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• These notes provide a structured overview of money laundering, terrorist financing risks, international standards, compliance programs, and related topics.

Risks and Methods of Money Laundering and Terrorist Financing

• Money laundering involves disguising the illegal sources of funds to use them for legal or illegal activities.
• It's the process of making dirty money look clean.
• Criminals disguise the source of funds, change the form of currency, or move money to less conspicuous locations.
• Predicate crimes for money laundering include illegal arms sales, narcotics trafficking, embezzlement, and fraud.
• FATF was formed in 1989 to set standards against money laundering.
• It demonstrated that money laundering occurs through various mediums, organizations, and businesses, not just cash transactions.

Defining Money Laundering

• The Palermo Convention defines money laundering as concealing illicit origins of property derived from criminal offenses.
• It includes concealing the true nature, source, location, disposition, and ownership of property derived from a criminal offense.
• It also covers the acquisition, possession, or use of property derived from a criminal offense.
• Knowledge is an important prerequisite in the definition of money laundering.
• FATF and the EU Directive state that intent and knowledge may be inferred from objective factual circumstances.
• Willful blindness, or deliberate avoidance of knowledge, is considered equivalent to actual knowledge in money laundering cases.

Countering the Financing of Terrorism (CFT)

• After 9/11, FATF expanded its mandate to address CFT
• Terrorists and money launderers can use similar methods to move money, like structuring or underground banking.
• Terrorist financing can include funds from legitimate sources, unlike money laundering.
• Concealing the purpose of funds is the primary goal in terrorist financing, not necessarily the source.
• Terrorist funds cover operating expenses and material support for terrorist acts, similar to criminal enterprises, they value transaction secrecy.
• FATF's revised recommendations include preventing the proliferation of weapons of mass destruction (WMD).

Three Stages of the Money Laundering Cycle

• Money laundering involves a complex series of transactions.
• It occurs in three stages.
• Placement: Disposing of cash or assets derived from criminal activity.

Economic and Social Consequences of Money Laundering

• Money laundering has negative impacts.
• Undermines the integrity of financial institutions.
• Deters foreign investment.
• Distorts international capital flows.
• Harms a country's reputation.
• Social costs include:
• Encouragement of crime and corruption.
• Damage to public health.
• Loss of tax revenue.
• Risks to privatization efforts.

AML/CFT Compliance Programs and Individual Accountability

• Governments and organizations have implemented AML/CFT compliance programs to counter the effects of money laundering and terrorist financing.
• Individual accountability is crucial in ensuring the effectiveness of these programs.

Methods of Money Laundering

• Money laundering can occur through various methods and institutions.
• These include banks, non-bank financial institutions, and non-financial businesses.
• Money laundering can occur through international trade activity, new payment products, and corporate vehicles.

Banks and Other Depository Institutions

• Banks are susceptible to money laundering through:
• Electronic fund transfers
• Remote deposit capture
• Correspondent banking.

Electronic Transfer of Funds

• Electronic transfers are vulnerable to money laundering due to their speed and global reach.
• They allow criminals to move money quickly and anonymously.

Remote Deposit Capture

• Remote deposit capture can be exploited by criminals to deposit illicit funds without physical presence.
• This makes it difficult to verify the source of funds.

Correspondent Banking

• Correspondent banking involves one bank providing services to another bank.
• It can be exploited for money laundering if proper due diligence is not conducted.
• Payable-Through Accounts are high risk because they can be used to facilitate money laundering, terrorist financing, and sanctions evasion.

Risks of Payable-Through Accounts (PTAs)

• PTAs are considered high-risk due to potential misuse.
• Risks include PTAs in offshore financial service centers with weak supervision.
• Risks also include failure to apply customer due diligence to the respondent bank's customers.
• PTAs used with subsidiaries can enable the respondent bank to offer branch-like services without supervision.

Use of Payable-Through Accounts (Case Example)

• Misuse of PTAs declined after strict controls were implemented.
• Lombard Bank Ltd misused a PTA at American Express Bank International (AEBI).
• Lombard customers had nearly full banking services through the PTA without a relationship with AEBI.
• Cash deposits were transported to Lombard's Miami affiliate for deposit in the PTA.
• AEBI did not know the source of the cash, raising AML/CFT compliance concerns
• AEBI paid a fine for its connection to money laundering by a Mexican drug cartel.

Key Takeaways Regarding PTAs

• PTA subaccount holders had checkbooks that allowed them to deposit and withdraw funds from Lombard's PTA.
• Correspondent banks should set clear limits on PTA use based on internal policies and risk profile
• PTAs often do not know the source of funds and customers’ identities.

Concentration Accounts

• Concentration accounts are internal accounts used to process multiple customer transactions.
• They aggregate funds from various locations into a centralized account.
• They're known as special-use, omnibus, settlement, suspense, intraday, sweep, and collection accounts.
• They facilitate transactions for private banking, trust, funds transfers, and international affiliates.
• Money laundering risks arise when customer-identifying information is separated from transactions.
• Loss of the audit trail can lead to misuse and improper administration.