AML Foundations 2024 PDF

AML FOUNDATIONS SAVITHA RAGHAVAN 2024 Page | 1  TOPICS COVERED BANKING INSURANCE ▪ Money Laundering and Terrorism Financing – Definition and Stages SECTOR SECTOR ▪ Banking Sector – Products and Services a...

AML FOUNDATIONS SAVITHA RAGHAVAN 2024 Page | 1  TOPICS COVERED BANKING INSURANCE ▪ Money Laundering and Terrorism Financing – Definition and Stages SECTOR SECTOR ▪ Banking Sector – Products and Services and related vulnerabilities ▪ Insurance Sector – Products and Services and related vulnerabilities ▪ Money Services Business – Products and Services and related vulnerabilities MONEY INVESTMENT ▪ Investment Firms – Products and Services and related vulnerabilities SERVICE FIRMS BUSINESS Page | 2 LEARNING OUTCOMES ▪ LO1 Define money laundering/Terrorist Financing/Proliferation financing ▪ LO2 Describe the predicate crimes that cause money laundering ▪ LO3 Identify financial products and services vulnerable to criminal abuses ▪ LO4 Discuss anti-money laundering laws and regulations Page | 3 Definitions Financial Crime Placement Money Laundering Layering Predicate Offence Integration Vulnerabilities Three Lines of Defence Page | 4 Introduction Every year, huge amounts of funds are generated from illegal activities such as: ▪ Drug trafficking, ▪ Human trafficking/Human Smuggling ▪ Arms trafficking ▪ Corruption ▪ Evasion of tax These funds are mostly in the form of Page | 5 Why Money Laundering? ▪ Evade Punishment/ Enjoy the fruits of their crime. ▪ The criminals who generate these funds need to bring them into the legitimate financial system without raising suspicion. ▪ The conversion of cash into other forms makes it more useable. It also puts a distance between the criminal activities and the funds. ▪ Criminals can avoid prosecution by distancing themselves from the illegal funds. ▪ Criminals can make profits by investing the criminal funds in businesses. Page | 6 Prevention and Prohibition of Money Laundering Law Money laundering’ is the name given to the process by which illegally obtained funds are given the appearance of having been legitimately obtained. The offence of money laundering includes: ▪ Conducting a transaction with criminal proceeds ▪ Concealing criminal proceeds ▪ Receiving/ transferring criminal proceeds ▪ Possession of criminal proceeds ▪ Being aware of and facilitating transactions in criminal proceeds Page | 7 Prevention and Prohibition of Money Laundering Law Offence relating to money laundering include: ▪ Failure to disclose information ▪ Tampering with evidence ▪ Failure to comply with official orders ▪ Prejudicial disclosure of information Failure to report any suspicious information to the Enforcement Unit shall be deemed as an offence related to money laundering and shall be punishable in accordance with the Law. The Anti-Money Laundering Law maintains personal liability of natural person(s) involved in the offence irrespective of their relation or position in the entity. The Law prescribes independent and separate penalties for each. Page | 8 Punishments for Money Laundering – AML Law ▪ Imprisonment for a period not exceeding 7 years ▪ Fine – Not exceeding One Million Bahrain Dinars (BD 1,000,000/-) ▪ Confiscation of property Maintenance of documents by institutions – AML LAW 2001 ▪ Keep all documents relevant to the identity of the client for a period of years after the relationship has ended. ▪ Keep a transaction record of a new or unrelated transaction for a period of years after the termination of the transaction. Page | 9 The UN 2000 Convention Against Transnational Organized Crime, also known as the “Palermo Convention” defines money laundering as: The conversion or transfer of property, knowing it is derived from a criminal offense, for the purpose of concealing or disguising its illicit origin or of assisting any person who is involved in the commission of the crime to evade the legal consequences of his actions. The concealment or disguising of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property knowing that it is derived from a criminal offense. The acquisition, possession or use of property, knowing at the time of its receipt that it was derived from a criminal offence or from participation in a crime. Page | 10 Definition of Money Laundering ▪ What is common in the above definitions? ▪ What is knowledge? ▪ How is knowledge inferred? ▪ What is willful blindness? ▪ Is willful blindness knowledge? Page | 11 Definition of Money Laundering ▪ Mental state and the act of money laundering ▪ The term willful blindness is a legal principle used in money laundering and other cases in some jurisdictions ▪ Willful blindness is the “deliberate avoidance of knowledge of facts” or “purposeful indifference” ▪ FATF expanded the willful blindness mandate to cover the financing of terrorism Page | 12 Economic & Social Consequences of Money Laundering Increased crime and corruption Undermines legitimate sector: Front companies commingle proceeds of illicit activity with legitimate funds Loss of confidence by genuine, legitimate investors Reputation risk Page | 13 Laws/ International Best Practices on AML FATF - Financial Wolfsberg CBB RULEBOOK PATRIOT ACT, 2001 Action Task Force Principles - FC Module Page | 14 Drivers of AML/CFT Risk 1 2 3 4 5 Customer Product/ Jurisdiction Delivery Sector Risk Service Risk Risk Channel Risk Risk Page | 15 Banking Sector Risk Criteria Customer Product/ Services Jurisdiction Sector Page | 16 Banking Sector Customer Risk Prohibited High Medium Low SDNs Cash Intensive SMEs Salaried Individuals Business (Audited Financials) Unlisted Entities Gatekeepers Nonresident customers Page | 17 Customer Risk – Continued HIGH RISK CUSTOMERS ▪ Charities/NPOs ▪ NFBPs ▪ Politically Exposed Persons What are the vulnerabilities? ▪ Consulates What are the related Due Diligence? ▪ Minors ▪ SMEs ▪ eCommerce entities Page | 18 Customer Risk – Continued (CBB rule book) The ownership structure of the company appears unusual or excessively complex given the nature of the company’s business Companies that have nominee shareholders Customer is a PEP or customer’s family members, or close associates are PEPs (including where a beneficial owner of a customer is a PEP) Customer resides in or whose primary source of income originates from high-risk jurisdictions Banking Sector Product/ Service Risk Prohibited High Medium Low Shell banks Current Account Loans to SMEs Salaried Accounts (Audited Financials) Savings Account Credit Cards Page | 20 Product/Service Risk – Continued HIGH RISK PRODUCTS/SERVICES ▪ Personal Financing ▪ Loans ▪ Private Banking ▪ Trade Finance What are the vulnerabilities ▪ Correspondent Banking What are the related Due Diligence? ▪ Wire Transfers ▪ Crypto Currency ▪ Crowd funding Page | 21  Product/Service Risk – Continued Non-face-to-face business relationships or transaction – FC-C.2.8.(c) Retail and corporate deposits Current accounts Bilateral loans Products or services that permit the unrestricted or anonymous transfer of value (by payment or change of asset ownership) to an unrelated third party, particularly those residing in a higher risk jurisdiction The geographical reach of the product or service offered, such as those emanating from higher risk jurisdictions; Virtual Currency – Red Flag Indicators FATF September 2020 The presence of the following suspicious indicators prompted an FI (bank) to file an STR with authorities, leading to an ML investigation: ▪ In the first two days after a personal account had been created for a young individual, the account received deposits of a commercial nature from different legal persons in large amounts; - Red flags? ▪ Transaction patterns – the deposited funds were immediately transferred to accounts of several VASPs (in one day) for VA purchase (Bitcoin) – Related due diligence? ▪ The bank also provided IP addresses used for internet banking services to the authorities Page | 23 Virtual Currency – Red Flag Indicators FATF September 2020 ▪ Based on an investigation, the personal account holder appeared to be a money mule recruited by criminals on a social media platform to help receive claimed payments for goods sold online. Red Flags? ▪ The deposited funds were immediately transferred out from the personal bank account via several divided payments to another account held by a joint-stock company in Czech Republic, and were exchanged to VA (Bitcoin) held in several local VASPs. – Red Flags? ▪ These VAs were then immediately withdrawn from the account. Page | 24 Virtual Currency – Red Flag Indicators FATF September 2020 The local VASP also noticed irregularities in the funds received and provided useful information to aid the investigation. The information included: ▪ Circumstances where the VAs were purchased; ▪ Transaction and other CDD information such as wallet address, copy of misused identification document for the purchase, and name of the alleged buyer. ▪ These allowed authorities to request additional information from the banks (e.g. bank statements). Page | 25 Virtual Currency – Red Flag Indicators FATF September 2020 Red Flag Indicators ▪ Making frequent transfers in a certain period of time (e.g. a day, a week, a month, etc.) to the same VA account – by more than one person; from the same IP address by one or more persons; concerning large amounts. ▪ Incoming transactions from many unrelated wallets in relatively small amounts (accumulation of funds) with subsequent transfer to another wallet or full exchange for fiat currency ▪ Converting a large amount of fiat currency into VAs, or a large amount of one type of VA into other types of VAs, with no logical business explanation. Page | 26 Banking Sector Jurisdiction Risk Prohibited High Medium Low Sanctioned Secrecy Havens Depends on Firms FATF compliant countries High in CPI Blacklist/ Grey list of FATF Page | 27 Jurisdiction Risk – Continued JURISDICTION RISK – Some criteria to look up ▪ FATF ▪ EU (ec.europa.eu) What are the vulnerabilities ▪ BASEL AML Index What are the related Due Diligence? ▪ Transparency International - https://baselgovernance.org/sites/default/files/2020-07/basel_aml_index_2020_web.pdf - https://ec.europa.eu/info/business-economy-euro/banking-and-finance/financial-supervision-and-risk- management/anti-money-laundering-and-counter-terrorist-financing/eu-policy-high-risk-third-countries_en - https://www.knowyourcountry.com/country-ratings-table Page | 28 Insurance Sector Customer Risk Prohibited High Medium Low SDNs Cash Intensive Mid size business Salaried Individuals Business owners (mix of cash & card payments) Unlisted Entities Agents/ Intermediaries Page | 29 Customer Risk – Continued HIGH RISK CUSTOMERS ▪ Charities/NPOs ▪ NFBPs ▪ Politically Exposed Persons What are the vulnerabilities ▪ Consulates What are the related Due Diligence? ▪ Unknown beneficiaries ▪ Third party beneficiaries Page | 30 Insurance Sector Typically used for retirement savings & pension schemes Generally subscribed by a Product/ Service Risk company in order to provide a future benefit to its employees Prohibited High Medium Low Anonymous Life Insurance Health Insurance Home Insurance Beneficiaries policies Group Annuities Marine/Cargo Insurance Generally taken by employer – Motor Insurance but prone to fraud Page | 31 Product/ Service Risk – Continued HIGH RISK PRODUCTS/ SERVICES ▪ Endowment policies ▪ Policy Loans What are the vulnerabilities ▪ Single premium policies What are the related Due Diligence? ▪ Cash premiums/cash payouts Policy loans ▪ Traded Life Policy Client purchases single premium policy and then takes out a policy loan. Policy loan amount is a percentage of the surrender value. Client may not repay the loan. Any outstanding loans are deducted from any future claim Page | 32 Money Service Business Customer base not constant. Different money exchange houses Customer Risk may be used by customers Prohibited High Medium Low SDNs Cash Intensive NA Salaried Business Individuals?? Relationship Walk in customers between sender Cash which is not and beneficiary Agents in local currency Page | 33 Customer Risk – Continued HIGH RISK CUSTOMERS A customer brings in large volumes of cash A customer only wants to deal with a particular person in your business. ▪ Charities/NPOs There is no commercial link between the customer’s business and the destination for the money transfer / ▪ NFBPs third party payment destination. The customer has no family link to the destination of ▪ Politically Exposed Persons the money. ▪ Consulates ▪ Employees of unlisted entities What are the vulnerabilities being paid in cash What are the related Due Diligence? ▪ Agents Page | 34 MSB Can MSBs used in Human trafficking/ smuggling? Product/ Service Risk Prohibited High Medium Low Shell entities Buy and sell NA WPS currency/ Exchange Precious metals Bulky volumes of low denomination notes changed Bulk transactions/ for easily transported high Bunching denomination notes. Page | 35 Product/ Service Risk – Continued HIGH RISK PRODUCTS/ SERVICES ▪ Third party transfers What are the vulnerabilities ▪ Products offered through Agents What are the related Due Diligence? ▪ Bunching of transactions Single beneficiary to multiple originators ▪ Cross country transfers Multiple originators to single beneficiaries Payment through exchange houses for import/ export Advance Fee frauds Large amounts send from individuals to entities specifically in high-risk jurisdictions Page | 36 Direct Equity Investments – Vulnerabilities Equity Investments Investors Investee Companies The Ultimate Purchaser On Exit Risk identification and related due diligence? Page | 37  Domicile Sector Target Invested Market Fund Asset Structure Classes Intermediaries Page | 38 Suspicious Transactions Any transaction or group of transactions, that relate to money transfers, about which doubts arise due to their unusual size, repetition, nature or unusual pattern and that which do not involve a clear economic objective or legal purpose. Page | 39 Mitigation/ Prevention of Financial Crimes ▪ CRP ▪ Due Diligence – CDD/ EDD ▪ Risk Based Approach ▪ Your Responsibilities? Page | 40 CDD - Requirements in Bahrain (CBB Requirements) – Discussion from the latest amendments FC Module – 2024 Customer Due Diligence Natural Persons ▪ Telephone/ Fax and email address ▪ Occupation or public position held ▪ Full legal name & any other names used ▪ Employer's name & address ▪ Full permanent address (if self-employed, the nature of self-employment) ▪ Date of birth ▪ Type of account, & nature & volume of anticipated business ▪ Nationality ▪ Signatures of the customers ▪ Passport number ▪ Source of funds ▪ Reason for opening the account ▪ CPR or Iqama number (for residents of Bahrain or GCC states) ▪ Place of Birth All the above information must be confirmed by taking a copy of a current valid official original identification document (e.g., Birth certificate, Passport, CPR or iqama, Utility bills etc.,) Page | 41 CDD - Requirements in Bahrain (CBB Requirements) – Discussion from the latest amendments FC Module – 2024 CDD Requirements Legal Entities ▪ Registration number ▪ Telephone, fax number and email address ▪ Legal form ▪ Regulatory body or listing body ▪ Registered address ▪ Name of external auditor ▪ Type of business activity ▪ Type of accounts and nature and volume of anticipated business ▪ Date and place of incorporation or establishment ▪ Source of funds The information obtained must be verified by obtaining certified copies of Certificate of incorporation, memorandum of association, Articles of association, Latest financial reports etc., Page | 42 Enhanced Customer Due Diligence Enhanced customer due diligence must be performed on customers identified as having a higher risk profile. The additional information include: ▪ Evidence of permanent address through the use of a credit reference agency search or through independent verification by home visit. ▪ A personal reference ▪ Another licensed entity’s reference ▪ Documentation outlining the customer's source of wealth including Independent verification of employment or public position held. Page | 43 Enhanced Customer Due Diligence - PEP The CDD measures include: ▪ Analysis of financial structures, including trusts etc., used by the PEPs. ▪ Establish both the source of wealth and the source of funds. ▪ A profile of anticipated customer activity, to be used in on-going monitoring ▪ Approval of senior management to establish an account and to continue an account ▪ On-going account monitoring of the PEPs account by senior management (such as the MLRO) Page | 44 WHO IS A PEP? PEP means individuals who are or have been entrusted with prominent public functions in Bahrain or a foreign country, such as: ▪ Heads of State or government ▪ Senior politicians ▪ Senior government officials ▪ Judicial or military officials ▪ Senior executives of state owned corporations ▪ Important political party officials Bahraini PEPs would include all Ministers, all MPs and all Ministry officials with the rank of undersecretary or above. Page | 45 CONCLUSION REMEMBER YOU MAY BE PERSONALLY ACCOUNTABLE FOLLOW THE SIX BASIC PRINCIPLES 1. BE AWARE 2. BE ALERT 3. DOCUMENT ON TIME 4. REPORT ON TIME 5. CO-OPERATE WITH AUTHORITIES 6. UNDERSTAND YOUR CUSTOMERS AND TRANSACTION THROUGHOUT Page | 46 Do you have any questions? [email protected] +973 00 00 0000 Page | 47  THANK YOU Follow the BIBF For the latest updates on programmes and initiatives Page | 48