AML/CFT/KYC Students Manual PDF

THE SCHOOL OF BANKING EXCELLENCE AML/ CFT / KYC (Anti Money Laundering/ Combating the Financing of Terrorism / Know Your Customer) Course Objectives At the end of the course Trainees will understand: 1. The Concept of AML, CFT and KYC 2. The des...

THE SCHOOL OF BANKING EXCELLENCE AML/ CFT / KYC (Anti Money Laundering/ Combating the Financing of Terrorism / Know Your Customer) Course Objectives At the end of the course Trainees will understand: 1. The Concept of AML, CFT and KYC 2. The destructive nature of ML and CFT 3. The concept of “Know Your Customer (KYC) / Business” 4. Global and local initiatives to fight ML and CFT 5. Statutory obligations of Banks 6. The need for compliance and the implications for non – compliance. Presentation Sections Section 01: Introduction to AML / CFT/ KYC Section 02: Money Laundering Process / Impacts Section 03: Know Your Customer / Business (KYC / KYCB) Section 04: Global and Nigeria Initiatives Section 05: Roles of Operations Unit in Banks Appendix: Case Studies Section 1 Outline 1. General definition i. Money Laundering ii. Anti - Money Laundering (AML) 2. UN Definition of Money Laundering 3. Combating the Financing of Terrorism (CFT) 4. Know Your Customers KYC and Know your Customers’ Business (KYCB) 5. Money Laundering (ML) Offences 6. Financing of Terrorism (FT) Offences 7. Big ML / FT Players  The big Money Laundering and Financing of Terrorism Players  1. General Definition of ML: i. Money Laundering (ML)  Cleaning of the proceeds of illegal business or Dirty Money.  Concealment of crimes that brought the illegal proceeds ii. Anti - Money Laundering Definition (AML) Laws, Regulations and Procedures to prevent Money Launderers or Criminals from disguising dirty Money. 2. United Nations Definition of ML: In 1988, at the Vienna Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances the UN gave two definitions of Money Laundering as follows: i. The conversion or transfer of property, knowing that such property is derived from drug trafficking offences, for the purpose of concealing or disguising the illicit origin. ii. The concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of the property even when you know the source. 3. Combating the Financing of Terrorism (CFT) - definition and examples of terrorism i. Combating the Financing of Terrorism Involves investigating, analyzing, deterring, and preventing sources of funding for activities intended to achieve political, religious, or ideological goals. ii. The Canadian Police Research shows that Terror Organizations usually benefit from the Financing of Terror by People and Organizations that have sympathy for them. Examples of terrorism: i. Bombing of the twin towers on September 11, 2001 in the US ii. Boko Haram operations in Nigeria iii. ISIS in Syria and Iraq. 4. Definitions of “Know Your Customer / Business” (KYC / KYCB) KYC means the Bank should know the Customers i. Identity ii. Suitability to be identified with the Bank iii. Risks around the Customers The Bank is also expected to know the Customers’ Business i. Type of business ii. The type of Clients that the Customers have  iii. And the possesses used to carry out their business. The rationale for a Bank to know the Customers and their Businesses is to avoid: 1. Legal problems - Bank 2. Legal problems –Staff 3. Loss of banking licence 4. Reputation risks 5. Profitability risks 5. Money Laundering Offences: i. Illegal Arms Sales ii. Smuggling iii. Bribery iv. Prostitution v. Drug Trafficking vi. Human Trafficking vii. Embezzlement viii. Insider Trading ix. Tax Evasion x. Fraud xi. Other activities of organized crime. 6. Financing of Terrorism Offences The sources of terrorist financing are in two parts as follows: a. Legal Sources – those who are engaged in legal business but have sympathy for the cause of Terrorists i.e.: i. Donation from Non – Profit Organizations OR ii. Donations from Profit Making Organizations b. Illegal Sources – proceeds of criminal activities by the Terrorists or their Sympathizers. i. Low or high scale Criminality or Organized Crime e.g.: i. Trafficking in Drugs, Weapons and Human Beings. ii. Levy or Taxes imposed on People iii. Ransom for Kidnapping iv. Exploiting natural resources oil and gas 7. The Big Money Laundering and Financing of Terrorism Players i. Drug Dealers ii. Mobsters/ Gang Members iii. Politicians iv. Public Officials v. Embezzlers vi. Terrorists Section 2: Money Laundering (ML) Process and Impacts - Outline 1. Criminal Activities that usually lead to Money Laundering (ML) 2. Critical Stages of ML and Graphical Illustration 3. Money Laundering Transaction Samples at each Stage 4. Popular Banks and Non-Banks Products used for ML 5. Global Scale of Money Laundering Problem 6. Characteristics of Fertile Countries for ML 7. Profiles of High-Risk Countries, Customers, Channels 8. Rationale for Regulatory Focus on the Banks and Financial Institutions 9. Impacts of ML and FT on the Society, Economic Development and Financial Institutions 10. Examples of the impacts on the Financial Institutions 1. Criminal Activities that usually lead to Money Laundering (ML) The activities listed below usually lead to Money Laundering because the people who are involved realized that the activities are illegal. Therefore, the proceeds from the activities must be disguised or laundered to avoid arrest and litigation. i. Kidnapping ii. Prostitution iii. Extortion iv. Drug Trafficking v. Bribery and Corruption vi. Smuggling (Arms; People; Goods) vii. Gambling; Cheating viii. Robbery ix. Terrorist Act x. Counterfeiting xi. Forgery 2. Critical Stages of Money Laundering (ML) Stage 1: Placement Stage:  Break the illegal money into small units and introduce it into the Financial System Stage 2: Layering Stage:  Convert the money into Smaller Investments. Buy Goods. Stage 3: Integration Stage  Funds re-enter the legitimate economy. E.g. through the Real Estate. 3. Money Laundering Transaction samples at each Stage Stage 1: Placement Stage 2: Layering Stage 3: Integration. 1. Smaller Cash 1. Buying and reselling 1. Purchasing valuable Deposits in Banks shares assets, properties, 2. Lodging Bank Drafts 2. Issuing several complex lands; in Banks bank transfers; 2. Financing business 3. Purchasing 3. Issuing transfers against projects; insurance policies goods (L/C); 3. Buying goods/ valuable 4. Smuggling money 4. Debt repayment artworks; over borders; (financing / credit cards); 4. Buying Bonds, equity 5. Buying etc.; precious/valuable metals; 4. Popular Banks and Non-Banks Products used for ML Banks and Investment Non-Bank Institutions Non-Financial Institutions Institutions Electronic Funds Money Transfer Companies Casinos / Gambling transfer Exchange Companies Traders in Precious Stones Correspondent Banks Insurance Companies Car Dealers Private Banking Stockbrokers Law Firms / Audit Firms Deposit Money Banks Securities Traders Investment Consultants Collusion with Discount House Products Real Estate Firms Forex Black Market  5. Global Scale of Money Laundering Problem 6. Characteristics of Fertile Countries for Money Laundering i. Country with low risk of detection ii. Availability of Financial Infrastructure iii. Unstable Economic Environment iv. Absence of Law and easy Tax Evasion v. Government may be involved 7. Profiles of High-Risk Countries, Customers, Channels i. High Risk Countries  Drug producing countries  Countries with high levels of corruption  Countries linked to terrorist financing ii. High Risk Customers  Private money Remitters  Money changers  Real estate dealers  Casinos, gambling outfits  Non- profit organizations –charities iii. High Risk Channels  Wire/ Funds transfers  Private banking  Correspondent banking  Electronic banking services-internet, debit/credit cards 8. Rationale for Focusing on Banks and Financial Institutions i. All of them render financial services defined under S.25 ML Act 2011 ii. They have products and services that may be exploited iii. All financial transactions pass through Financial Inst. iv. Financial Institutions are the hub of the Economy. 9. Impacts of ML and FT on: a. The Society  Corrupt the value system  Financing of Terrorism  Country’s Reputation at risk  Increases country’s risk rating  Accentuates moral decadence b. Economic Development  Capital flight / Tax evasion  Economic disruption  Risks to privatization initiatives  Stifles competition and growth  Distortion of macroeconomic indices c. Financial Institutions  Legal risks for Banks  Loss of market integrity  Negative impacts on ethical standard  Banks complicity with criminals  Use of Privatization exercise for money laundering. 1. Introduction  Know your customer (KYC) is the process of a business including banks and financial Institutions verifying the identity of its clients.  The term is also used to refer to the bank regulation which governs these activities  Banks, insurers and export credit agencies are increasingly demanding that customers provide detailed anti-corruption “due diligence” information, to verify their probity and integrity  Know your customer policies are becoming very important globally to prevent identity theft, financial fraud, money laundering and terrorist financing activities 2. Objectives of KYC Guidelines a. To ensure appropriate customer identification and verification b. To monitor transactions of a suspicious nature c. To prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering activities d. Related procedures also enable banks to know or understand their customers, and their financial dealings better e. These will help Banks to manage the risks of money being laundered through them prudently 3. KYC Policy Roles a. Bank’s Policy should be to: i. Establish True identity of every Customer ii. Obtain adequate information about each Customer  b. Type of Information: i. Clients’ Identity ii. Information iii. Evidence iv. Suspicious transactions v. Risk Issues vi. KYC for existing Customers c. Elements of Key Policy Roles – usually formulated by top Management: i. Customers’ Acceptance Customers Identification Procedure ii. Customers Identification Procedure iii. Monitoring of Transactions iv. Risk Management 4. Customers Definition and Classification a. Customer i. A person or entity that maintains an account and/or has a business relationship with the bank ii. One on whose behalf the account is maintained (i.e. the beneficial owner) iii. Beneficiaries of transactions conducted by professional intermediaries, such as Stock Brokers, Chartered Accountants, Solicitors etc. as permitted under the law, and iv. Any person or entity connected with a financial transaction which can pose significant reputational or other risks to the bank, say, a wire transfer or issue of a high value demand draft as a single transaction. v. Beneficiaries of Trust or Will conducted by Professionals e.g. Trustee vi. Any Individual or Corporate Body connected to a financial transaction that can cause reputational damage to a Bank. b. Classification i. High Risk  Non-Resident Customers  Private Banking Customers  Legal Persons or Legal Arrangements such as Trusts  Companies having Nominee Shareholders or Bearer Shares  PEPs (politically exposed persons) ii. Medium Risk  Small/medium enterprise accounts  All other accounts not in high and low risk groups iii. Low Risk  Where risk of ML/FT is non-existent  Where identity information is publicly available  Financial Institutions  Public Companies listed on the Stock Exchange  Government Ministries and Parastatals 5. Customers Identification Procedure Customer identification means identifying the customer and verifying his/ her identity by using reliable, independent source documents, data or information Customer Identification Procedure should be carried out at the following stages: While establishing a banking relationship While carrying out a financial transaction When the Branch/Office has a doubt about the authenticity/veracity or the adequacy of the previously obtained customer identification data 6. Identification Evidence 1. The customer identification process should not start and end at the point of establishing the relationship but continue as far as the business relationship subsists. 2. Banks should obtain evidence before, during and after establishing relationship subject to the Standard Operations Procedure (SOP). 3. Personal Identity Documents i. Current International Passport ii. Residence Permit issued by the Immigration Authorities iii. Current Driving Licence issued by the Federal Road Safety Commission (FRSC) iv. National Identity card v. Inland Revenue Tax Clearance Certificate vi. Birth Certificate/Sworn Declaration of Age 4. Legal Identity Documents – Corporate Bodies a. Certificate of Incorporation /Certificate of Registration b. Memorandum & Articles of Association c. Partnership Deed d. Resolution of the Board of Directors to open an account e. Identification of those who have authority to operate the account f. Power of Attorney granted to its managers, officers or employees to transact business on its behalf 5. Legal Identity Documents – Others including Non-Govt Bodies When opening an account for a Trust, the financial institution should take reasonable steps to verify the trustee, the settlor of the trust (including any persons settling assets into the trust) any protector, beneficiary and signatories. Beneficiaries should be identified when they are defined: In the case of a foundation, steps should be taken to verify the founder, the managers/directors and the beneficiaries When a professional intermediary opens a client account on behalf of a single client that client must be identified, or where there are "sub-accounts" which can be attributable to each beneficial owner, all beneficial owners of the account should be identified 6. Documentary Evidence of Address Solicitor’s letter confirming recent house purchase or search report from the Land Registry Tenancy Agreement Search reports on prospective customer’s place of employment and residence signed by a senior officer of the financial institution. Checking of a local or national telephone directory can be used as additional corroborative evidence and this should not be used as a primary check. 7. The 3-Tiered KYC Approach a. The CBN in 2013 released the three-tiered KYC to relax the requirements for account opening, in furtherance of the objective of enhancing financial inclusion and access b. According to the CBN, to continue to maintain the same level of KYC requirements for the affluent and the poor, those in the formal sector and those in the informal side of the economy or the literate and the illiterate, encourages prevalence of informal financial systems which in turn undermines the AML/CFT objective c. The three-tiered KYC approach ensures application of flexible account opening requirements for low and medium value accounts d. These are subject to caps and restrictions as the amounts of transactions increase e. This means that account opening requirements will increase progressively with less restrictions on operations. - (Requirements will increase with volume, restrictions will decrease with Operations) Structure of the 3-Tiered KYC Approach Level ONE – Low Value Account Description & Amount/Threshold Customer Identification Characteristics Limitations Requirements Account can be opened at Maximum single deposit All that is needed is basic branches of FI or through amount of N20,000 customer information such banking agents Maximum cumulative as passport photograph; Deposits can be made by balance of N200,000 at any name, place, date of birth, account holder and 3rd point in time gender, address, telephone parties Mobile Banking Products number, etc. while withdrawal can only Maximum transaction limit This information may be be done by the account of N3,000 and daily limit of sent electronically or holder N30,000 submitted on site in bank’s No minimum amount is branches or agent’s office Account can be linked to required for opening of Evidence of information mobile phone accounts, but account provided by customer or its operation is only valid in Accounts are strictly verification of same is not Nigeria savings required  International funds transfer They are subject to close is prohibited. monitoring by the financial institutions and less scrutiny by Bank Examiners Structure of the 3-Tiered KYC Approach Level TWO – Medium Value Account Description & Amount/Threshold Customer Identification Characteristics Limitations Requirements Can be opened at any Maximum single deposit of Evidence of basic customer branch of a bank by agents N50,000 and a maximum information is required for enterprises (used for cumulative balance of Withdrawal would be mass payroll) or by the 400,000 at any time denied if cross-checking of account holder. Mobile Banking Products clients ID information is not Can be operated via Maximum transaction limit completed at the point of internet banking or linked to of N10,000 and daily limit of the account opening. a mobile phone account N100,000 Customer information May be used for funds No minimum amount is verified against official transfers within Nigeria required for opening of database of the National only. account Identity Management The accounts are strictly Commission (NIMC), savings and subject to Independent National monitoring Electoral Commission (INEC) voters register, Federal Road Safety Commission (FRSC) amongst others. Structure of the 3-Tiered KYC Approach Level THREE – High Value Account Description & Amount/Threshold Customer Identification Characteristics Limitations Requirements Banks are required to No limit is placed on AS CONTAINED IN THE obtain, verify and maintain cumulative balance BANK’S STANDARD copies of all the required Mobile banking products OPERATING documents for opening of Maximum transaction limit PROCEDURES (SOP) accounts of N100,000 and daily limit Account is to be opened at of N1 million, the bank branches by Such products are subject physical presence of the to the CBN Regulatory prospective customer Framework for Mobile These accounts could be Payments Services in both savings and current Nigeria  No amount is required for opening of accounts 8. Monitoring of Transactions: Customer Due Diligence (CDD) Financial institutions are required to identify their customers (whether permanent or occasional; natural or legal persons; or legal arrangements) and verify the customers’ identities using reliable, independently sourced documents, data or information. All financial institutions are required to carry out the full range of the CDD measures. However, in reasonable circumstances, financial institutions can apply the CDD measures on a risk-sensitive basis. Financial institutions should not establish a business relationship until all relevant parties to the relationship have been identified and the nature of the business they intend to conduct has been ascertained. Once an on-going business relationship has been established, any inconsistent activity can then be examined to determine whether there is a suspicion of money laundering. Identifying the customer on the basis of documents, data or information obtained from a reliable and independent source Identifying, where applicable, the beneficial owner and taking risk-based and adequate measures to understand the ownership and control structure of the customer Obtaining information on the purpose and intended nature of the business relationship Conducting ongoing monitoring of the business relationship including ensuring that the transactions being conducted are: consistent with the knowledge of the customer, Consistent with the business and risk profile, Including, where necessary, the source of funds and ensuring that documents, data or information held are kept up-to-date 9. Higher Risk Categories of Customers Financial institutions are required to perform enhanced due diligence for higher-risk categories of customer, business relationship or transaction. Examples of higher-risk customer categories include: a) Non-resident customers; b) Private banking customers; c) Legal persons or legal arrangements such as trusts that are personal-assets holding vehicles; d) Companies that have nominee-shareholders or shares in bearer form; and e) Politically exposed persons (PEPs), cross-border banking and business relationships, etc. 10. Politically Exposed Persons (PEPs) PEPS are individuals who are or have been entrusted with prominent public functions both in Nigeria or Foreign Countries and those associated with them. Examples of PEPs include, but are not limited to; Heads of State or government; Governors; Local government chairmen; Senior government officials; Family members or close associates of a Politically Exposed Persons (PEP) Financial institutions are required, in addition to performing CDD measures, to put in place appropriate risk management systems to determine whether a potential customer or existing customer or the beneficial-owner is a politically exposed person Financial institutions are also required to obtain senior management approval before they establish business relationships with a PEP and to render monthly returns on their transactions with PEPs to the CBN and NFIU 11. Suspicious Transaction Reporting Where a transaction: Involves a frequency which is unjustifiable or unreasonable Is surrounded by conditions of unusual or unjustified complexity Appears to have no economic justification or lawful objective In the opinion of the Financial Institution involves terrorist financing or is inconsistent with the known transaction pattern of the account or business relationship - that transaction shall be deemed suspicious The Financial Institution is required to seek information from the customer as to the origin and destination of the fund, the aim of the transaction and the identity of the beneficiary And not later than 72 hours draw up a written report and take appropriate actions to prevent the laundering of the proceeds of a crime or an illegal act and report any suspicious transactions and actions taken to the NFIU This provision shall apply whether the transaction is completed or not. In cases where Financial Institutions form a suspicion of money laundering or terrorist financing, and they reasonably believe that performing the process will tip off the customer, they are permitted not to pursue the CDD process, but instead to file an STR Financial Institution which fails to comply with this provision is liable to a fine of N1,000,000 for each day during which the offence continues The directors, officers and employees of Financial Institutions who carry out their duties in good faith shall not be liable to any civil or criminal liability, or have any criminal or civil proceedings brought against them by their customers 12. General Challenges of KYC / KYCB a. Developing political will at senior levels of government.  b. Knowing your client is not always easy. Knowing your client’s client may, even be impossible. c. Tighter AML can be costly and reduce resources from other needs. d. Coordination among countries law enforcement, regulators, and judiciaries is not usually easy. e. Building capacity in developing countries for investigation and prosecution. f. Application of AML regime in a cash-based economy is difficult. 13. RISK MANAGEMENT: Typical KYC Controls include the following: Collection and analysis of basic identity information Necessary checks before opening a new account so as to ensure that the identity of the customer does not match with any person with known criminal background or with banned entities such as individual terrorists or terrorist organizations available from Circulars etc. Not to open an account or close an existing account where the branch is unable to verify the identity and/or obtain documents required as per the risk categorisation due to non-cooperation of the customer or non reliability of the data/information furnished to the bank Circumstances, in which a customer is permitted to act on behalf of another person/entity, should be clearly spelt out in conformity with the established law and practice of banking as there could be occasions when an account is operated by a mandate holder or where an account may be opened by an intermediary in the fiduciary capacity Determination of the customer's risk in terms of propensity to commit money laundering, terrorist finance, or identity theft Creation of an expectation of a customer's transactional behaviour Monitoring of a customer's transactions against their expected behaviour and recorded profile as well as that of the customer's peers Financial institutions are required to report all cash transactions in any currency above a threshold of N2,000,000 for individual and N10,000,000 for corporate bodies to the NFIU. Adequate KYC policies and procedures – Contributes to a bank’s overall safety and soundness Protects the integrity of the bank by reducing the likelihood of the bank becoming vehicles for money laundering, terrorist financing and other unlawful activities Protects the bank from significant risks, especially legal and reputational ones 1. Global Bodies Initiatives and Focus Relevant Issues in FATF recommendations to Banks 1. Criminalize Money Laundering (ML) 2. Prevent ML by seizing property of Criminals 3. Undertake due diligence measures always 4. Keep close watch on Politically Exposed Persons 5. Gather information about offshore institutions 6. Have intelligence Unit for suspicious transactions 7. Monitor activities for compliance with the law 2. Nigeria Initiatives and Focus The Nigeria initiatives are various legal and structures put in place by the Government to prevent money laundering and to combat financing of terrorism. They are outlined below: Year Legal Initiative Focus 1980 NDLEA Brought Nigeria in tandem with the 1988 Vienna Convention on Narcotic Drugs and Psychotropic Substances. 1991 BOFIA Amended in 2002 to make it tougher on ML and FT. 1993 Advanced Fee Fraud Act Amended in 1995 specifically to capture “419” offences 1994 Failed Bank Act Include provisions for illicit money crimes 1995 AML Amended 2002, 2004 & 2011 2000 ICPC Act Established the ICPC (Independent. Corrupt Practices Commission 2002 AML law was Amended to Definition and the amounts of transactions reflect periodic report to be reported periodically – detail below. 2002 EFCC Act – hurriedly This is the Act that set up the EFCC passed to escape FATF (Economic and Financial Crime sanction in Dec 2002 Commission). 2003 NFIU was set up by EFCC NFIU became operational in 2004. (NFIU means Nigeria Fin. Intelligence Unit) 2011 Terrorism Prevention Act This law was enacted to prohibit and combat was enacted. the acts of financing of terrorism in Nigeria. It was amended in 2012.  3. Nigeria Other Initiatives and Focus These consists of initiatives by organized private sectors and Ministry Departments and Agencies cooperation to prevent money Laundering. They are detailed below: Nos. Entity Initiative 1 CSCS / NGX Central Securities Clearing System set up by NSE to vet Capital Importation to screen ML funds. 2 Due Process Fiscal Responsibility Office set up in the Presidency to prevent ML in addition to its primary focus 3 Court for ML Cases ML Cases to be tried by Fed High Court and not State High Courts 4 Agencies Power Agencies given power to investigate, trace, confiscate assets of the Money Launderers 5 Financial Regulation Law enforcement, Regulators and Private Sector to work together for prevention 6 FATF Cooperation Country to cooperate with FATF in combating the menace Section 5: Roles of Banking Operations Units Compliance Operations Officer Staff. 1. Summary Roles: 2. Operations Unit Staff and Compliance Officer – Operations Staff Caution – Routine Roles of Operations Staff Risks Identify – Documentation and Reporting Roles Monitoring Politically and Control – Transaction reporting threshold Exposed Persons. – KYC/KYCB Documentation – Treatment of Suspicious Transactions – Red Flags Transactions that must not be ignored – Risks for non-compliance with ML Laws. 3. Case Studies  1. Summary Roles 2. Operations Staff Caution Do not Assist Report Suspicion Do not Tip Off Do not assist the money You should always raise Ensure that you do not tip launderer if he/she decline flags and report suspicions off suspicious transactions to provide necessary to your AML officer if you to the customer, who may documents for building feel the transaction is be a potential money relationships and update unusual or the customer is launderer the documents every 2 not entertaining your years request for documents etc. 3. Transaction Reporting Threshold a. N5 Million and above for Individual b. N10 Million and above for Corporate Bodies c. $10,000 for Individual & Coy. d. Transaction above $10,000 Get authentic ID e. Penalty: N1m per day if a Bank fails to: i. Obtain ID from a Customer in respect of the above transactions ii. Make return of the above transactions to NDLEA in 7 days 4. KYC and KYCB Documentation Mandatory Customer Information Program (CIP) a. Every Customer must complete the Bank’s KYC or KYCB forms as specified in the Bank’s SOP while the Bank must ensure: i. Customer Identification ii. Document Verification iii. Identification of PEPs iv. Checklist b. If there is a deviation, the Compliance Officer should be informed immediately. 5. Treatment of Suspicious Transactions Section 14 (sub-section 1) Terrorism Prevention Act 2011 Measures Specified Provided Specified Reports that provided by Requirements Penalties must be provided S.14 within 72 Hours For prohibition For the effective For breaches 1. Suspected funds and combating convention on of the from legal or illegal the acts of the prevention provisions of sources financing of and combating AML and CFT 2. Proceeds of crime terrorism in of the acts of Laws that is related to Nigeria terrorism funding of terrorism 3. Funds that belong to a known Terrorist Exemption from Non- Other Directives from CBN Liability Disclosure of Information Banks and FIs Banks and FIs Banks should not process transactions are not guilty of should not that are “unreasonable and unjustifiable” any breach of disclose but if the suspicious transaction is confidentiality information sent processed, the Bank must: rules for to the 1. Prevent laundering of the proceeds of disclosure of Authorities to crime or an illegal act. suspicious any other 2. Send a copy of the report & action transactions person taken to CBN, NDLEA & SEC 3. Failure to comply attracts a fine of N1m per day on conviction for the number of days that the crime persists. 6. Customers’ Red Flags that must not be ignored Ex-Convict for acquisitive crime Clients trying to hide owner of fund Clients asking for short cuts Giving loan without basis Huge private funding from an individual Transactions from high-risk country Fake back up documents Reluctant to show ID. Alterations to avoid showing ID. Customer trying to change large small currency denominations to large denominations Customers conducting business in cash and avoiding Negotiable Instruments Frequent demand for TCs in Forex Two Clients remitting funds to the same beneficiary 7. Risks of Non-Compliance with Money Laundering Laws National Drug Law Enforcement Agency (NDLEA) Act 2011 Fed. High Court Order required Offences Penalties By Banks to place By Banks to “tap 1. If you acquire, 1. 5 years prison any Customer’s phone or have conceal, use or terms OR Account or access” to transfer 2. 5 times the Telephone under financial records proceeds of proceeds of surveillance of a customer on crime on behalf the crime the computer of another systems person. 2. If you know about the crime but fail to disclose 8. Risks of Non-Compliance with Terrorism Prevention Act 2011 SECTION 15 SECTION 17 Dealing in Terrorist Property Tracking of Terrorist Property 1. Offence: Conniving with SSS is empowered Failure to comply with or others to keep transfer or under this Act to obstructing an Order sell a Terrorists Property apply to a Judge in made under sub-section Chambers for an (1) (a) of S.17, the Judge Order requiring a in Chamber can order  2. Liable under this Act to a Bank to produce the search of the maximum prison term of 10 Clients’ documents Premises and remove years. documents 9. General Risks of Non-Compliance Below are the problems that a Bank or Financial Institutions can face: a. Staff Imprisonment b. Reputational damage c. Licence cancellation d. Financial Loss through Fines Appendix: Case Studies 1. Money Laundering through the Sale of Used Cars 2. Relationship Manager’s Dilemma 3. Insufficient and unsatisfactory KYC/B documents Case 1: Money Laundering through the Sale of Used Cars Mr. Andreou is an accountant and a Consultant in Cyprus while Mr. Smith is a Car Dealer in UK. Mr Smith approached Mr. Andreou and requested for Agency Services in Cyprus. Mr. Andreou agreed and sets up a company to purchase used cars from Mr. Smith’s UK Company to be sold in Cyprus on a going concern basis. The Business dynamics was that Mr. Smith would ship the used car to Mr. Andreou in Cyprus while Mr. Andreou and his Staff would process the invoices and prepare proper accounting records in Cyprus. The business was very profitable and cash rich, as the used cars were bought at a very low price and resold at a significantly higher price in cash. One employee of Mr. Andreou expressed her concerns to Mr. Andreou as she was worried that the majority of sales were made in cash (below the €10,000 threshold) and, in addition to this, in many instances the cars were registered to a different customer than the one paying for the sale. Mr. Andreou dismissed her worries and explained that “this is how business is done in Cyprus, and that many people still have cash at home after the deposit haircut* in 2013”. Not long after, Mr. Smith was convicted and imprisoned in UK, since it emerged that he was a drug dealer who had set up used car sale businesses in a number of countries to launder the proceeds from drug sales. As a result, all used cars and cash were viewed by the Republic of Cyprus, when they heard, as criminal proceeds and were now the subject of confiscation proceedings. Mr. Andreou was arrested in Cyprus and put on trial alongside his Staff. According to the prosecution, the set up and management of the company was intended to eliminate the trail that led back to Mr. Smith and his illegitimate funds and they should have been suspicious of the transactions as the cars sold were almost obsolete but generated high income in cash. Mr. Andreou and his Staff pleaded that they did not know that Mr. Smith was using them to Launder Money in Cyprus. They were all jailed. Quiz: 1. What are the red flags identified which might indicate money laundering activity and/or terrorist financing in this case? 4 marks 2. Why was the cars being sold at Euro 10,000 or below? 2 marks 3. Why was it difficult for Mr. Andreo to consider the warning of his Staff favorably? 4 marks * “Haircut is “a percentage reduction applied to the value of an Asset” Case 2: Relationship Manager’s Dilemma A depositor came into the Banking-hall to lodge a large amount of Cash. The Relationship Manager met and asked him about the source of the money which appeared larger than the Customer’s usual lodgments. The Customer informed him that he would not be able to provide details of the source of funds because his Tax Consultant advised him not to do so. The Relationship Manager had collected the prospects passport and other details during past meetings but found the current non-disclosure to be suspicious. He is now faced with possibility of losing the Customer or taking ML Risks. Quiz a. Why is the Relationship Manager Suspicious? 1 mark b. Mention at least 5 Suspicious Transactions (apart from the one in this case) 5 marks c. What should the Relationship Manager do to resolve the dilemma? 4 marks Case Study 3: Insufficient and unsatisfactory KYC/B documents Maria is the Compliance Officer of the ABC Bank Ltd. She is in charge of meeting with all new prospective clients and obtaining all necessary information before the commencement of the banking relationship. A new client, Mr. Johnson, has come to the Bank to open a Current Account. Mr. Johnson lives in Lagos and he is the Founder of a Furniture Company. Maria went through all the KYC/B documents required before a Current account can be opened for him including Bank’s policies and procedures. Mr. Johnson left with a promise that he would provide all documents in one week. As promised Mr. Johnson dropped off at the reception an envelope with some documents after a week. Upon review, Maria realized that he had only provided a few documents. She e-mailed him a list of the missing documents. Mr. Johnson responded that he was in a hurry to get the account opened and requested the Bank to proceed with the account opening. He would come back next week with all the necessary documents. Maria prepared the necessary KYC documents to be signed by Mr. Johnson and asked him to come to the office and sign them while submitting the remaining documents. Mr. Johnson came to the Bank with the intention to sign but did not submit the outstanding documents. He explained that the documents were held by his lawyer, and he had not passed by his office to collect them.  Maria refused to allow the account to be opened for Mr. Johnson because the latter did not submit the missing documents which included utility bill for his Lagos residence. Mr. Johnson stated that all the Documents were being kept by his Lawyer for a different transaction. As a result, Maria informed him that the Bank cannot provide any banking services to him. Quiz What are the impacts or risks that the Bank may face if the Account is Opened? 5 marks Write Short notes on 5 KYC / KYCB requirements that you know. 5 mark