Understanding AML and CFT

Introduction to AML and CFT

• Money laundering disguises the illegal sources of criminal proceeds to enable their use in licit or illicit activities
• It makes dirty money look clean

Money Laundering Goals

• Hide the source of funds
• Change the form of currency
• Move funds to less conspicuous locations

Predicate Crimes

• Predicate crimes, which lead to money laundering, often include:
  • Illegal arms sales
  • Narcotics trafficking
  • Contraband smuggling
  • Organized crime
  • Embezzlement
  • Insider trading
  • Bribery
  • Computer fraud schemes

FATF and Money Laundering

• FATF (Financial Action Task Force) dispelled the idea that money laundering only involves cash
• Money laundering can occur through any medium, financial organization, and business

United Nations on Money Laundering

• According to the UN's Palermo Convention, money laundering includes:
  • Converting or transferring property derived from a criminal offense to conceal its illegal origin or to help someone involved in the crime evade legal consequences
  • Hiding the true nature, source, location, disposition, movement, or ownership of property derived from a criminal offense
  • Acquiring, possessing, or using property, knowing it came from a criminal offense or participation in a crime

Terrorist Financing

• In October 2001, FATF expanded its mission to counter terrorist financing (CFT)
• Terrorists and money launderers use similar methods to move funds without detection
• Methods include structuring payments to avoid reporting and using underground banking or value transfer systems
• Money laundering involves funds from criminal activities; terrorist financing can involve funds from legitimate sources
• The primary goal of concealing funds for terrorism is to hide the funds' purpose, not their source
• Terrorist funds are used for operating expenses like food, transportation, and rent, and for material support of terrorist acts
• Terrorists, like criminal enterprises, prioritize secrecy in transactions
• In February 2012, FATF's revised 40 recommendations included a new one to prevent, suppress, and disrupt the proliferation of weapons of mass destruction (WMD).

Financial Crimes Defined

• Financial crime involves illegal acts by individuals or groups to gain personal wealth through financial services or markets
• Financial crimes include:
  • Fraud or dishonesty
  • Misconduct or misuse of financial market information
  • Handling proceeds of crime
  • Financing of terrorism

Types of Financial Crimes

• Fraud: Deceiving others for financial gain through investment, insurance, identity theft, credit card, and wire fraud
• Money Laundering: Disguising the origins of illegal money, typically involving complex banking or commercial transactions to make the funds appear legitimate
• Embezzlement: Misappropriating funds by someone entrusted with managing money

Other Financial Crimes

• Insider Trading: Trading securities based on non-public information, unfairly benefiting insiders
• Bribery and Corruption: Influencing actions through something of value; corruption is the abuse of power for personal gain
• Cybercrime: Illegal online activities like phishing, hacking, ransomware, and financial information theft, targeting individuals and institutions

Additional Financial Crimes:

• Counterfeiting: Producing fake goods or currency to deceive others for financial gain, harming economic stability and consumer trust
• Tax Evasion: Illegally avoiding taxes by underreporting income, inflating deductions, or using fraudulent means

Knowledge of Derivation in Money Laundering

• Knowledge is a key element in defining money laundering
• It involves "knowing" that property is derived from a criminal offense
• The FATF and EU directives suggest that intent and knowledge can be inferred from objective facts

Knowledge and Intention in Crime

• A crime can be committed either unintentionally or intentionally
• Determining intention can be broken down into:
  • Mens Reus: The intention to commit a crime through planning
  • Actus Reus: The act of committing the crime itself
• Intention can be determined as either direct or indirect

Willful Blindness

• Some jurisdictions use willful blindness as a legal principle in money laundering cases to prove knowledge
• Willful blindness is defined as deliberately avoiding knowledge of facts or purposeful indifference
• Willful blindness equates to actual knowledge of the illegal source of funds or customer intentions in a money laundering transaction

Stages of Money Laundering

• Money laundering involves a series of complex transactions often difficult to distinguish from each other
• The process is commonly understood to have three stages:
  • Placement
  • Layering
  • Integration

Placement

• Placement is the physical disposal of cash or assets derived from criminal activity
• This phase introduces illicit proceeds into the financial system
• It is achieved by placing funds into circulation through formal financial institutions, casinos, and other businesses, domestically and internationally

Placement Transaction Examples

• Blending illegitimate funds with legitimate funds
• Purchasing stored value cards
• Foreign exchange with illegal funds
• Breaking up amounts by dividing cash into small amounts and depositing it into numerous bank accounts to evade reporting requirements
• Currency smuggling via cross-border physical movement
• Repaying legitimate loans with laundered cash

Layering

• Layering separates illicit proceeds from their source through financial transactions to hide the origin of the proceeds
• This stage converts proceeds into another form and creates complex layers of financial transactions to obscure the source and ownership of funds

Layering Transactions

• Transactions include:
  • Electronically moving funds internationally and dividing them into various financial options
  • Moving funds between financial institutions or within accounts at the same institution
  • Converting cash into monetary instruments
  • Reselling high-value goods and prepaid access products
  • Investing in real estate and other legitimate businesses
  • Placing funds in stocks, bonds, or life insurance
  • Using shell companies to hide the ultimate beneficial owner and assets

Integration

• Integration is the process of giving an apparent legitimacy to illicit wealth through re-entry of funds into the economy
• This involves normal business or personal transactions
• Laundered proceeds are used in normal transactions to create legitimacy
• Launderers might invest the funds in real estate, financial ventures, or luxury assets
• At this stage, differentiating between legal and illegal funds is exceedingly difficult

Defining Integration

• Integration occurs when a launderer is able to increase their wealth with the proceeds of crime
• Integration is difficult to identify unless there are major differences between a person or company's legitimate income or wealth, or assets.

Examples of Integration

• Purchasing luxury assets, such as property, artwork, jewelry, or high-end cars
• Engaging in financial arrangements and ventures for business investment