Handbook of Anti-Money Laundering

Dennis Cox

• Publisher: Wiley
• Year: 2014
• Print ISBN: 9780470065747
• eBook ISBN: 9780470685273
• Edition: 1
• Topic: Business
• Subtopic: Finance
• Index: Business

Effectively implement comprehensive anti-money laundering regulations

Handbook of Anti-Money Laundering details the most up-to-date regulations and provides practical guidance toward implementation. While most books focus on the regulations themselves, this useful guide goes further by explaining their meaning to bank operations, and how the rules apply to real-life scenarios. The international perspective provides a broader understanding of the anti-money laundering controls that are in place worldwide, with certain country-specific details discussed in-depth. Coverage includes the Wolfsberg Principles, Financial Action Task Force guidance, the U.S. Patriot Act, and the latest from both the EU and Bank for International Settlements.

The IMF estimates that two to five per cent of the global GDP – $590 billion to $1.5 trillion – is laundered every year. Globally, banks and other financial institutions have been required to put in place specific arrangements to prevent and detect money laundering and the criminal activity that underlies it. This book provides the latest regulations and guidance toward application.

• Understand what money laundering regulations mean in practice
• Reference international and country-specific rules and regulations
• Get up to speed on the most current regulations and practices
• Implement the most effective anti-money laundering measures

In response to the increased monitoring and regulation, money launderers have become more sophisticated at disguising the source of their funds. Financial institutions' employees must be ever more aware of what they're facing, and how to deal with it, making actionable guidance a critical companion to any regulatory information. For financial institutions seeking more thorough understanding and practical advice, the Handbook of Anti-Money Laundering is a comprehensive guide.

CHAPTER 1
WHAT IS MONEY LAUNDERING?

1.1 THE INITIAL CONCERNS

The growth industry which we refer to as money laundering has developed significantly over recent years. The industry really started with what might be considered a key public concern over organised crime and the negative impact that this was having on people. The governing authorities surmised that, by tracking the movement of cash, they would then be able to detect unusual patterns of behaviour. This led to a series of rules being put in place, originally locally but increasingly globally, to enable relevant authorities to identify organised crime through its use of the financial sector.

The key element that underpins the regulation is that inappropriate funds were being moved within the banking system to disguise the original source of the funds, enabling organised crime to make free use of funds that may have originated from tainted sources, including drug trafficking. Essentially, the plan was to use the movement of the gains to identify the criminal, since the original criminal activity was so hard to detect.

The impetus behind money-laundering legislation in any country always comes from some form of issue which is considered to be of such magnitude that it actually gets onto the political agenda. The legislation is then generally developed in a hurry to meet these perceived and specific needs. We are seeing this at present with the revised banking regulations, designed to try to prevent a financial crisis yet actually creating one of their own.

The initial drive to combat money laundering derived from the wish to reduce narcotic-related criminal activity. Much of the original legislation concentrated on narcotic-related issues, since this area was seen as being the primary concern. This initial legislation has now been extended in most countries to include terrorist financing and, more recently, to incorporate funds resulting from any form of illegal act. The definition of what is an illegal act does vary between countries and is likely to be broader than you might initially expect.

To take one area where there may be concerns, taxation-related matters are a particularly complex area for financial crime regulation. Tax avoidance is generally not illegal unless it is deemed abusive, whereas tax evasion is illegal. In cases where tax evasion has taken place, criminals have the use of the funds that should have been paid over as taxation and therefore these are funds relating to criminal activity. Any transaction relating to these funds will now be considered as money laundering. Changes in regulation and legislation that are currently being implemented are often designed to capture different elements of the abuse of the taxation system of the relevant jurisdiction and this has led to much of the recent growth in financial crime regulation.

As discussed, the consequence of the manner in which legislation has been enacted globally is that what are considered to be money-laundering predicate offences do vary considerably between countries. More recently there has been a significant effort to achieve a level of international standardisation within the money-laundering deterrence arena, led by groups such as the Financial Action Task Force (FATF) as discussed in Chapter 3, although they, of course, do not have any statutory responsibility. It remains the responsibility of the local legislature to implement the requirements into local law – and they will often take into account specific local issues and other existing legislation in doing so. This is particularly the case in respect of the USA, as discussed in Chapter 9, and is addressed in more detail in the various country profiles which conclude this text.

1.2 WHAT IS MONEY LAUNDERING?

The idea of money laundering is simple in principle. The person who has received some form of ill-gotten gains will seek to ensure that they can use these funds without people realising that they are the result of inappropriate behaviour. To do this they will need to disguise the proceeds such that the original source of the proceeds is hidden and therefore the funds themselves appear to be legitimate. Given that it is often cash that needs to be disguised, the criminal will often seek out legitimate cash-based businesses to enable them to disguise the source of their illegitimate cash.

When you are discussing the laundering of money, there are generally two different connotations to consider. Money laundering refers both to the use of a cash business such as a launderette to facilitate the mingling of legal and illegal funds and also to the generic process of disguising the original proceeds of the funds, a process more normally referred to as layering. By mixing legitimate and illegitimate funds, the entire amount could potentially appear to be legitimate, and would therefore have been laundered, achieving the objectives of the money launderer. The funds will appear to have come from the legitimate business whereas some of the funds actually have arisen from criminal activity of some type. Indeed, coin-operated launderettes, which are generally cash-based businesses, would represent an ideal opportunity to achieve this, and much early money laundering did make use of legitimate cash-based activity to disguise and transform ill-gotten gains.

If a business normally takes in cash of, say, £20,000 per week, would anyone notice if this increased to £25,000? The original £20,000 is clearly legitimate business that is being conducted, whereas the next £5,000 may represent funds from an inappropriate source that is being laundered through the medium of the legitimate business. It is hard for any financial institution to identify that a firm should have only banked £20,000 when in fact it banked £25,000, so this type of money laundering is actually very difficult to identify. The only approaches to addressing such issues are due diligence on the part of bank employees and modelling approaches which serve to select specific accounts warranting additional investigation. Of course, any investigation work must be undertaken without notifying the customer that they are under suspicion, as we shall discuss later.

It is important to recognise that there are two main styles of money laundering – professional and amateur. The professional money launderer will take advantage of any perceived weakness in the systems of control operated by a financial institution or regulatory structure. Amateur money laundering takes an opportunity and does not really cover its tracks very well, leaving obvious causes for concern which are easy to identify either by employees being diligent or through the use of modelling systems. It is normally the latter type of money laundering that is detected by law-enforcement agencies. The professional is always much harder, and therefore more expensive, to identify.

As discussed above, initially cash-based businesses were one of the key areas on which money launderers would concentrate to launder their funds. Returning to the business of a launderette, this is an obvious example of such a suitable vehicle for the money launderer. Anyone can walk into a coin-operated launderette and put their coins into the machine or pay the attendant for laundry services. The payments will predominantly be in cash and there can be very little control to ensure that the funds that would be banked by the launderette business are actually the same as those that are received by the launderette. This therefore achieves the objectives of money laundering – the use of the launderette business will enable a criminal to disguise the source of their funds so that they appear to be from legitimate sources and can be used freely.

Clearly, organised criminals are able to take advantage of any number of cash-based businesses to disguise illegal proceeds. The following are just a few of the types of business which have been subject to abuse by money launderers:

• Launderettes
• Newspaper sales
• Taxis
• Bars and fast food restaurants
• Casinos
• Insurance
• Asset management
• Antiques
• Property.

Some of the vehicles will not be used for the primary placement of cash but will become part of the layering process which is considered in more depth in the next chapter. Of course, as detection of money laundering has become more sophisticated, then so has the skill of the money launderer, giving rise to more complex ways of making use of the financial markets.

1.3 THE PROCESS OF MONEY LAUNDERING

Money laundering is essentially a three-stage process, as discussed in Chapter 2. It starts with the criminal activity that gives rise to the illegal funds. We have mentioned drug-trafficking offences, but everything from tax evasion to bribery and corruption results in funds being produced which the criminal will seek to disguise. The funds need first to be received and then introduced into the system. It is often at this first introduction phase that the detection authorities have their best chance of identifying the funds as being inappropriate, leading to potential criminal prosecution. This stage is then followed by the layering and integration phases.

Clearly, a series of fees and costs will need to be incurred by the launderer to achieve their objective of disguising the original source of the funds. It is the combination of the level of criminal activity in the world with the level of fees that may be earned that results in money laundering being such a lucrative industry. Of course, as the money launderer becomes more sophisticated, it is also incumbent on the financial intermediaries (banks, brokers, insurers, casinos and other entities) together with law-enforcement agencies to become more sophisticated and vigilant in their deliberations. This tends to result in new legislation being implemented to deal with what is the last problem that has been identified – whether it actually reduces money laundering is, of course, another matter. While we still have activities that we consider to be criminal, we will have criminal proceeds and consequently money laundering to contend with.

1.4 THE PRIMARY OFFENCES

Initially, the drive of the money-laundering-deterrence legislation was to restrict and identify the activities of organised criminals and gangs. This was then extended to the area of narcotics and drug trafficking – indeed much of the current legislation has drug-trafficking prosecution at its heart. The idea is that by making it difficult for the syndicate that is producing the narcotics and then distributing them around the world to make use of the funds generated, there will be a reduction in the level of narcotics that are available and therefore drug taking will reduce. Of course, for this to be the case the penalties under the legislation and the likelihood of being detected must be higher than the expected benefits from the narcotics trade. Whether this is actually the case is open to debate and could be one of the reasons why the narcotics trade does not appear to be diminishing.

In more recent years terrorist financing has also become a major cause for concern, and again money-laundering deterrence has been targeted as one of the ways in which the authorities within a country can be seen to be acting to attempt to reduce the ability of such organisations to act within a specific jurisdiction.

So, the three original key areas where money-laundering-deterrence legislation and regulation were intended to be effective were:

• Organised crime
• Drug trafficking
• Terrorist financing.

Each of these is a clearly illegal activity in most countries, although they are not always easy to define completely or accurately. More recently in many countries the scope of such rules and regulations has broadened significantly, effectively becoming what might be considered “all crimes” legislation. This clearly results in a broadening of the area...

Table of contents

• Cover
• Title Page
• Copyright
• INTRODUCTION
• CHAPTER 1: WHAT IS MONEY LAUNDERING?
• CHAPTER 2: THE PROCESS OF MONEY LAUNDERING
• CHAPTER 3: INTERNATIONAL MONEY-LAUNDERING REGULATION – THE ROLE OF THE FINANCIAL ACTION TASK FORCE
• CHAPTER 4: THE EC MONEY LAUNDERING DIRECTIVES
• CHAPTER 5: UN RESOLUTIONS
• CHAPTER 6: THE UK REGULATORY FRAMEWORK
• CHAPTER 7: HOW MONEY-LAUNDERING-DETERRENCE REGULATIONS ARE APPLIED IN THE UK – THE JOINT MONEY LAUNDERING STEERING GROUP
• CHAPTER 8: THE WOLFSBERG PRINCIPLES
• CHAPTER 9: THE US REGULATORY FRAMEWORK
• CHAPTER 10: FINANCIAL SANCTIONS
• CHAPTER 11: RISK MANAGEMENT AND MONEY-LAUNDERING DETERRENCE
• CHAPTER 12: THE ROLE OF THE MONEY LAUNDERING REPORTING OFFICER
• CHAPTER 13: KNOW YOUR CUSTOMER
• CHAPTER 14: MONEY LAUNDERING TRAINING
• CHAPTER 15: RETAIL CUSTOMER IDENTIFICATION
• CHAPTER 16: CORPORATE CUSTOMER IDENTIFICATION
• CHAPTER 17: POLITICALLY EXPOSED PERSONS
• CHAPTER 18: NON-FACE-TO-FACE CUSTOMERS
• CHAPTER 19: SUSPICIOUS CONDUCT AND TRANSACTIONS
• CHAPTER 20: UNUSUAL TRANSACTIONS
• CHAPTER 21: INVESTIGATING SUSPICIONS
• CHAPTER 22: ONGOING MONITORING
• CHAPTER 23: TIPPING OFF
• CHAPTER 24: CORRESPONDENT BANKING
• CHAPTER 25: RECORD-KEEPING
• CHAPTER 26: MONEY-LAUNDERING-DETERRENCE SOFTWARE
• CHAPTER 27: COUNTRY PROFILES
• APPENDIX: TRANSPARENCY INTERNATIONAL 2013 CORRUPTION PERCEPTIONS INDEX
• INDEX
• End User License Agreement