple a
person wishing to evade tax can obtain
a nominee director of a corporation for
about $1000 in a dial-up company.
Another person pretends to be the owner
of this corporation for a $500 service fee. They
open a bank account for that company and the
second person becomes the “so-called owner”.
According to Kenney, in some of the
large fraud cases he has come across, there
may be four or five separate self-contained
entities, each perhaps with 250 corporations,
all owning parts of each other and then owned
by a trust with secret beneficiaries.
The name of those beneficiaries is locked
in a safe somewhere in a lawyer’s office in
the Bahamas.
“It becomes an enormous task to unravel
it. It’s a multi-veiled hydra.”
■
In the ongoing case involving Paul Hogan
and the receipts from his two Crocodile
Dundee movies, there are also allegations of a
tortuous money trail being used. The profits
are said to be have flowed from Hollywood to
companies in the Netherlands, where Hogan
and his business partner John Cornell had
assigned the copyright to their films. Those
companies allegedly acted as conduits to
bank accounts in the Netherlands Antilles
and so-called “secret trusts” in Hong Kong.
According to a report in The Age, the
structure was allegedly used as a legal means
to avoid US withholding tax on copyright
royalties. It is known in celebrity circles as
a “Dutch sandwich”.
The money is alleged to have been moved
to Hong Kong, where it was held in various
currencies by a chain of Hong Kong trusts
which, in turn, were controlled by what are
termed “straw men”, so-called secretive figures with links to advisers in Australia.
“Hogan and Cornell were not documented
as trustees or trust beneficiaries but are
thought to have retained power to intervene
and appoint new trustees if necessary (and
thereby assume control of the trust’s bank
accounts),” The Age says. Both Hogan
and Cornell maintain they are innocent
of any wrongdoing.
Not dissimilar structures were used by a
number of Australian rock stars, including the
late lead singer of INXS, Michael Hutchence
and members of the 1980s rock band Men
at Work. In July 2005 it was reported that the
fortune of dead rock star Michael Hutchence,
was estimated to be between $1.5 million
and $3 million ($HK10-20 million).
The money, it seems, has disappeared.
Hutchence’s financial advisers have said
profits from rock bank INXS were squirreled
away through a web of companies across the
globe to keep his fortune away from “thieving
relatives” and “girlfriends”.
■
ANTI-MONEY LAUNDERING
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COMPLIANCE
Image © istockphoto
Remember, remember
the 12th of December
Is the so-called deadline of June 12 of any importance? This deadline relates to the record
keeping and know your customer provisions for correspondent banking, but as many AML
practitioners observe, it is the totality of what is needed by December 12 that really counts,
says Richard Hemming
A
USTRALIAN REPORTING entities
are in the midst of constructing
compliance programs that will
effectively put into practice the new antimoney laundering and counter-terrorism
(AML/CTF) laws, which received royal
assent on December 12, 2006.
The timeline for implementation has
been staggered by Australian Transactions
Reporting and Analysis Centre (Austrac) to
help the industry ease into compliance in
bite-size stages. This month it reaches its first
trigger point since the AML/CTF Act received
royal assent in December – that is, June 12.
But does this date have any real meaning?
Ostensibly it covers only record keeping, know
your customer (KYC) and some customer provisions for correspondent banking. And it joins
other obligations that were “due” as soon as
royal assent was received last December and
22
JUNE / JULY 2007
that include monitoring of designated remittance services, electronic and cross-border
currency movements and some record keeping
obligations. To most practitioners, June 12
hardly seems to be an auspicious date. There is
confusion not only about its relevance but as to
how pressing the requirements are for many of
those caught by the act. The obligations cover
all the different entities that come under the
act, including gaming institutions, financial
services providers and bullion dealers.
Peter Jones, a partner at law firm Allens
Arthur Robinson, says that the main component of the compliance program is due in
December 2007. He does not see the point of
obligations placed on reporting entities at such
an early stage.
“When you think of compliance reports
you think compliance with what? Those firms
which logically have to report obligations
have had to do so from the moment the act
commenced on December 12, 2006, through
to June 12 this year. But they are only
complying with the first stage of four and
I’m not really sure why Austrac thinks that is
worth doing,” he says.
Chris Cass, a partner at accounting firm
Deloitte, says that evidence from speaking
to his clients suggests Austrac will face
considerable problems in gaining full
compliance from reporting entities.
“We are now in the first year of implementation and given the expected demands in
the remainder of 2007, it’s going to be challenging to meet the statutory deliverables.”
In essence, the program required to be
implemented by June 12 is the record keeping
and KYC requirements associated with
correspondent banking and only applies to
banks with offshore banking requirements.
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COMPLIANCE
The requirement is for banks to keep detailed
foreign exchange records and records of
dealings with overseas banks.
Some experts say that banks should
already know the overseas financial institutions
with which they interact and be keeping up-todate files on them that meet the requirements
of the draft rules issued by Austrac in 2006.
But Cass says many banks are struggling
to come up with programs for these rules,
let alone implement them, which is indicative
of the problems Austrac faces across the
staggered process as a whole.
“The honest reality is that hardly anyone
has done anything in respect of this formal
timeline. Even with correspondent banking,
the big banks are struggling to implement a
full correspondent banking review, let alone
by the statutory deadline in June,” Cass says.
He points out that most banks have not got
a handle on the requirements of standard due
diligence that involves an account opening
form and collecting the minimum of information required for knowing your customer.
This is substantially below the requirements under the enhanced due diligence, where
banks must assess existing customers’ changing
risk profiles and obtain additional information.
“If you have thousands of relationships
you have to comply with the act on each one
of those, it takes a lot of time and resources
and costs money,” says Jones.
But he says that the 15-month moratorium
that kicks in after the compliance date – during which organisations will not be prosecuted
for a breach of the new law – is a good thing.
“In this case it will give the banks
15 months to ensure they have systems in
place to properly consider before they enter
into a new relationship and have the systems
for their existing relationships.”
Cass’s colleague at Deloitte, Julie Beesley,
adds that there is a question mark about what
Austrac will do with the information once it
comes in. Prior to last December, Austrac was
lauded as one of the world’s best financial
intelligence units. But now it is the regulator,
which involves both the education and enforcement of the law on which entities depend.
“There is a question mark
about what Austrac will do
with the information once
it comes in.”
Julie Beesley
Austrac recently issued its self-assessment questionnaire but Beesley wonders what
will occur when they start receiving the forms,
and what they propose to do with them. Does
Austrac have the resources to collate all the
material that is being sent back, she asks.
Experts agree that the KYC requirements
that come into force on December 12 are the
most important obligation to be placed on
entities and will require the greatest changes
to information technology systems as well as
changes to what employees do.
Because the KYC requirements are the
most onerous on firms, Jones says it is
absolutely essential that Austrac runs an extensive public education campaign “pretty soon”.
“It takes people a while to realise that
things are changing. If you know the
government told you that you have to do it,
customers accept it,” he says.
At the lowest level, entities need to
obtain data from potential new customers
across all product lines. This job should
not be underestimated, according to
industry experts, and they stress that
organisations need to start complying
with this requirement.
Those caught by the new laws need to be
cogniscent that by this December compliance
programs run by reporting entities must be
approved by their board of directors. There
is also a 15-month moratorium on Austrac
prosecutions for non-compliance. Ros Grady,
a partner at law firm Mallesons Stephen
Jaques says that the 15-month moratorium
“If you have thousands of relationships
you have to comply with the act on
each one of those, it takes a lot of
time and resources and costs money.”
Peter Jones
ANTI-MONEY LAUNDERING
doesn’t apply to criminal offences. She adds
that the board of directors [of the reporting
entity] can “still be investigated by Austrac”.
Underlying this whole process is a
risk based approach that places a great responsibility upon reporting entities to assess
whether or not a potential customer or existing
customer could be involved in money
laundering or counter terrorism financing.
“The law says you must have a broad compliance program that manages how you handle
your obligations, then it goes on to say that you
have to understand and assess the risk of your
products and services being used to launder
money or finance terrorism,” says independent
AML specialist, Joy Geary.
“The 15-month
moratorium doesn’t
apply to criminal
offences. The board
of directors [of the
reporting entity] can
still be investigated
by Austrac.”
Ros Grady
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COMPLIANCE
“If your staff think a customer
is behaving strangely, that
is something you should
be investigating. If it is
suspicious, report it to
Austrac. That is usually the
end of your involvement.”
Joy Geary
There are some mandatory requirements, but
the bulk of the reporting entity’s obligations are
up to themselves, on a risk-based approach. The
point of the current approach is to allow Austrac
the ability to place together all the pieces of the
jigsaw puzzle provided to them from the reporting
entities. In this way Austrac can obtain an overall
picture of the transfer or movement
of monies by individuals and companies.
Reporting entities must work out the
individual levels of risk and concentrate on
doing more work on those they consider to be
high risk. Some of the elements involved in
this process are probity checks, police checks
and whether a potential or existing customer
is a politically exposed person such as a
senior politician in New Zealand.
The overall idea is simple, says Geary.
“[W]ork around the customer and know
enough to do a risk rating. Are they high risk
or low risk? Then once you have done that you
must monitor what they do. This means having
systems that look at their activities to see if
anything unusual is happening.
“If your staff think a customer is behaving
strangely, that is something you should be investigating. If it is suspicious, report it to Austrac.
That is usually the end of your involvement.” ■
24
JUNE / JULY 2007
Jensen: Civil penalties ‘not granted to just anyone’
So what is the
regulator saying
about all this?
A
USTRAC’S chief executive
Neil Jensen sounds a note of
warning to reporting entities:
“Don’t wait until December 2008 [for
your AML and CTF programs to be up to
date]. The information has been published
for some time now. I expect most entities
are well on their way.”
If entities are having difficulty they
should contact Austrac directly and/or
speak to their industry association, says
Jensen, who adds that Austrac is
providing phone line assistance.
Austrac, he says, aims to provide
guidance notes relating to compliance
obligations “in the next month to two
months, in a draft form”.
Later this year Austrac aims to
produce a regulatory guide. In addition
Austrac is working on an education
campaign. In the meantime entities can
contact the regulator for information.
A key point of reference for entities
is their industry bodies. Austrac is conducting consultative committees with the
financial services and gaming industries in
late June which will enable members to
raise issues and ask questions, he says.
Further, Jensen says that Austrac is
hiring a lot more people and is looking
extensively offshore as well as domestically. His organisation has the resources
to fund the employment program, he
says with a total appropriation up to
$59 million for each financial year.
He admits that Austrac and reporting
entities face “challenges” but says that he
will not easily grant the 15-month moratorium on civil penalties to just anyone.
“We are working hard to help business
to meet the deadlines and the challenges
and have in place a range of programs.
Industry has sought legislation that is
non prescriptive and want the ability to
determine the amount of risk they face.”
Lastly, Jensen says that one only has
to look at the programs already in place in
the United Kingdom and in the US to see
where our anti-money laundering campaigns are headed. But he says Austrac is
conscious of putting in place “what will
work for Australia”.
■
ANTI-MONEY LAUNDERING
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Image © istockphoto
LEGAL
A guide to designated
business groups
Stephen Cavanagh explains the ins and outs of designated business groups and
the potential administrative and compliance benefits they offer to group members.
A
DESIGNATED BUSINESS GROUP
(DBG) is a concept created by
the Anti-Money Laundering and
Counter-Terrorism Financing Act 2006, with
the broad objective of allowing its members
to share responsibility for compliance with
the act's requirements. But not everyone
is eligible to join a DBG.
This article comments on the eligibility
criteria for membership, the membership
process and the nature and value of the
administrative and compliance benefits
which attach to membership of a DBG.
What is a designated
business group?
A designated business group is defined
in section 5 of the act as a group of two or
more persons, where:
ANTI-MONEY LAUNDERING
“(a) each member of the group has elected,
in writing, to be a member of the group,
and the election is in force; and
(b) each election was made in accordance
with the AML/CTF rules; and
(c) no member of the group is a member of
another designated business group; and
(d) each member of the group satisfies such
conditions (if any) as are specified in the
AML/CTF rules; and
(e) the group is not of a kind that, under
the AML/CTF rules, is ineligible to be a
designated business group.”
The above definition relies heavily on the
AML/CTF Rules. Significantly, it is the rules
which determine whether a person may be
a member of a DBG. The relevant rules did
not take effect, however, until 12 June 2007
(of particular relevance to ss106 and 107
described below).
Eligibility for membership
of a designated business group
The rules require each member of a DBG to
satisfy one of the following two conditions:
• each member must be related to each other
member of the group (within the meaning
of s50 Corporations Act 2001) and each
member must be either (a) a reporting
entity or (b) a company in a foreign
country which, if it were resident in
Australia, would be a reporting entity; or
• each member must be providing a
designated service pursuant to a joint
venture agreement to which each member
of the group is a party.
As a result, unless the joint venture
condition described in paragraph (ii) above
JUNE / JULY 2007
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LEGAL
is met, membership is only available to related
companies; it is not available to companies
which are not related nor is it available to
non-corporate entities. Further, under
paragraph (i), except where one of the
related companies is a foreign company,
all members must be reporting entities.
Although the condition described in
paragraph (ii) does not expressly refer to each
member being a reporting entity, the requirement that each member must be providing a
designated service necessarily means that each
member must be a reporting entity. The parties
to the joint venture agreement need not be related companies (and need not be companies at all)
but they cannot be members of other DBGs (s5).
The need for a joint venture agreement
(as described in paragraph (ii)) means that a
number of other similar arrangements will
not be able to benefit from categorisation as a
DBG. Arrangements that may not be covered
include “white branding” arrangements,
origination arrangements, and broking arrangements. This is so, even if the party excluded
from membership of a DBG is taken to
provide a designated service only because it
is “arranging” for the customer to receive a
designated service from a third party.
The process of establishing
a designated business group
For the purpose of paragraph (b) of the above
definition of DBG, the rules require that a
person’s election to membership must be made
by way of an “approved election form” (ie
Form 1 of Chapter 2 of the rules) and that form
must be provided to Austrac by the “nominated
contact officer”. The nominated contact officer
is the person appointed by the DBG to hold
that position. To be eligible, the person must be
an “officer”, under the Corporations Act 2001,
of a member of the DBG, or the AML/CTF
compliance officer of a member of the DBG.
Form 1 requires confirmation of the grounds
upon which the member claims to be entitled
to be a member of a DBG.
The rules stipulate further that a DBG is
“established” only when a second approval
form (Form 2 of Chapter 2 of the rules) is provided to the Austrac CEO giving notice of the
establishment of the DBG and its membership.
The nominated contact officer must
also notify the Austrac CEO (using Form 3 of
Chapter 2 of the rules) of the withdrawal
of a member, the election of a new member,
the termination of the DBG or of other
change in the details previously notified
to the Austrac CEO regarding the group
or the nominated contact officer.
26
JUNE / JULY 2007
What are the benefits of
membership of a designated
business group?
In summary, members of a DBG can:
• have a joint AML/CTF program;
• undertake customer identification
and ongoing customer due diligence
for each other;
• lodge group compliance reports;
• discharge various record keeping
obligations for each other; and
• share information in certain
circumstances.
also carried out the applicable customer
identification procedure in respect of X.
The two requirements set out in paragraphs (iii) and (iv) are the requirements,
respectively, of rules 7.3.2(2) and 7.3.2(3).
There is an inconsistency between the first
of those requirements (rule 7.3.2(2)) and s114
of the act which is discussed further below.
The exemption which this affords B from
the requirement to undertake its own customer
identification procedure is dependent upon A
having undertaken the applicable customer
identification procedure and accordingly the
FROM 12 DECEMBER 2007, MEMBERS OF A DBG
WILL BE ABLE TO ADOPT AND MAINTAIN A
JOINT AML/CTF PROGRAM APPLICABLE TO
EACH OF THEM, INSTEAD OF ADOPTING AND
MAINTAINING SEPARATE PROGRAMS.
Customer identification
From 12 December 2007, in certain circumstances, members of a DBG will be able to
rely on the customer identification procedure
undertaken by another member.
The combined effect of s38 of the act
and rule 7.3 is that if A and B are members of
the same DBG, and:
(i) A has carried out the applicable customer
identification procedure in respect of
customer X to whom A provided (or proposes to provide) a designated service;
(ii) X is, or becomes, a customer of B in
relation to whom a designated service is
provided (or is proposed to be provided)
by B;
(iii) B has obtained a copy of the record made
by A in accordance with s114(2) of the act
(NB I believe that this reference to s114(2)
in Rule 7.3 should read s112(2)) in respect
of X or under an agreement in place for the
management of identification or other
records, B has access to the record made by
A in accordance with s112(2); and
(iv) B has determined that it is appropriate
for B to rely upon the customer identification procedure which was carried out by
A, having regard to the money laundering/
terrorism financing risk faced by B
relevant to the provision of B’s designated
service to X, then the act (except Part 10)
is to have the same effect as if B had
benefit of the exception is not available where
A itself is excused from undertaking the
applicable customer identification procedure –
that is, in the case of pre-commencement
customers or low risk services (ss28 and 30).
Joint AML/CTF program
From 12 December 2007, members of a
DBG will be able to adopt and maintain a
joint AML/CTF program applicable to each
of them, instead of adopting and maintaining
separate programs.
Part B of the program must address, in conformity with the requirements of Chapter 4 of
the rules, the applicable customer identification
procedures to be undertaken by each member.
Although this may, in principle, present an
opportunity for members of the DBG to have
common identification procedures, Part B of
the program must take into account the fact
that different group members may provide
different types of designated services involving
different types of laundering risk.
In other words, Part B must address
appropriately the risks associated with the
provision of all designated services by all
group members. In doing so, the program
may prescribe different procedures in respect
of different members (s85(4)). Part B could
also take account of the benefits afforded to
members by s38 and rule 7.3 (see above)
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LEGAL
but with due regard, in particular, to
rule 7.3.2(3) (see above).
Part A of the joint AML/CTF program
must address the requirements of Chapter 9
of the rules. As with Part B of the program,
although a single program is involved, it must
still address the laundering risk faced by
each member of the DBG in relation to the
provision of designated services. For instance,
the settlement of a single risk awareness
training program and/or employee due
diligence program, as part of the AML/CTF
program, must involve appropriate training
for each employee of each member and appropriate risk-based systems and controls being
put in place for each member to determine
whether, and in what manner, to screen any
prospective employee. Similarly, a DBG need
only have one AML/CTF compliance officer.
Although Part A of the program must be
approved by, and be subject to the ongoing
oversight of, each member’s board and senior
management, in circumstances where each
member of a DBG is related to the others,
the approval and ongoing oversight can be
given by the governing board and senior
management of the main holding company
of the group (rule 9.4).
A record must be made of the adoption
of the program and that record as well as the
program (or copies of them) must be retained
for seven years. These obligations may be
met by any member of a DBG (s116(6)).
above to illustrate the operation of s38, if A
made a record of the customer identification
procedure it carried out in respect of X and/or
of the information collected from X in the
course of that procedure, s114 requires B,
by notice given to A within five days of X
becoming a customer of B, to request a copy
of the record made by A. A must comply
within five business days of B’s request.
B must retain a copy of that record for
seven years after the last designated service
is provided by B to X (s114(5)).
It is arguably odd that B, in the above
example, is required to obtain a copy of
the identification records. As noted above,
pursuant to s38 and rule 7.3, B is deemed to
have carried out the applicable identification
procedure in respect of X should B merely
have access to the record made by A (rule
7.3.2(2)). Why does B need to require and
retain a copy of the record?
If B, in our example, had in fact carried
out its own customer identification procedure
in respect of X, s112(5) and s113(4) would
operate respectively to allow A to make a
record of what B did and to retain that
record (ie. without B itself having to do so).
Yet, in contrast, where B is deemed, by
s38, to have carried out the applicable
identification procedure in respect of X,
it is, by s114, not sufficient for A to have
made a record of the identification procedure
and to have retained it. That record must
be provided by A to B and must be retained
by B. It is difficult to understand the policy
basis for this difference.
Making and retaining records
of identification procedures
Other records and their retention
From 12 December 2007, a reporting entity
which carries out an applicable customer
identification procedure must make a record
of the procedure and of any information
obtained in the course of carrying out the
procedure (s112). That record (or a copy of
it), must be retained for seven years after the
last designated service has been provided by
that reporting entity to the customer (s113).
If that reporting entity is a member of a
DBG, the obligation to make the record may
be discharged by any other member of the
DBG (s112(5)) and/or the obligation to retain
the record may be discharged by any other
member of the DBG (s113(4)).
Section 114 of the act is more controversial. It operates specifically in connection
with the circumstance where, by application
of s38 (discussed above), the applicable
customer identification procedure which is
carried out by one member of a DBG is
deemed to have been carried out by another
member. Returning to the example used
If a reporting entity makes a record of the
provision of a designated service to a
customer, it must retain that record, or a copy
of it, for seven years (s107). If a document,
relating to the provision, or prospective
provision, of a designated service by a
reporting entity, is given to the reporting
entity by or on behalf of a customer, the
reporting entity must also retain that document or a copy of it for seven years (s108).
If that reporting entity is a member of a
DBG, the obligations to retain those records
may, after 12 June 2007 (the date after which
a DBG may be established under the Rules),
be discharged by any other member of the
DBG (ss107(4), 108(4)).
The obligations under ss107 and 108
commenced on 13 December 2006. Oddly,
they overlap (until 12 December 2007) with the
comparable obligations imposed on financial
institutions by Part VIA of the Financial
Transaction Reports Act 1988 in respect of
financial transaction documents. This overlap is
ANTI-MONEY LAUNDERING
presumably an error, however, it is important to
note that a failure to comply with the requirements of Part VIA of the FTRA constitutes an
offence and, relevantly, those obligations cannot
be discharged by a member of the DBG.
Compliance reports
Section 47 of the Act requires a reporting
entity to give the Austrac CEO a report as
to the entity's compliance with the act and
rules. The report is to be in the approved
form and is to relate to a period prescribed
by the rules. There is as yet no approved
form but draft rules, made 15 May 2007,
propose a reporting period of 13 December
2006 to 31 December 2007 and a report
lodgement date of 31 March 2008. If the
reporting entity is a member of a DBG,
the obligation to provide the report may be
discharged by any other member of the group
and the report relating to each member may be
set out in the one document (ss48(6) and (7)).
Ongoing customer due diligence
Section 36 of the act requires that reporting
entities after 12 December 2008 monitor
their customers in relation to the provision
of designated services with a view to identifying, mitigating and managing laundering
and terrorism risk and to do so in accordance
with rules which are yet to be made. When
this obligation takes effect, it may be undertaken by any member of a DBG (s36(4)).
Sharing information
and tipping off
A necessary consequence of the operation
of a number of the act’s provisions discussed
above is that members of DBGs will be
entitled to share information about their
customers. To the extent that this is authorised
by the act, the sharing of customer information will not contravene the Privacy Act 1988
or duties of confidentiality.
More particularly, the s123(2) offence
of tipping off in circumstances where a
suspicious matter reporting obligation arises
under s41 (after 12 December 2008), is not
committed should the reporting entity’s
suspicion be disclosed to another member
of a DBG where both have adopted a joint
AML/CTF program. The disclosure may
only be made for the purpose of informing
another member of the group about the
risks involved in dealing with the particular
customer in respect of whom the suspicion
has arisen (s123(7)).
■
Stephen Cavanagh is a partner at Blake
Dawson Waldron. Contact (02) 9258 6070.
JUNE / JULY 2007
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SPONSORED FEATURE
Leveraging New Innovative Capabilities at Your Financial Institution
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Financial Institutions Need to Strengthen
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Due Diligence (CDD) Procedures
Monitoring Customer
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Customer Due Diligence (CDD)
RATIFYING anti-money laundering (AML) regulators’ appetite for
Customer Due Diligence (CDD)
has never been easy because good data
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determined, applied and adjusted
throughout each customer relationship.
Financial institutions need to have a
risk-sensitive approach for CDD, and
monitoring is a crucial part of it.
G
CDD has always been a key component of an effective money laundering
control program. CDD also makes good
business sense as it allows firms to tailor
their products and services to the needs
of their customers, and in some cases to
prevent fraud. In Europe the Third EU
Directive repeats the main CDD requirements of the first and second Directives,
but adds more detail to the requirements
by, among others, including a specific
requirement of ongoing monitoring, on
a risk sensitive basis, of the business
relationship. This move toward a riskbased approach started in the UK and is
now making its way across the globe, as
driven by the FATF Recommendations.
On the 25th of May in 2007,
AUSTRAC issued five new regulatory
policies to support compliance with the
new AML/CTF regulations: supervisory
framework, education, exemptions,
monitoring and enforcement. Each policy
provides guidance reflecting a risk-based
approach. What does that mean?
28
JUNE / JULY 2007
The risk-based approach is principally
about performing a thorough risk assessment and then allocating resources and
attention to areas of higher money laundering (but not necessarily terrorist financing)
risk, and reducing AML investment in
areas of lower risk. This allows financial
institutions to minimize the adverse impact
of anti-money laundering procedures on
their legitimate customers. Firms must
however be able to demonstrate to the
supervising authorities that the extent of
the measures is appropriate to the risks of
AML/CTF Legislation
money laundering and terrorist financing,
which is not always easy.
Monitoring of customers and transactions should be done in a manner consistent with a “reasoned” risk assessment.
NetEconomy can help in many ways to
achieve this. Not all risks can be seen at the
account opening moment. Specific money
laundering risks may only become evident
once the customer has begun transacting
either through an account or otherwise in
the relationship with the financial institution.
For example, an international wire transfer
might be normal for a business customer,
but unusual for a retail customer. That is
why appropriate and reasonable back end
monitoring of customer transactions is an
essential component of an effectively
designed risk-based approach to CDD.
•
Risk-based approach to combat
money laundering and terror-financing
•
Ongoing customer due diligence
(CDD)
•
Re-verification and ongoing
customer identification (CID)
•
Monitoring of suspicious
activities or transactions
•
Record keeping
Some examples of how
NetEconomy provides an
effective approach for the riskbased monitoring part of CDD:
•
Reporting suspicious transactions
■
•
Employee training
•
Independent audit and
compliance review
•
EDD on cross-boarder
correspondent banking
•
Sanction lists screening
Taking a Risk-based Approach
•
Nature, size and complexity
of the business
•
Customer types, including
politically exposed persons
•
Types of designated services
•
Delivery methods
•
Foreign jurisdictions
•
Identify significant changes
Risk-based Alert Generation:
NetEconomy enables the financial
institution to store a lot of customer
and account characteristics, to be
used in a risk-based approach for
transaction monitoring. “Static” risk
factors captured at the account
opening process such as PEP status,
High/Medium/Low risk classification,
country of nationality, account type,
missing identification information,
etc., can all be used in combination
with transaction characteristics to
decide whether or not to generate an
alert, and prioritize the alerts based
on risk. This directs investigative
resources towards the highest risks –
whether it’s a very large or very
unusual transaction by a low-risk
ANTI-MONEY LAUNDERING
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SPONSORED FEATURE
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NetEconomy’s expanded capabilities
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Sebastian Kuntz, CEO of NetEconomy
NetEconomy provides dynamic risk scoring at account opening and for ongoing customer due diligence.
customer, or one with a lower
threshold for a high-risk customer.
■
■
Advanced Peer Group Analysis:
The Advanced Peer Group module is
another important component of CDD
and KYC, as it enables the bank to
determine what is normal behavior
for certain types of customers and
businesses. The bank can define peer
groups based on its own assessment
of relevant customer/account characteristics (such as industry code or
account type), and the system starts
calculating average behavior for each
peer group so that significant deviation by a member can be alerted.
Dynamic Risk Scoring: NetEconomy
also provides the Dynamic Risk Scoring
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import expected behavior of the
customer as obtained during account
opening, so that actual behavior can
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and subsequently start calculating its
own risk score for comparison and
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Expanding Your Capabilities
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These capabilities are all integral
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The risk-based approach is an
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that the bank can quickly sign up low-risk
clients to low-risk products, while placing
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www.neteconomy.com
ANTI-MONEY LAUNDERING
JUNE / JULY 2007
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REGIONAL REVIEW
Image © istockphoto
Keen to be seen
to be clean
South Korea has made significant progress in the eyes of the world in combating money
laundering over the last six years, but the country has yet to commit to criminalising terrorist
financing. Brent Robens and Gary Gill from KPMG discuss the changing anti-money laundering
landscape of the Republic of Korea to shed light on its improvements and reveal some bumps
in the road towards a more robust AML environment.
Transaction reporting
and KoFIU – round won
T
HE REPUBLIC OF KOREA’S
anti-money laundering (AML) efforts
kicked off seriously in 2001 with
the enactment of its Financial Transaction
Reports Act (FTRA). The Korean Financial
Intelligence Unit (KoFIU), South Korea’s
equivalent of Austrac, was created under
the FTRA, as was the country’s suspicious
transaction reporting (STR) regime.
30
JUNE / JULY 2007
Under to the STR requirements of the
FTRA, South Korean reporting entities are
required to report to KoFIU transactions of
more than 20m won (A$26,000), or the
foreign currency equivalent of US$10,000,
but only if those transactions involve
suspected money laundering or tax evasion.
Reporting entities may, however, also report
suspicious transactions of lesser amounts if
there are reasonable grounds for suspicion.
The FTRA also sets out the penalties
that financial institutions face – a fine of
5m won for failure to report a suspicious
transaction. Making a false report may
result in imprisonment of up to a year
and/or a fine of 5m won. Reporting entities
under the FTRA include banks, securities
firms, insurance companies, asset management companies and futures companies,
as well as venture capital companies and
corporate restructuring companies.
South Korean authorities also target
money laundering via the Proceeds of Crime
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REGIONAL REVIEW
Image © istockphoto
A South Korean soldier stands on guard on the DMZ; North Korea is in the background.
Act (POCA) 2001, which was designed to
eliminate economic motives for crime by
confiscating illegal proceeds. The POCA also
criminalises the acts of concealment, disguise
and receipt of criminal proceeds. Money
launderers can be imprisoned for up to
five years and face fines up to 30m won.
Information sharing
and information to share
The FTRA stipulates that KoFIU may
exchange information on suspicious
transactions with overseas FIUs. This
legislative provision is one that KoFIU is
keen to use, as witnessed by its prolific
signing of memoranda of understanding
(MOUs) – including an MOU with Austrac
signed in 2003. Similar MOUs have been
signed between South Korea and about
30 other nations.
The KoFIU’s information-sharing
responsibilities also extend to providing
STR information to the Public Prosecutor's
Office, the National Police Agency, the
National Tax Service, the Korea Customs
Service, the Financial Supervisory
Commission and the National Election
Commission. Information is provided to the
ANTI-MONEY LAUNDERING
National Election Commission when there
is a suspicion that the transactions relate
to political funding.
The KoFIU released its Annual Report
for 2005 in September last year, which credits
the setting up of “an advanced AML system”
for raising public awareness of financial
institutions and the public. STR filings have
increased from 20 to 1500 per month during
the previous four years.
KoFIU also reported that banks represent
about 95 per cent of STR filings. Sixty-seven
percent of filings involve domestic currency
transactions. Of the STRs filed with KoFIU,
17 per cent were referred to law enforcement
agencies and 44 per cent of these were
found to be engaged in money laundering
and were prosecuted.
South Korea in the
international arena and
the fight against terrorism
On the international front, South Korea has
applied to join the Financial Action Task
Force on Money Laundering (FATF) and was
invited by FATF in August 2006 to join as an
observer – the first step to full membership.
South Korea is already a member of the
Asia Pacific Group on Money Laundering
and KoFIU is a member of the Egmont Group
of financial intelligence units.
Looking ahead, however, South Korea
still needs to resolve international concerns
over its lack of specific legislation targeting
the financing of terrorism. South Korea
has signed and ratified the United Nations
International Convention for the Suppression
of the Financing of Terrorism, but has not
yet passed a relevant law. It has also
committed to ratifying UN Security Council
Committee Resolutions 1173, 1127, 1267
and 1373, which means that South Korean
entities must freeze any assets in their
possession that belong to the Taliban,
al-Qaeda, the Angolan rebel group UNITA,
and related parties.
However, South Korea does not currently
have specific legislation combating terrorist
financing. There is a new anti-terrorism bill
still pending in the country’s parliament
(the National Assembly), but previous
attempts to pass similar bills in Korea
have not succeeded, based on fear of giving
the National Intelligence Service (NIS) too
much power. The reason South Koreans
are treading carefully is because former
administrations oversaw civil rights abuses
and corruption. Amnesty International also
weighed into the debate, describing the NIS
in a 2003 public statement as “a secretive
agency about which Amnesty International
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has expressed concern because of its responsibility for some of the most serious human
rights violations”.
One of the key powers that South Korean
authorities will have if the anti-terrorism bill
is passed is the ability to seize legitimate
businesses from which profits have been used
to finance terrorist activity. This power is also
currently available in cases where the business
has been used to launder drug money.
Supernotes, hawala networks —
the usual risks
South Korean authorities occasionally
discover operations involving the “hawala”
system of transferring money, which is
illegal in South Korea. This system,
operated by way of a network of brokers,
is common in Middle Eastern and Asian
countries. In May 2005, two Iranians were
arrested for arranging 60 billion won in
illegal hawala transactions for a number
of their compatriots in South Korea.
In November 2005, officers from five
Mongolian banks were charged with running
a similar system and operating in Korea
without a financial services licence.
Another money laundering threat to
South Korea is the trade in counterfeit notes.
A South Korean was charged with moving
US$140,000 in fake US$100 “supernotes”
from China in April 2005. With the finger
pointed at North Korea for producing
these notes, South Korea is badly placed
geographically to keep clear of the US fakes.
South Korean efforts to target the flow of
counterfeit international currency are having
a positive effect, with the Bureau for
International Narcotics and Law Enforcement
Affairs reporting a two-thirds drop in the
number of counterfeit notes discovered in
2006 compared with the previous year.
Improvements in relations with its
Northern neighbour could also increase the
risk of supernotes flowing into the South,
as well as opening up new money laundering
risks. The two countries are planning to
re-open rail crossings over the border for the
first time in 50 years. This link will open
up the potential for physical flows of both
counterfeit notes and the proceeds of crime.
Additionally, the increased trade between
the north and the south means there will be
a greater flow of money from legitimate
business. With increased business comes a
greater opportunity to disguise dirty money.
As its relationship strengthens with
North Korea, South Korea is still careful to
differentiate itself from its neighbour. With
32
JUNE / JULY 2007
the north using the shutdown of nuclear
facilities as a bargaining chip in demanding
the return of US$25m from Macau-based
Banco Delta Asia, South Korea has offered
to extend its support to international efforts
by offering to organise and facilitate the
repatriation of the funds. The money was
frozen as a result of US allegations of
money laundering and counterfeiting by
the North Korean government.
Combating corruption
South Korea has made significant progress
in reducing corruption, since the election
of Kim Young-sam as president in 1992.
One of his first acts upon election was to
start an anti-corruption campaign, requiring
government and military officials to publish
their financial records. This resulted in the
resignation of several high-ranking officers
and cabinet members, and in two of his
predecessors being charged with corruption
and treason. The anti-corruption campaign
was also part of an attempt to reform
the chaebol, the large South Korean
conglomerates that dominated the economy.
Part of the anti-corruption reforms saw the
Anti-Public Corruption Forfeiture Act passed in
1994, under which the proceeds of corruption
are forfeited, and there is a solid system in place
to identify, trace and seize assets related to
crime. South Korea also signed the United
Nations Convention Against Corruption in
2003, which requires countries to criminalise
such acts as bribery, embezzlement and money
laundering. However, while the National
Assembly signed the convention in 2003,
it has not yet ratified it.
The relative success of South Korea’s
anti-corruption drive has been illustrated by
its scores in the Transparency International
Corruption Perceptions Index, which rates
countries on a scale of one to 10, where
one is perceived to be extremely corrupt
and 10 as low-level corruption. The country
scored 5.1 out of 10 in 2006, placing it
42nd in a ranking of 163 jurisdictions –
a clear improvement over its 1995 score
of 4.29 out of ten.
The road ahead
By its own admission, KoFIU faces the threat
of not responding well to a rapidly changing
environment due to the “one-way management of information and static nature” of its
system of analysing suspicious transactions.
In recognising the issue, KoFIU is well
placed to improve its system and is doing so
by developing and refining its data analysis
and mining capabilities.
Since the election of Kim Young-sam
as president in 1992, South Korea
has made significant progress in
reducing corruption. © AP Image
In addition, a major flaw in the AML
legislation is that there are no obligations
on casinos unless they exchange foreign
currency. The growth of casinos in the region,
as well as the vulnerability of this industry to
money laundering, means that this is a hole
in the legislation that needs to be filled.
Additionally, the need for specific legislation
to target terrorist financing is recognised and
further debate regarding the contents of this
legislation is expected in the short term.
South Korea has clearly made considerable inroads to joining the fight against
money laundering and corruption. With
FATF recognising these efforts, labelling
the AML system as “well developed”,
South Korea is tipped to become a full
member of FATF in the near future.
However, a savvy AML/CTF compliance
officer will recognise that FATF membership
is not a guarantee of an environment free of
money laundering and terrorist financing
risks, although it will help to improve South
Korea’s jurisdictional risk profile. As with any
jurisdiction, regardless of the sophistication
of its AML/CTF regime, money launderers
and terrorist financiers will continue their
efforts to exploit any systems and controls that
may be in place, and some measure of due
diligence towards transactions involving
South Korea will still be required.
■
The views and opinions expressed herein are
those of the author and do not necessarily
represent the views and opinions of KPMG,
an Australian partnership, which is part of
the KPMG International network.
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Caught in the wheel
of Patriot Act politics
If the US believes a bank is tainted, that’s enough to have the bank boycotted by the
international banking community. That’s what has happened in the BDA-Macau affair
when it was allegedly linked to North Korean funds, even though there’s never been
any proof of laundering, writes Zoë Lester.
I
N TODAY’S politically charged economic
environment, institutions accused of laundering dirty money or financing terrorism
may suffer extensive financial and reputational
harm. As demonstrated by the recent actions
taken by the United States Department of the
Treasury against Banco Delta Asia (BDA),
institutions may suffer incalculable damage
even where there is no hard evidence to substantiate their involvement in such activities.
Traditionally a small, family-owned
financial institution operating in Macau’s
Special Administrative Region, BDA has
been at the centre of an international money
ANTI-MONEY LAUNDERING
laundering scandal since September 2005;
when it was designated a “primary money
laundering concern” under Section 311 of
the USA Patriot Act of 2001. That section
empowers the US Secretary of the Treasury
to identify foreign money laundering threats,
and to order US financial institutions to take
one or more “special measures” against
those designated threats.
According to the US Treasury, BDA was
considered a threat to the US financial system
because it had previously assisted North
Korean government agencies and front
companies to place counterfeit currency in
the international financial system, make
surreptitious cash deposits and withdrawals,
and launder funds derived from various
criminal enterprises. Although BDA publicly
denied those accusations, the US Treasury’s
Financial Crimes Enforcement Network
(FinCEN) nevertheless issued a proposed rule
on 20 September 2005 that, if adopted, would
effectively lock BDA out of the US financial
system by prohibiting US financial institutions
from opening, maintaining or managing any
correspondent or payable-through account
in the US on behalf of BDA.
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The fallout from the designation
By the time the proposed rule was finalised
in March 2007, BDA had already suffered
significant financial and reputational damage.
The effect of the notice which was posted
in September 2005 was both tangible and
immediate for BDA.
Within 48 hours of the US Treasury’s
declaration that BDA was of “primary money
laundering concern” depositors withdrew
more than $US37.5 million ($45.6 million)
from the bank; about 10 per cent of the bank’s
total deposits. This run on the bank continued
until it had lost about one-third of its deposits,
and was forced to take out a $US62.5 million
loan from the Macau government.
The hardship caused to BDA by this
extensive run on its deposits, was merely
compounded when the Macau authorities
froze about 50 accounts, reportedly containing
$US25 million, held by the bank’s North
Korean customers. However, it should be
noted that the significant financial damage
incurred by the bank was not simply a product
of the run on the bank’s deposits. It was also
attributable to the freezing of about 50 North
Korean accounts, reportedly containing about
$US25 million, by the Macau authorities.
All for one and one for all:
unilateral sanctions
Whilst the rules made under Section 311 of the
Patriot Act only apply to US banks and banks
located in the US, foreign financial institutions
have been increasingly incorporating such
rules into their own due diligence processes
since 11 September 2001.
In effect this has given the US an unparalleled ability to enact municipal orders that
ultimately and informally translate into multijurisdictional sanctions. This is particularly
evident with regards to the international standing
attributed to the proposed rule concerning BDA.
Although the rule did not initially compel
US financial institutions to cut all ties to BDA,
many US and foreign organisations treated it
as a stringent sanction and, fearing their own
exclusion from the US banking system,
began placing de facto restrictions upon their
dealings with it. Further, several foreign financial intelligence units (FIUs) also willingly
attributed legal status to the US Treasury’s
proposed rulemaking regarding BDA.
Shortly after the release of the proposed
rule in September 2005, some authorities
(including the Hong Kong Monetary Authority)
requested that institutions operating in their
jurisdiction formally report any relationships
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JUNE / JULY 2007
Macau: The authorities froze 50 accounts totaling $US25m
they had with the bank. The combined actions
of these FIUs and foreign financial institutions
almost elevated the proposed rule to the status
of a binding, international law.
Patriot Act politics
Whilst Section 311 of the Patriot Act may have
been initially devised to act as an economic
shield, the circumstances surrounding BDA’s
designation seemingly demonstrate its ability
to also be wielded by the US as a political
sword. The bank’s designation as a “primary
money laundering concern” occurred in the
midst of delicate, nuclear-related multilateral
negotiations (the six-party talks involving
the US) relating to North Korea’s nuclear
weapons development program.
Rowan Bosworth-Davies, a UK-based
anti-money laundering expert who has long
studied the issue of US extraterritoriality in
money laundering cases, says these talks would
ultimately provide “a lovely opportunity for
[the US to engage in] some hard sabre-rattling”
designed to bring some heavy pressure to
bear on North Korea and give the country “a
diplomatic poke in the gut to let [it] know just
how far the US could reach, if it wanted to”.
BDA’s designation and the consequent
freezing of its profitable North Korean
accounts, dealt a severe and immediate blow
to North Korea’s moribund economy at a time
when economic strength would have given
the traditionally intransigent country greater
bargaining power during the six-party talks.
It tied up $US25 million in North Korean
funds, cut off one of the impoverished
country’s few remaining lifelines to the
international financial system, and placed
so much financial pressure upon North Korea
that it refused to participate in the negotiations
until its frozen funds were returned to it.
For this to occur however, the US needed
to make a final determination about whether
to finalise the proposed rule placing
constraints upon dealings with BDA.
In order to facilitate the return of North
Korea’s $US25 million and thus progress the
nuclear-related negotiations, the US Treasury
finalised the proposed rule against BDA on
14 March 2007 and has subsequently taken
steps to have the funds returned to North
Korea. This is particularly ironic given that the
final rule formally confirmed the bank’s status
as a “primary money laundering concern” and
the very funds the US has tried to release had
previously declared to be tainted due to their
alleged connection with illicit activities.
Once the final rule was made, the decision
to unfreeze the North Korean funds tied up at
BDA technically rested with the Macau authorities. However, given the eagerness of the US
to continue the six-party talks and the potential
ramifications attached to refusing to release
such funds, Macau authorities have recently
decided to unfreeze the suspect accounts.
The Macau government has been holding
the funds since they were unfrozen earlier this
year, but it will be interesting to now see
whether – and how – such funds are returned
to North Korea. The country has recently
demanded that its funds be returned via an
inter-bank transfer through the US to a bank
in a third country, most likely Russia. The US,
seemingly desperate to get the nuclear talks
back on track, has been making efforts to facilitate this exchange by approached Wachovia
Bank to aid in the transfer of these funds.
However, it remains unclear exactly
which authority the US government will try
to use to actually permit the flow of allegedly
dirty North Korean funds flowing through an
American institution such as Wachovia Bank.
Whilst the Office of Foreign Assets Control
can issue special licences that allow the
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evasion of its sanctions, no such mechanism
exists in relation to the sidestepping of Section
311 designations. However, given the reported
willingness of the US to do almost anything
to resolve the issue of these frozen funds, it is
probable that its government will find a way.
AS PERCEPTION IS REALITY IN TODAY’S COMMERCIAL ENVIRONMENT,
THE LACK OF EVIDENCE PROVIDED BY THE US TREASURY ... WAS
INCONSEQUENTIAL. THE MERE SUGGESTION THAT THE BANK HAD
LAUNDERED MONEY FOR ITS NORTH KOREAN CLIENTS WAS ENOUGH
TO BLACKEN ITS CORPORATE REPUTATION AND EMPTY ITS ACCOUNTS.
A trial with a jury —
but no evidence
Given the relative timing of BDA’s designation, the finalisation of the proposed rule and
the six-party talks, some concern has arisen
regarding the validity of the US Treasury’s
claims that BDA posed a money laundering
threat to US financial institutions. A number of
journalists have suggested that the allegations
made against the bank were simply created or
exaggerated in order to give the US greater
bargaining power during the nuclear negotiations with North Korea. Such speculation
can perhaps be attributed to the lack of hard
evidence verifying the US Treasury’s claims.
Embarrassingly for the US government,
two investigations carried out into BDA’s
activities have found no proof that the bank
laundered money for North Korean entities.
The first of these investigations was
carried out by international accounting firm
Ernst & Young shortly after the public release
of the bank’s designation and accompanying
proposed rule.
While Ernst & Young found that BDA
had poor internal record keeping, outdated
information technology systems, and a lack
of written AML policies, it could identify
no evidence which showed that the bank had
engaged in the activities alleged by the US
Treasury. A similar investigation carried out
by the Macau government also failed to find
anything validating the US Treasury’s claims.
Given the inability of two separate
investigations to find any evidence of BDA’s
alleged money laundering activities, there
has seemingly been a growing push for the
US Treasury to publicly release evidence
justifying the bank’s designation.
However, it is under absolutely no legal
obligation to release any evidence pertaining
to an institution’s designation as a “primary
money laundering concern” under Section
311. Even if the Treasury now released such
evidence and this evidence was held by the
international community to be fabricated
or flawed, it is uncertain what would be
accomplished. While BDA may perhaps
salvage some of its shredded credibility, the
damage has already been done – and most of
it occurred more than 18 months ago.
As perception is reality in today’s
commercial environment, so the lack of evidence provided by the US Treasury at the time
of BDA’s designation in September 2005, was
inconsequential. The mere suggestion that
the bank had laundered money for its North
Korean clients was enough to blacken its
corporate reputation and empty its accounts.
Lessons to be learnt
BDA provides a perfect example of the
financial and reputational damage that
can occur once an institution is alleged to
have laundered the proceeds of criminal
enterprises. Even before the proposed rule
was finalised in March 2007, the Treasury’s
claims that BDA had engaged in money
laundering activities were sufficient to
cause an extensive run on the bank. This is
despite the fact that no factual evidence
tying the institution to such activities
has ever been released.
Although BDA was a well-known and
well-respected financial institution, its
commercial standing and reputation have
effectively been obliterated by accusations,
innuendos and the administrative procedure
enshrined in Section 311 of the Patriot Act.
However, it is unclear what the bank could
have done to avert, or better control, the
fallout arising from its commercial dealings
with North Korean clients. It apparently took
steps to limit its money laundering risk by
retaining HSBC New York to screen all the
large cash deposits it received from its
North Korean customers.
While BDA may have further minimised
its exposure by implementing a more robust
AML program, implementing stronger AML
controls may have made little difference to
the detriment suffered by the bank, given the
political context within which its designation
occurred. If, as a number of commentators
believe, the bank was simply a puppet in a
larger political game of cat-and-mouse being
played by the US and North Korea, no AML
program could have spared it from a Section
311 designation.
Conclusion
BDA’s designation as a “primary money
laundering concern” under the Patriot Act
demonstrates how business, politics, statesponsored crime and extraterritorial AML/CTF
legislation may intersect on the global stage.
Arguably, the bank was convicted of money
laundering by a US-run “kangaroo court”
which justified its verdict retrospectively
“through a drip feed of innuendo and speculation that would be considered scandalous and
defamatory were it directed against a bigger
bank in a more powerful jurisdiction”.1
Whilst the Treasury has held that the
measures taken against BDA were instituted
to protect the US financial system, the
political context surrounding their imposition
indicates otherwise. The timing of the
six-party talks and the finalisation of the
proposed rule strongly suggest that these
measures were directly related to North
Korea’s nuclear program, and the desire
of the US to have it decommissioned.
The circumstances surrounding BDA’s
downfall has also led some commentators to
conclude that the bank was simply a victim of
the US strategy to fight the ‘War on Terror’
and nuclear proliferation via organisations’
balance sheets and account ledgers.
If that is true, then the bank may have
been the subject of a Section 311 designation
even if it had employed more robust
transaction screening technology and a
more comprehensive AML program. While
institutions can implement AML controls to
manage their risk, the BDA affair highlights
that such controls will generally be powerless
to manage or mitigate strong external forces,
such as foreign political agendas, international
relations, or the willingness of the global
community to believe in something for
which they have no real proof.
■
Zoë Lester is a senior executive analyst at
KordaMentha Forensic, and is currently
writing a PHD thesis at Sydney University
on money laundering/terrorism financing risk
and risk-based approaches to AML.
Contact: [email protected]
1 Anonymous, No Sign of Thaw for Delta Asia, Macau Business, 1 January 2006. Accessed at http://www.Macaubusiness.com/index.php?id=367 on 3 January 2007.
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No substitute for
criminal intelligence
What happened to the real professional white collar crook-busters? Is there a
desire to know what makes the criminals tick? Rowan Bosworth-Davies explains
why the basics of criminal understanding are being progressively forgotten.
“…One of the reasons we fail
to understand business crime is
because we put crime into a category
that is separate from normal business.
Much crime does not fit into a
separate category.
It is primarily a business activity . . .”
William Chambliss, sociologist
ANTI-MONEY LAUNDERING
A
S SOMEONE who has spent all
his adult life dealing with the
phenomenon of white collar crime,
I never cease to be amazed at just how
little willingness is shown by the financial
services industry to encourage strategicallypositioned practitioners to gain higher
academic qualifications in this area.
Financial crime costs the world’s financial sector billions of dollars annually, money
which is deducted directly from the bottom
line of the balance sheet. The problem is so
acute that international regulators now require
all regulated institutions to adopt a risk-based
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approach towards the prevention and
interdiction of financial crime as part of
their compliance strategies.
The responsibility for ensuring the
successful implementation of this policy lies
at senior board level. However when board
members are questioned as to their knowledge
of the causes, the practices, and the phenomenology of the problem they are required to
prevent, the level of practical expertise is a
resounding zero.
Work down the food-chain within the
corporation and try to find anyone who has
any understanding of the way in which the
criminal mind works, and you will find an
almost complete void. Occasionally you may
be lucky and discover a former detective or
seasoned former police officer on staff in
some dark corner of a financial institution,
but they rarely hold a senior position and have
very limited input into policy decisions.
But why stop with the regulated sector?
Why not examine the regulatory agencies?
How many experienced former detectives
with the knowledge or expertise to be able to
understand the criminal mentality are holding
down senior policy-informing roles within
the regulatory agencies?
Who in their various financial crime
teams has really worked in the arena of
financial crime and who has had any
experience of really dealing with professional
financial criminals? This is not to belittle any
of the efforts made by these good people, it is
merely asking the question: “What experience
or knowledge befits them for this role?”
I recall meeting a woman at a conference
not so long ago who asked me a series of
questions on my presentation about criminal
trends and criminological tendencies. It turned
out that she had been seconded to one of
the UK financial regulators and was
responsible for determining a financial crime
policy initiative. When asked what experience
she possessed, the answer was that she
had absolutely none at all, but she did have
a PhD in finance.
Her employer, a bank, had no work for
her at that time so she had been sent on a
sabbatical to the regulatory agency to fill in
the time until the market conditions improved.
The regulator obviously had no room for
her in any of the financial policy divisions,
so they tucked her away in the financial crime
office and told her to find something to do.
She was reduced to doing the rounds of the
conferences, trying to dredge up enough
background information to enable her to
make a contribution to the internal debate
for which she had been employed.
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JUNE / JULY 2007
It is instances like this that make the
wider white collar crime debate risible,
and illustrate just how little anyone in
government or industry really cares about
domain knowledge and expertise in the field
of white collar crime.
Perhaps this goes some way to explain
both why the volume of financial crime is
rising exponentially, and why governments
around the world are repeatedly demonstrating
their powerlessness to deal with the
phenomenon.
Recent UK government initiatives
have either just dwindled away to nothing;
or have been forced to close down because
of their incredible inefficiency, like the Asset
Recovery Agency (ARA).
When she was appointed to the role of
head of the ARA, Jane Earl was interviewed
by reporter Nick Kochan for The Observer.
He wrote: “…a new crime fighter is
gearing up to take on the heaviest of Britain’s
organised criminals gangs. But the new sheriff
in town is not a gun-toting cop or even a
hot-shot lawyer.
“Jane Earl is a cool administrator from
the Home Counties whose experience in law
enforcement goes no further than managing
Some of the applicants for the position
of head of the ARA were very experienced
practitioners who had already proved their
mettle in asset recovery operations against
major criminals and Irish terrorists, and who
would have brought significant experience to
the role. However, skills, knowledge, expertise
and a few hardened battle scars – none of
these count for anything as long as you
can talk the talk of the new regime of
major-generals appointed by Lord Protector
Blair to rule the UK’s public policies.
Jane Earl herself expresses disappointment at the failure of her agency to deliver
results. She talks in a surprised voice of
the tactics adopted by her targets and their
lawyers in using the civil court procedure
to fight back against ARA actions.
She appears puzzled by the fact that
those with the most to lose financially did not
appear to have any qualm about arguing
every point to obfuscate the issue, to deflect
the court’s direction and to make the ARA
prove its case to the ultimate degree.
What did she expect? It was not her fault
that she had no experience of dealing with
professional law breakers, who should be
expected to fight back with every last resource
LET ME LET YOU INTO A LITTLE SECRET KNOWN ONLY TO FORMER
DETECTIVES: ALL YOU DO WHEN YOU TAKE ASSETS FROM A THIEF
IS TO GUARANTEE ANOTHER SERIES OF THEFTS.
committees in local councils – she has just
quit as chief executive of Wokingham Council
– and keeping order in the parent-teacher
association of her children’s school.
“Now this sober lady from Reading will
be fighting the most vicious type of organised
criminal, including Colombian, Irish and
Islamic terrorists and the Russian mafia.
“But she is determined not to change
her life as efficient mother and school
governor. Despite security concerns expressed
by her staff, she continues to cycle to her
local station . . .”
Jane Earl came to her role with no qualifications, domain knowledge or life experience of
dealing with the very people whom she was
going to be expected to confront on a daily
basis. It’s not her fault that she was appointed
by some apparatchik who almost inevitably
shared her complete lack of criminological
experience, but who believed her when she
declared her “passion” for finding new ways of
dealing with crime. This was “Blair-speak” with
knobs on, and people who talk the language of
New Labour get the jobs under New Labour.
against having their assets confiscated.
The fault should lie with the bureaucrat
who failed to understand the problem and
who, instead, unblinkingly followed Tony
Blair’s line that taking the profits of crime
from criminals would teach them not to
do it again, and would prove to be a major
disincentive to crime.
Let me let you into a little secret known
only to former detectives: all you do when
you take assets from a thief is to guarantee
another series of thefts.
My concern is that there is no agenda,
either within government or within the
industry it seeks to regulate, to provide
any level of real academic expertise on
the nature of the criminal mentality and
criminogenic behaviour.
Why should this be? Is it that those who
administer these environments have merely
overlooked the importance of these subjects?
Or is it more sinister, reflecting a deeply
submerged realisation, as the quotation at the
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start of this article points out, that many of
the practices which are commonplace in the
financial sector and openly encouraged by
those with money to make, are little more than
thinly-disguised criminal activities, and that
those who engage in them are indeed nothing
more than financial criminals in nice suits?
Could it be that those with the most to
lose from a truly transparent evaluation of
the business customs and practices prevalent
in the market, deliberately discourage any
serious study of white collar crime, for fear
that this knowledge might become antithetical
to the continued ambitions of those with the
most to gain from an unfettered continuation
of the status-quo.
Now before someone from a training
company suffers a sudden rush of blood to the
head, let me stress that I am not talking about
training. There are more training companies
out there than you can shake a stick at –
some are very good, some are not quite
so good, and some are downright useless.
Training is vital for a well-regulated
industry, and is legally mandatory but, with
respect, a training course is designed for
entirely different purposes.
The purpose of training is to ensure staff
understand their roles and responsibilities
within the regulated sector, and to give them
a very basic but workmanlike knowledge of
the jobs they have to perform.
It simply does not and can not provide
the level of academic insight, nor demand
the depth of intellectual rigour that a higher
degree requires, and it is this level of
academic excellence of which I speak.
Training merely looks at the status quo and
provides responses in suitable circumstances.
Education looks at the status quo and asks
“Why?”, “How?”, “What if?”, “How does this
inform me?”, “What if this were to happen
again in other circumstances?” and “How
would I react if I saw this conduct but in
very different circumstances?” Training gives
people a series of possible answers. Education
teaches people to ask further questions.
All too often I have addressed these
issues with practitioners, only to be told, and
with apologies to Pink Floyd, “We don’t need
no education”. Academic study, so it seems,
is not required, merely a minimal level of
training to satisfy the regulators.
Universities have serious difficulty in
attracting students to study for higher
degrees in white collar criminology or
financial crime management.
I approached a major business school
and suggested that as part of their MBA,
they should include a series of lectures on
ANTI-MONEY LAUNDERING
THERE ARE MORE TRAINING
COMPANIES OUT THERE
THAN YOU CAN SHAKE A
STICK AT – SOME ARE VERY
GOOD, SOME ARE NOT QUITE
SO GOOD, AND SOME ARE
DOWNRIGHT USELESS.
financial criminology. The proposal was
turned down out of hand.
What lies behind the adamant refusal to
admit the need for more academic knowledge,
research and study in financial crime? The
study of white collar criminology teaches us a
significant amount about the human condition
and helps interpretation of the attitudes which
are so often expressed by practitioners.
Conflict and Criminality, by American
criminologist, Austin Turk, provides an
illuminating insight into the work attitudes of
financial services compliance officers. It also
explains a great deal about their discomfiture
about being perceived as performing a “policing” function within a financial environment.
The fact that the original research dealt
with township kids in South Africa and their
relationships with the white Afrikaners police
who patrolled their squatter camps is irrelevant.
The parallels with the financial sector
regulators are exact and very informing.
White collar criminology also assists in
our understanding of why City people behave
in the way they do and why they so often get
their institutions into difficulty. Nick Leeson
was an accident waiting to happen. Had
one of his managers read and understood
Christopher Stanley’s research on the
legitimatisation of deviancy and the anomie
of affluence, they would have identified
the risk Leeson posed.
In an article Mavericks at the Casino:
Legal and Ethical Indeterminacy in the
Financial Markets, Stanley identified the
development of a new phenomenon within
the previously ordered environment of the
City of London. He observed:
“…The New City reflected the
ideological aspirations of a system of political
administrations which disrupted the post-war
consensus of relations between polity
and economy.
“It also reflected the casino or
disorganisation of capitalism: an international
financial system in which gamblers in the
casino have got out of hand … thus settled
norms of conduct were open to disruption.”
I suspect that deep at the root of the
problem of the institutionalised refusal to
accept that criminology can help understand
the white collar fraud and financial crime
phenomenon, lie attitudes and preconceptions
about class.
It is almost as if recognising that the
wrong-doing of the middle and educated
classes can be identified in exactly the
same way as the behaviour of more easily
recognisable members of the criminal underclass is something which those who engage
in this kind of conduct do not wish to do.
The professional and chattering classes do
not want to be confronted by the fact that their
behaviour is no different from the class they
profess to despise, and with whom they would
never, ever admit any degree of similarity.
Senior management needs to completely
reconsider its attitudes towards employing
those with the education necessary to
understand white collar crime.
Young ambitious graduates, looking to
further their careers in business, finance and
management, think nothing of signing up
for expensive MBA courses. The MBA has
almost become the sine qua non for entry
to the highest levels of management.
If business provides such recognition of
the MBA, then why does it refuse to recognise
the benefits offered by the provision of the
highest level of crime preventative and loss
forestalling expertise offered by a master’s
degree in white collar criminology?
Such degrees do exist, but unless they
are recognised for being the sources of
inspired business awareness and best practice
facilitators, which they are, the courses
will be closed down and the costs of fraud
and losses to business will continue to
follow an exponential growth curve.
■
Rowan Bosworth-Davies is a UK-based
consultant on anti-money laundering
and counter-terrorism financing.
Contact: [email protected]
JUNE / JULY 2007
39
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RISK TRIGGERS
Through the
smoke and haze
Listed managed funds, as well as various other exchange-traded
instruments, appear to be exempt from any real oversight likely
to weed out corrupt investors, says Michelle Hannan
By Michelle Hannan
FINANCIAL CRIME CONSULTANT
T
HE NEW AML/CTF legislation has a number of issues that are
widely known; the majority expected to be clarified through the
AML/CTF rules and guidelines. However, one issue that has not
had a great deal of attention to date is the likely treatment of listed
investments, in particular, listed managed funds.
While the legislation captures managed funds in general, it does
not differentiate between retail and wholesale or listed and unlisted
managed funds. Each of these funds has key characteristics that differentiate them. For instance, investor type and investment size are key
differences between retail and wholesale funds. For listed and unlisted
funds, the key differences include investor type, investment methods
and more importantly, the degree of contact and control over investors.
The dilemma for listed managed funds
Unlisted funds have direct control over whether to accept or reject
applications to invest through the take up of units and the redemptions
of those units. By comparison, listed managed funds have no control
over who invests and how much is invested, as transactions take
place on-market via an exchange.
This means that one of the main ways in which potential money
laundering and terrorist financing activity are identified – know your client
(“KYC”) and customer identification and verification – is not available to
listed funds. It also means that the KYC obligations set out in the legislation and rules cannot be undertaken by listed funds. The best a listed fund
can do is to monitor the share registry for PEPs, but this is unlikely to pick
up the majority of laundering and terrorist financing activity.
A listed fund is able to undertake transaction monitoring to identify
potential laundering and terrorist financing activity, but given the nature
of trading in stocks of listed funds, it is likely that a high number of
false positives will be generated, and only a low number of likely
laundering or terrorist financing events will be identified. Trading of
shares in listed funds is determined by a number of factors, including
perceived value, market price relative to similar investments, economic
factors, market movements and overall market investor sentiment.
This means that the investor base and transactions in the listed fund’s
units will be more volatile, which makes transaction tracking and
pattern matching more difficult, although not impossible.
Unintended consequences
for exchange-traded markets
The problems of investor identification and meaningful transaction
monitoring are practical difficulties facing listed funds, and these
difficulties that may well be exacerbated with the passing of time.
As the financial sector tightens its monitoring and preventative measures
for potential money laundering and terrorist financing, these activities
will be displaced1 to other financial activities and markets where
detection is less likely and transactions are more easily undertaken.
In other words, as banks and fund managers implement their
AML/CTF programs and risk assessment processes, the risk of detection
of laundering and terrorist financing activity through these institutions
will increase. This will prompt launderers and financiers to look for
other ways in which to move money by exploiting perceived weaknesses
in sections of the financial market where oversight is less rigorous.
This will inevitably shift more of their attention to exchange-traded
markets. Exchange-traded markets provides a degree of anonymity
for the customer, high volume of transactions, and the ability to move
large amounts of money quickly and globally with minimal traceability
– just the factors launders and financiers look for.
This prompts the question: how should exchange-traded markets
be monitored for laundering and terrorist financing activity in the
future, and who is responsible for doing this monitoring and oversight –
the exchange, the companies themselves by monitoring their share
registers and stock holder activity, or Austrac?
When Austrac is considering how it should treat listed managed
funds, these future implications and practical difficulties will need to
be taken into account. While it may be sufficient to exclude listed
vehicles from designated services at the moment, consideration should
be given to just how listed managed funds and other exchange-traded
products can now be used to launder or finance terrorist activities and
how they may be used for this purpose in the future.
It will be critically important to focus on any unintended consequences of tightening AML/CTF measures within the OTC context
■
while not applying similar measures to exchange-traded markets.
1 Displacement is a criminological term which relates to how criminal activity moves elsewhere when a particular area is targeted, rather than being reduced or prevented from occurring overall in the future.
Drugs provide a good example, where police may target drug dealing in a particular area, but all that happens is that the dealers move to the suburb next door and continue business from there.
40
JUNE / JULY 2007
ANTI-MONEY LAUNDERING
© 2007 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG
International, a Swiss cooperative. June 2007. VIC11135FAS.
AML/CTF legislation
In-depth knowledge working for you
The Government’s new anti-money laundering and
counter-terrorism financing (AML/CTF) legislation is upon us.
At KPMG, we can help you assess clearly and pragmatically
the impacts for your business.
Our team of AML/CTF professionals offer deep knowledge
and practical experience in helping financial services
organisations, just like yours.
We can help you assess the money laundering and terrorist
financing 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/CTF processes,
policies, training and technology. It all translates into more
focused, up-to-date and relevant advice for your business.
When it comes to understanding the new AML/CTF
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