Legal Framework and Regulatory Regime Required for an effective AML/CFT System

1
Legal Framework and Regulatory Regime Required
for an effective AML/CFT System

• Richard Pratt
• 29 March 2005

2
The context for the regulatorThe essential
elements for any effective regime

• Criminalise Money Laundering/Terrorist Financing
• Wide range of predicate offences
• Special requirements for certain institutions
• Monitoring compliance with special requirements
• Compulsory suspicious transactions reports
• A Financial Investigation Unit
• Powers to investigate and collect information
• Powers to freeze and confiscate assets
• Domestic and international cooperation
• The regulators role

3
How do money launderers and terrorists abuse
banks?

• Cash transactions
• Rapid international transfer of funds
• Complex transactions
• Use of trusts and companies
• Identity theft
• Anonymous accounts / fictitious names
• Disguising source of funds
• Use of legitimate businesses
• Use of charities
• Low value transactions for terrorist acts

4
What AML/CFT Regulations on banks should cover

• Corporate Governance / Staff Training
• A risk based approach
• Knowing the customer
• Limiting cash transactions
• Monitoring the account
• Complex account structures
• Accepting funds only from known sources
• Reporting suspicions

5
Corporate Governance

• Fit and Proper Management
• The Structure of Management
• The commitment of management
• A clear policy based on a risk assessment
• Controls and Monitoring (including audit)
• Record keeping
• Training of staff
• Regular review of policy

6
A risk based approach

• Reputational, operational, legal
• Drugs
• Terrorism
• Capital flight
• Fraud and tax evasion
• Corruption and extortion
• Politically exposed persons
• Risks inherent in new technologies

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Knowing the Customer

• FATF 5
• Financial institutions should not keep anonymous
  accounts or accounts in fictitious names
• Financial institutions should undertake customer
  due diligence including identifying and verifying
  the names of their customers, when
• Establishing a business relationship
• Carrying out occasional transactions
• There is a suspicion of money laundering or
  terrorist financing
• There are doubts about the accuracy or adequacy
  of information previously obtained.
• Due diligence must be applied to beneficial owners

8
Knowing the Customer

• Applying a risk based approach
• Identification and verification
• Drilling down through complex structures
• Source of wealth
• Source of funds
• Transaction profile
• Monitoring transactions
• Reporting suspicions

9
Client Risk Rating ( an Example)
Rating/Score
Risk Factor
Due Diligence
Drug producing country
8
Nationality
Rating System
UK
Domicile
2
Oil
Business
1-3
6
Profession
Businessman
2
4-7
Origin/Source of Funds
Shares
6
8-10
Dom Cos/Multiple Relationships
Complexity
6
Asset Volume
6
80 M
36/7 5
10
Cash

• Applying a risk based approach
• Understanding the purpose, source and direction
• Reporting cash transactions
• Reporting suspicions

11
Monitoring the Account

• The risk based approach
• Comparing with profile
• Identifying suspicions the use of IT
• The reason for the transaction
• The reason for complexity
• The source of funds
• The destination of funds
• Wire transfers
• Charities

12
Truck Supplier
Switzerland
The Isle of Man
50
50
Nigeria
Jersey
13
Understanding complex structures

• The risk based approach
• The purpose of the structure
• The ultimate owner
• Understand trusts

14
DEF Trust Company (Jersey)
GHI Nominees (BVI)
JKL settlement (A Nevis trust)
ABC Nominees UK
Mr Smith
XYZ Company Cayman Islands
Where is the owner?
Assets
15
Funds from suspect sources

• A risk based approach
• Shell banks
• Correspondent banks
• Wire transfers
• Bank secrecy jurisdictions
• Non co-operating countries and territories

16
Reporting suspicions

• A reporting officer
• Training what is suspicious
• Monitoring and control
• Relationship with FIU

17
Essential Regulatory Powers

• To be independent
• To make rules
• To vet businesses, owners senior officers
• To impose record keeping requirements
• To have access to all records, officers,
  premises, without notice
• To mount investigations
• A wide range of sanctions
• To share information

18
Regulatory Process

• Risk Based Approach
• Licensing
• Supervision
• Enforcement

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Licensing

• Fit and Proper
• Competence, integrity, financially sound
• Directors, MLROs, Compliance Officers,
• Owners and controllers
• Defining controlling shareholder, monitoring
  shareholdings, removing unfit controllers
• Seeking information
• Imposing conditions

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Supervision

• On-site supervision
• Checking the Guidance and regulations are being
  followed
• Sampling the files
• Desk based
• Periodic returns eg on STRs

21
Enforcement

• Policy on investigations
• Criminal or civil
• Staff training on evidence collecting
• Risk based approach
• Graduated response
• Proper Appeal

22
Regulatory Essentials

• Risk assessment for the jurisdiction
• Clear regulatory objectives
• Regulatory plan
• Staff training and motivation
• Staff Integrity
• Monitoring Consistency
• Risk based enforcement
• Determination

23
Legal Framework and Regulatory Regime Required
for an effective AML/CFT System

• Richard Pratt
• 29 March 2005