ICA Certificate in Financial Crime Prevention Course Manual PDF

ICA Certificate in Financial Crime Prevention Course Manual G069/14031 Principal Author Sue Thornhill Contributing Author Pekka Dare Series Editors Dawn Fisher Andrew Clarke KangHui Wong First Edition September 2012 Second Edition January 2014 Third Edition April 20...

ICA Certificate in Financial Crime Prevention Course Manual G069/14031 Principal Author Sue Thornhill Contributing Author Pekka Dare Series Editors Dawn Fisher Andrew Clarke KangHui Wong First Edition September 2012 Second Edition January 2014 Third Edition April 2015 Fourth Edition July 2016 Fifth Edition September 2017 Sixth Edition July 2018 Seventh Edition April 2020 Eight Edition October 2021 Published by: International Compliance Association Fort Dunlop 6th Floor Fort Parkway Birmingham ENGLAND B24 9FD www.int-comp.org All rights are reserved. No part of this publication may be reproduced, stored in a retrieval system, mechanical, photocopying, recording or otherwise, without the prior permission of International Compliance Association. While all reasonable care has been taken in the preparation of this manual, neither International Compliance Association nor any of the authors accept responsibility for any errors it may contain or for any loss sustained by any person placing reliance upon its contents. © 2021 International Compliance Association G069/14031 Unit 1 What is Financial Crime? Unit 1: What is Financial Crime? Learning objectives The purpose of this unit is to: z define what is meant by financial crime z introduce the different components of financial crime z provide an understanding of money laundering, insider dealing and market abuse z provide an overview of the different types of fraud, and z provide a useful insight into the motives for committing financial crime. 1. Defining financial crime There is no single universal definition of financial crime. It is a term sometimes used interchangeably with: z white-collar crime – crime committed by a person of apparent respectability and high social status, in the course of their occupation1 z corporate crime – crime committed by a corporation or individuals associated with a corporation z occupational crime – crime committed through opportunity that arises in the course of employment, and z economic crime – crime related to financial fraud, money laundering and corruption. In addition, financial crime is a wide and complex area that involves a range of criminal offences that have their origins in different pieces of legislation. Most enterprise crimes are structured and run in the expectation of profit. Those who engage in trafficking activity, whether of drugs, people, arms or cultural heritage, do so with one primary object – financial benefit. In motivation, the drug lord is no different from the fraudster or insider dealer. In the UK, for example, the term ‘financial crime’ was given a specific legal definition in the Financial Services and Markets Act 2000 (FSMA 2000), Section 1H(3), as follows. “Financial crime” includes any offence involving– (a) fraud or dishonesty, (b) misconduct in, or misuse of information relating to, a financial market, or (c) handling the proceeds of crime, or (d) the financing of terrorism. 1. As defined by Edwin Sutherland, an influential criminologist of the 20th century. 5  Unit 1: What is Financial Crime? To put this in context, under section 1D(2)(b) of the FSMA, the integrity objective of the Financial Conduct Authority (FCA) – the UK’s financial regulator – includes protecting the UK financial system from being used for a purpose connected with financial crime.2 Globally, it is mainly financial market regulators that have engaged in addressing financial abuse, rather than banking regulators. This may be because in many jurisdictions banking supervision has traditionally been the responsibility of the central bank, and central bankers have much wider responsibilities than just the policing of banking institutions. Financial crime can include any offence involving: z fraud or dishonesty z insider dealing or market manipulation z corruption z money laundering, and z terrorist financing. Consequently, it can be seen that the scope of financial crime is wide, is not clearly defined and is an expanding concept. 2. Types of financial crime There are numerous activities that fall under the heading of financial crime; this section will look at some of these in detail. 2.1 What is fraud? Historically, the various crimes linked to both dishonesty and deception – generically known as ‘fraud’ – were prosecuted under a range of criminal offences. Fraud is a complex issue and defining it does not come easy. In legal terms, it is a relatively simple concept, as all developed jurisdictions have some kind of fraud offence or similar legislation within their statutes, clearly expressing the elements required and the points to be proved for a prosecution to succeed. Yet fraud itself goes well beyond offences with ‘fraud’ in their title and encompasses an array of activities involving dishonest intentions. There are a number of definitions as to what constitutes fraud, both from academics and those who investigate and prosecute it. In the most general terms, a crime is an offence which is proscribed by law and for which there is a legal penalty. Fraud is comprised of many activities involving dishonesty, deception and concealment, where the perpetrator intends to make a gain or cause a loss. Fraud can happen in all business sectors and no organisation is immune from its potential damage, whether carried out externally by customers/third parties or internally by staff. The different types of fraud can be broadly categorised under one of the following typologies: z corporate fraud z banking fraud 2. Legislation.gov.uk, ‘Financial Services and Markets Act 2000’: https://www.legislation.gov.uk/ukpga/2000/8/ section/1D – accessed October 2021 6  Unit 1: What is Financial Crime? z securities and investment fraud z insurance fraud z intellectual property fraud z cyber-enabled fraud and Internet fraud z identity theft, and z bribery and corruption. Each of these will be explained in turn. 2.1.1 Corporate fraud Corporate fraud is fraud that affects companies, businesses and other similar organisations. It can be further divided into the following three types. i. Management fraud involves dishonesty by the top levels of management (i.e. board of directors, business leaders and senior managers) who abuse their position of trust through manipulation or misreporting of financial data, false accounting, or other acts of dishonesty whereby a company’s true assets or liabilities are misrepresented. Example: Tesco plc and Tesco Stores Ltd3 In September 2014, more than £2 billion was wiped off the value of Britain’s biggest retailer. This was after forensic accountants and lawyers were drafted in to scrutinise its books in the wake of a warning from a whistle-blower alleging accounting irregularities that had misleadingly boosted profits by £250 million in the first six months of 2014. Tesco later revised this overstatement to £326 million. On 29 August 2014, Tesco plc published a trading update in which it stated that it expected trading profit for the six months ending 23 August 2014 to be in the region of £1.1 billion. On 22 September, Tesco plc published a further trading update in which it announced that it had ‘identified an overstatement of its expected profit for the half year’. The UK Serious Fraud Office (SFO) launched a criminal investigation into accounting practices at Tesco in October 2014. Three Tesco executives were subsequently charged by the SFO with fraud and false accounting. Finance Director Carl Rogberg, Managing Director Chris Bush and Commercial Director John Scouler were suspended from their roles in November 2014 and went on trial in October 2018. The SFO ultimately fined Tesco Stores Ltd £129 million in a deferred prosecution agreement. Tesco separately agreed with the FCA to pay £85 million in compensation to investors affected by the misleading trading statement that overstated profits, having agreed that Tesco plc committed market abuse. 3. Serious Fraud Office, ‘Tesco PLC’, 4 November 2014: https://www.sfo.gov.uk/cases/tesco-plc/ – accessed October 2021 7  Unit 1: What is Financial Crime? During the trial of the three former executives, it was reported that staff at Tesco felt compromised at being asked to misreport profits. Some resigned, feeling that their professional integrity would be compromised. It was Senior Tesco accountant Amit Soni who ultimately blew the whistle on the scheme to the executives. In December 2018, the case against Bush and Scouler was dismissed after being thrown out by the judge who stated the prosecution case was ‘weak’, clearing them each of one count of fraud and another of false accounting. Rogberg was also acquitted on the basis of insufficient evidence in January 2019. ii. Employee fraud means a fraud committed by any other employees apart from senior management. Fraud from within the organisation can be for a number of reasons, including for personal gain or to hide mistakes. Example: The HBOS Reading fraud case A notable example includes the involvement of former HBOS employees and a consultant, specialising in business turnaround, who were each sentenced to a prison for a total of 5 years for their involvement in a conspiracy to defraud £245 million. It was alleged that bank employees accepted kickbacks, including cash payments, to refer the turnaround consultants into distressed businesses within the bank’s distressed lending department. Ultimately, HBOS shareholders and small business customers, of which many were wrongly categorised as high-risk customers despite never missing repayment, were the victims in the scandal (in addition to the British taxpayers). Lyndon Scourfield, the head of the bank’s Impaired Assets Division, would require businesses to support his favoured turnaround consultants, Quayside Corporate Services (QCS) in return for its continued support. QCS, which was run by David Mills and Michael Bancroft, would then submit inflated business cases for addition finance, often at times against the wish of the owner. It is alleged that QCS arranged for Scourfield to receive luxury items such as Rolex watches, hundreds of thousands of pounds in cash, vacations, drugs and prostitutes. The businesses were then frequently asset stripped by QCS and often made bankrupt or sold for nominal amounts to companies linked to Mills or Bancroft. Source: https://www.bbc.co.uk/news/business-38796087 8  Unit 1: What is Financial Crime? iii. External fraud means fraud conducted from outside the organisation by a customer/client, supplier or contractor. This would also include ‘mandate fraud’, which has increased significantly in recent years with the opportunity to engage in email contact to facilitate the fraud. Mandate fraud is when someone gets you to change a direct debit, standing order or bank transfer mandate, by purporting to be an organisation to which you make regular payments, for example your business supplier. A common form of mandate fraud, known as CEO fraud, or business email compromise (BEC), will typically start with a ‘spoof’ email sent from a fraudster to a member of staff in a company’s finance department. This is often a junior member who may have been identified as recently starting in the role, possibly through social media research. The fraudster, purporting to be a company director or CEO, will instruct the member of staff in the email to make an urgent transfer to a certain bank account for a specific reason. The money will have been sent money to a fraudster’s bank account. According to the FBI’s Internet Crime Complaint Center, BEC scams continue to grow and evolve, targeting businesses of all sizes. Between January 2015 and February 2017, there was a 1,300% increase in identified exposed losses, now totalling over $3 billion. Source: FBI, https://www.fbi.gov/news/stories/business-e-mail-compromise-on-the-rise A recent report from the City of London Police’s National Fraud Intelligence Bureau shows that over £32 million has been reported to be lost as a result of CEO fraud... The largest reported amount of money given by a member of staff to a fraudster was £18.5 million... typically the average amount given to a fraudster is £35,000. Source: https://www.actionfraud.police.uk/news/action-fraud-warning-after-serious-rise-in-ceo- fraud-feb16 2.1.2 Banking fraud This refers to any fraud that affects the banking sector. Fraud in banks can be further divided into the following four main categories. i. Customer account fraud involves accounts that may be opened by fraudsters for criminal purposes, such as money laundering or to facilitate lending fraud. Typical frauds include withdrawal against uncleared effects, abuse of new cheque books and dishonest use of access to online banking facilities. ii. Deposit fraud often involves the diversion of legitimate deposits to accounts (which can be located in less well-regulated offshore locations or countries with strict bank secrecy laws) controlled by fraudsters and the non-recording of the deposits in the bank’s accounting records. Where a high level of discretion is given to the bank by the customer, the scope for misusing the customer’s deposits is also increased. iii. Domestic and international payment fraud and misuse of money transfer systems usually involves false instructions by fraudsters. Payment fraud is more easily committed with internal collusion whereby an employee may provide information relating to high-value customers or they may amend customer records or facilitate the payment itself. 9  Unit 1: What is Financial Crime? iv. Lending and credit fraud occurs when any advance is granted, continued or increased on the basis of false information of a material nature (for example, through impersonation of individuals with good credit profiles, or forged signatures on documents/counterfeit documents) supplied by the borrower. Identity fraud and misrepresentation of a financial position are common in this respect. Credit card fraud occurs when a merchant is deceived into releasing merchandise or rendering services, believing that a credit card account will provide payment for goods/services. Different types of banking fraud will be discussed in more detail in Unit 4. 2.1.3 Securities and investment fraud This occurs when investors are deceived and manipulated via misleading financial reports, resulting in theft of capital or income. Typical frauds include bogus products and investments, selling or lending investments without authority, trading without authorisation, fraudulent instructions and churning.4 One particular investment fraud is known as a ‘Ponzi’ scheme, named after the Charles Ponzi case in the 1920s. He promised clients a 50% profit within 45 days, or 100% profit within 90 days. The scheme eventually collapsed, as they all inevitably must do, costing victims $20 million. A Ponzi scheme generates returns for existing investors by acquiring new investors; when the flow of new investors runs out, the scheme falls apart. Example One case in the US involved defrauding investors out of more than $10 million in just two years. Michael Wilson, who was convicted of wire fraud, was sentenced to 108 months in prison. Wilson created several false investment companies – known collectively as ‘New Frontier’. He then enticed individuals and companies to invest, promising high-yield earnings and returns. Rather than investing his clients’ money, Wilson lived the high life, buying properties in the United States, Canada and Vietnam, automobiles, artwork and other items. As part of his sentence, a judgement of over $5.5 million has been entered against him. He had several bank accounts in Canada, Singapore and the Grenadines. The FBI Agent-in-Charge said: ‘By the time Michael Wilson was 21 years old, he was comfortable stealing money from people, and he was good at it’. When he realised his investment schemes were unravelling he became even better at trying to hide that stolen money – and himself – in multiple countries across the globe. Source: U.S. Department of Justice, https://www.justice.gov/usao-wdny/pr/ hamburg-man-who-fled-country-sentenced-wire-fraud 4. Churning involves the excessive buying and selling of securities solely for the purpose of generating additional commission. 10  Unit 1: What is Financial Crime? 2.1.4 Insurance fraud This refers to fraud in the context of an insurance business, which can be further divided as follows. z Claimant fraud involves insurance claims filed by customers with intent to defraud the insurance provider, for example, overstated claims, false claims on life policies, bogus accident claims, arson or destruction of the insured assets. z Agent and employee fraud involves cancellation of a policy against the customer’s interests, forged surrender of policies, or false claims by insurance company employees based on customers’ policies. z Bogus policy fraud involves companies that are established with the sole intention of defrauding their unwary customers through producing bogus insurance products, such as capital investment bonds, bogus cover notes and insurance policies, and the manipulation of risk classes by agents. Example: Operation Dino This was the biggest car insurance fraud investigated in the UK. There was a total of 82 convictions in the scam, which involved the deliberate damaging of vehicles operated from a garage based in Blackwood, South Wales, UK. The fraud ring cost the insurance industry more than £760,000. The garage was owned by the Yandell family. Gwent Police said they were the masterminds of the scam and provided the insurance fraud service for dozens of family members and friends. They were eventually caught by their own CCTV driving a Land Rover into a forklift truck to make it look like the car had been in an accident. The judge said: ‘The cost to insurance companies of this type of fraud is immense and the cost is passed on by insurance companies to those who pay insurance premiums.’ Speaking after the hearing, Detective Chief Inspector Richard Williams said: ‘Two officers have worked on this case full-time for four years.’ Given the number of perpetrators, a series of individual trials were held. The original case ended in 2015 with 81 people prosecuted for staging accidents involving 57 different car vehicles. Since then, there have been further court cases. In the first set of prosecutions, a total of 601 months in jail were dished out to 81 fraudsters. The second set of trials ended in June 2018, covering additional insurance claims linked to the original investigation. This led to 96 convictions for 77 defendants. Source: https://www.walesonline.co.uk/news/wales-news/cash-crash-inside-story- biggest-14858438 11  Unit 1: What is Financial Crime? 2.1.5 Intellectual property fraud This occurs when intellectual property (such as brands, trademarks, copyrights, patents, design rights and customer lists) are stolen, misappropriated or infringed by employees or third parties. A simple example is the counterfeiting of Chanel, Louis Vuitton and BMW products. The use of counterfeit goods has serious health implications; fake cosmetics often contain toxic levels of chemicals; fake vehicle products such as brake pads can fail causing accidents; and fake electrical items such as hair curling tongs can overheat and result in serious injury. In some cases, intellectual property is far more valuable to the business than its tangible assets. These illegal products are frequently found in a range of industries, from luxury items (e.g. fashion apparel or deluxe watches), via intermediary products (such as machines, spare parts or chemicals) to consumer goods that have an impact on personal health and safety (such as pharmaceuticals, food and drink, medical equipment, or toys). Within the EU, annual revenues from counterfeiting now exceed those from narcotics. According to a study led by the European Union’s Intellectual Property Office (EUIPO), counterfeit bags, clothing, smartphones and fraudulent drugs cost the European economy a loss of €60 billion each year. They estimate counterfeit products represent 5.8% of imports in the EU or €119 billion per year. Internationally, they estimate counterfeit and pirated products represent up to 2.5% of world trade, an amount of up to €412 billion. Source: https://euipo.europa.eu/ohimportal/en/web/observatory/report-on-trade-in-fakes 2.1.6 Cybercrime and Internet fraud Cybercrime involves a range of crimes which are committed either through or with the support of computers and the Internet. There were 3.8 billion Internet users in 2017 (51% of the world’s population of 7 billion), up from 2 billion in 2015. Typical frauds of this type include data manipulation, computer manipulation, theft of information, viruses, worms, hoaxes and phishing attacks,5 which will be discussed in more detail in Unit 5. It has been predicted that cybercrime will cost the world $10.5 trillion annually by 2025, up from $6 trillion in 2021. This represents the greatest transfer of economic wealth in history and will be more profitable than the global trade of all major illegal drugs combined. 5. Phishing refers to the action of assuming the identity of a legitimate organisation or website, and sending forged email and/or using webpages of that organisation/website to convince consumers to share their usernames, passwords and personal financial information, which will then be used to commit fraud. 12  Unit 1: What is Financial Crime? Cybercrime Magazine’s Steven Morgan summarises the vast range of threats and their associated costs, from: damage and destruction of data, stolen money, lost productivity, theft of intellectual property, theft of personal and financial data, embezzlement, fraud, post-attack disruption to the normal course of business, forensic investigation, restoration and deletion of hacked data and systems, and reputational harm.6 2.1.7 Identity theft This takes place when an individual’s identity has been stolen or impersonated by fraudsters, typically for financial gain. This will be discussed in more detail in Unit 5. Example: Identity theft A classic example of an identity theft is where A obtains a loan from the bank by pretending to be B. A uses personal information (address, birth date, financial details, bank account numbers, etc.) about B, which he acquired somehow, to convince the bank that he is B. 2.1.8 Bribery and corruption This can occur in the form of kickbacks, bid rigging, gifts or gratuities with the purpose of improperly manipulating or influencing business decisions. For example, an employee might receive kickbacks or commission from a supplier for awarding the contract to that supplier, or a borrower may offer bribes to management and employees of an institution to obtain credit or to manipulate lending criteria. Bribery can occur at the highest levels of society, for example within government, when it may be called ‘grand corruption’, or at a lower level involving smaller amounts of value, but nonetheless with an insidious impact. Example: Mahmoud Thiam As Minister of Mining for the African country of Guinea, he took $8.5 million in bribes from executives of a Chinese conglomerate in exchange for helping them secure lucrative mining rights. Thiam had 14 years’ experience as an investment banker in New York and owned $3.75 million of property in the US. Guinea has the world’s largest reserves of bauxite and high-grade iron ore, as well as gold and diamonds. And yet 55% of the population live below the poverty line, with 100,000 children under age 5 suffering from severe malnutrition. Thiam was convicted in the US and in August 2017 he was handed a seven‑year sentence.7 6. Stephen Morgan, Cybercrime To Cost The World $10.5 Trillion Annually By 2025’, Cybercrime Magazine, 13 November 2020: https://cybersecurityventures.com/hackerpocalypse-cybercrime-report-2016/ – accessed November 2021 7. Richard L. Cassin, ‘Federal jury convicts former Guinea mining minister of laundering bribes’, The FCPA Blog, 4 May 2017: http://www.fcpablog.com/blog/2017/5/4/federal-jury-convicts-former-guinea-mining-minister-of-laund.html – accessed November 2021 13  Unit 1: What is Financial Crime? Example: Munir Yakub Patel A clerk at a magistrate’s court in the UK, Patel took a £500 bribe in exchange for not putting details of a traffic summons on a court database, thus avoiding an endorsement being recorded on the defendant’s driving licence record. Convicted of bribery and misconduct in office, he was eventually sentenced to four years’ imprisonment.8 2.2 What is insider dealing? At its most basic, insider dealing is conducting trading activity using information that is not available to other investors, e.g. information that was obtained through the course of employment. While today most countries have legislation to combat insider dealing, countries such as Germany, Japan and Switzerland have enacted specific provisions only in recent years. Although it is probable that a good deal of new legislation is the result of a desire on the part of those responsible for the markets to be in line with internationally accepted standards, the pressure that the US Securities and Exchange Commission (SEC) and US government have brought to bear on foreign agencies, when requesting assistance in pursuing insiders suspected of abuse, has had a significant impact. Generally, an individual is guilty of insider dealing if they: z deal in price-affected securities in a regulated market by taking advantage of inside information not in the public domain to further their own interests z encourage others to deal in price-affected securities in a regulated market on the basis of inside information, or z disclose inside information other than in the proper performance of the functions of their employment, office or profession. There may also be considerable variations from one community to another as to what amounts to insider dealing. Much will also depend upon the nature and, in particular, the depth of the market. In the US a high proportion of the more significant cases of insider abuse are discovered as a result of whistle-blowing. This takes many forms and ranges from colleagues who are suspicious of an individual’s lifestyle to disgruntled clients. In the US it is possible for the authorities to pay a bounty to those who have given information that has led to successful enforcement action against an insider dealer. In other countries, this robust approach to detection has been rejected as going too far. Nonetheless, there is little doubt that encouraging those who are suspicious to disclose their suspicions to the appropriate authority has assisted enforcement in regard to securities frauds in the US and the detection of abuses, such as corruption, elsewhere. Legal restrictions on insider dealing Most jurisdictions impose an obligation on insiders to disclose their dealings in the securities of their companies. Where anti-insider dealing laws exist, this obligation must 8. BBC News, ‘Bribe conviction for court clerk Munir Patel UK-first’, 14 October 2011: http://www.bbc.co.uk/news/uk- england-london-15310150 – accessed November 2021 14  Unit 1: What is Financial Crime? assist detection of insider abuse and aid enforcement of the law. There are examples of laws that impose obligations and liabilities on insiders that depend for their operation on disclosure and reporting obligations. For example, section 16(b) of the US Securities Exchange Act 1934 requires directors, officers and substantial shareholders of corporations to account to their company for any profit that is made through buying and selling company securities within any period of six months. This depends for its effectiveness on the reporting obligations cast upon such insiders in section 16(a). Even in those jurisdictions, which today are very few, where there is no substantive prohibition on insider trading, disclosure may still serve to focus attention on the activities of insiders. Public censure Hong Kong has adopted a regime that uses public censure in cases of ‘culpable insider dealing’. Nonetheless, for disclosure to have effect as a sanction, it is important that the conduct to which it draws attention be regarded as wrongful in the society. Example: Insider dealing (1) The CEO of Company A learns (prior to a public announcement) that Company A will be taken over and buys shares in Company A knowing that the share price is likely to rise. Even if the CEO of Company A does not trade on the basis of inside information but instead passes the information to their partner, who then trades on it, insider dealing would occur. Example: Insider dealing (2) The classic example that is often given of insider dealing is where a director of a company learns in a board meeting that his/her company’s profit forecasts are about to be revised to a significant extent; they then go to the stock market and trade on the basis of this information before it is made publicly available. In such circumstances, he/she has clearly taken advantage of his/her position and the information that came to him/her by virtue of their seat on the board. He/she has misused the confidential information that was entrusted to him/her in the proper performance of their duties as a director, or, in the words of the US Federal law, misappropriated it. It would also generally be regarded as falling within the notion of insider dealing, if he/she persuaded another person to deal in the securities of his/her company, or disclosed the information to a third person knowing that they would be likely to deal or otherwise misuse the information. Usually, such matters are dealt with in the US through civil enforcement actions, often seeking an injunction and restitution. Section 32(a) of the Securities Exchange Act 1934 provides that criminal penalties are available against a person who violates the provisions of the Act, if they act ‘wilfully’. 15  Unit 1: What is Financial Crime? Case study: Raj Rajaratnam, Galleon Group In November 2011, Sri-Lankan born Raj Rajaratnam, the founder of Galleon Group hedge fund, was fined $92.8 million (€67 million) in penalties by the SEC. The fine followed his sentencing in October 2001 to 11 years in jail for one of the biggest insider trading cases in American history. Rajaratnam was convicted on 14 counts of securities fraud and conspiracy charges after a two-month trial.9 2.3 What is market manipulation? Market manipulation is generally defined as the misuse of information, the giving of a false or misleading impression, and distortion of the market (i.e. behaviour that manipulates price to the detriment of investors). Case study: Court convicts individual for false trading and deception Mr Wong Leon Keat (Mr Wong) was sentenced on 12 March 2021 to a total of eight weeks’ imprisonment and a fine of $30,000 for false trading and deceiving a brokerage firm while trading in the shares of Gaylin Holdings Limited (Gaylin). From 2012 to 2016, Mr Wong helped several individuals manage their investments and had control over their UOBKH trading accounts. On 17 occasions from 11 November 2015 to 25 October 2016, Mr Wong bought Gaylin shares, in small quantities of 100 to 200 shares each time, through a UOBKH trading account belonging to one of these individuals. His trades caused Gaylin’s share prices to close 6.5 percent to 38.6 percent higher than they would have done otherwise. Mr Wong wanted to create the misleading appearance with regard to Gaylin’s share prices in order to, amongst other things, protect his reputation, because his company WRPL had been involved in Gaylin’s IPO process and he had introduced investors to invest in Gaylin shares.10 2.4 What is money laundering? Money laundering is the process used by criminals to move, conceal and legitimise their criminal proceeds. Money laundering can occur every time a transaction takes place or any relationship is formed that involves any form of property derived from criminal activity. 2.4.1 The purposes of money laundering The main purposes of money laundering are: z to disguise the criminal origins of the property (i.e. to make it look as if the property comes from a legal source) z to avoid law enforcement detection (i.e. to break the evidence link between the criminals and the property) 9. Susan Pulliam and Chad Bray, ‘Trader Draws Record Sentence’, The Wall Street Journal, 14 October 2011: https://www.wsj.com/articles/SB10001424052970203914304576627191081876286 – accessed November 2021 10. Monetary Authority of Singapore, ‘Court convicts individual for false trading and deception’, 15 March 2021: https://www.mas.gov.sg/regulation/enforcement/enforcement-actions/2021/court-convicts-individual-for-market- manipulation-and-deception – accessed November 2021 16  Unit 1: What is Financial Crime? z to keep control of the property (i.e. to conceal/distance ownership of criminal property but still keep control of it), and z to benefit from the proceeds of crime (i.e. to spend the proceeds on luxury goods and services). Example An employee steals large sums of cash from their employer without getting caught. If they were to make large deposits into their bank account, their bank might become suspicious of the unusually large deposits. Therefore, in order to avoid suspicion or detection, and to distance the funds from their criminal origin, they might simply use the cash to make purchases and then resell those items in a legitimate market to get the money back. This is money laundering. In this way, they can keep control and benefit from their proceeds of crime. If a criminal buys and sells property many times, it becomes very difficult for the police to link the property to the proceeds of crime and to trace the original source of the money used to purchase the property. 2.4.2 The money laundering process There is no one way of laundering the proceeds of crime. It is important to recognise that the word ‘money’ covers the proceeds of crime in all its various forms. It may be cash, but equally it may also be proceeds such as funds held on account, high-value goods or precious stones. The money laundering process is traditionally considered to involve three stages, namely placement, layering and integration. i. Placement is the first stage in the ‘washing’ cycle. Proceeds from criminal activity can be placed into the financial system by means such as: z paying cash into a bank z purchasing high-value goods, property or business assets, or z smuggling assets out of the country. ii. Layering involves concealing or disguising the source and the ownership of the funds by setting up complex and/or multiple financial transactions, which confuse the audit trail and separate the money from its criminal origin. In reality, this process can be as simple or complex as the situation demands. Examples of complex financial transactions include: z wire transfers abroad z cash withdrawn from accounts and then re-deposited, particularly using overseas banking systems, thereby breaking the audit trail z transfer of assets into offshore financial structures, e.g. trusts (for further research consider the 2021 ‘Pandora Papers’ which contains examples),11 and z resale of high-value goods and assets, for example, selling the property to other members of the family so as to disguise the ownership of the property. 11. International Consortium of Journalists, ‘Offshore havens and and hidden riches of world leaders and billionaires exposed in unprecedent leak’, 3 October 2021: https://www.icij.org/investigations/pandora-papers/ global-investigation-tax-havens-offshore/ – accessed November 2021 17  Unit 1: What is Financial Crime? iii. Integration is the final stage, where illicit funds are then mixed with all other assets in the system so that they appear as normal, legally earned funds. The illicit funds will technically remain the proceeds of crime but will have an appearance of legitimacy, if successfully laundered. For example, money launderers may establish anonymous, dummy, front or shell companies in foreign countries where the right to secrecy is guaranteed. They then grant themselves loans out of the laundered money for future legal transactions and create false loan repayments. Note It is important to note that, while useful, this three-staged approach is a simplified model and does not fully reflect the money laundering process because money laundering does not always occur in distinct stages. Money laundering is not just about the laundering of cash, but involves all forms of property, and this is particularly relevant at the ‘placement’ stage. Consider a fraudulent investment scheme when the victim pays funds across from account to account: funds are already within the financial system and not subject to a traditional ‘placement’. Money laundering techniques vary in their degree of sophistication depending on a number of factors, including the: z type of crime and location where it was committed z quantity of assets z structure and level of organisation of the criminals involved z amount of fear and intimidation a criminal enterprise can generate z educational, professional and business background of the criminals z availability of technology, and z cost and ease of hiring financial experts to develop and implement money laundering schemes. In most jurisdictions, in order to counter money launderers, financial services firms are required to follow certain mandatory requirements: z set up customer due diligence (CDD) policies and procedures to z allow for verifying the identity of clients, for example, requiring evidence of identity and proof of address z establish the basis of the relationship, so anything untoward will be highlighted z set up recordkeeping procedures for evidence of identity and transactions z set up internal reporting procedures for suspicious activities or transactions z appoint a money laundering reporting officer (MLRO) or similar role, to manage the regulatory requirements, and z train relevant employees in their legal obligations relating to reporting of suspicious activities and money laundering laws. 18  Unit 1: What is Financial Crime? 2.5 What is terrorist financing? The International Convention for the Suppression of the Financing of Terrorism defined the primary objective of terrorism as: to intimidate a population, or to compel a government or an international organization to do or to abstain from doing any act. This is in contrast to other types of criminal activity, where financial gain is generally the ultimate objective. Terrorist organisations all require support in order to achieve their aims. Like any criminal organisation, they must be able to build and maintain an effective infrastructure. Terrorist organisations require money for many purposes, including recruitment, training, weapons, travel, materials and safe houses. Major terrorist acts such as 9/11 or the 2004 Madrid train bombings needed a significant amount of time and effort before they could be carried out. However the actual financial cost of the individual terrorist act itself may be surprisingly low, which brings challenges in terms of detecting terrorist financing. Terrorists often control funds from a variety of sources around the world and employ increasingly sophisticated techniques to move these funds between jurisdictions. In managing the flow of funding, they often draw on the services of professionals such as bankers, accountants and lawyers, and take advantage of a range of services and products. The process of financing terrorism is a different process to that of laundering the proceeds of crimes that have already occurred. Money laundering and terrorist financing do, however, have a number of features in common. z The destination of money used to support terrorism has to be disguised, in the same way that the source of laundered funds must be disguised. z Both require use of products and services provided by the financial sector. z Many terrorist groups are known to have links with criminal organisations and in many cases derive funding from such organisations, either with direct involvement in crime or by imposing a form of ‘tax’ on criminal activity, depending on the capability for violence and intimidation. Many of the techniques used to disguise the destination of terrorist funds are identical to those used to launder the proceeds of crime. Whatever the difficulties, the risks posed by both processes are now firmly established and must be avoided. Note Money laundering is a key concept in the broader environment of financial crime, particularly when you consider that, as we have already mentioned, money laundering can occur every time any transaction takes place or any relationship is formed that involves any form of property that is the proceeds of crime (and the majority of financial crime is committed for gain, which then has to be laundered to avoid detection). 19  Unit 1: What is Financial Crime? This of course has implications for other financial crimes – as by creating ‘proceeds of crime’ they may effectively generate broader liabilities under specific money laundering legislation and regulation. 3. Who commits financial crime? There are three main categories of people who commit the various types of financial crime. i. Managers, including senior executives and directors, may manipulate or misreport financial data in order to misrepresent a company’s true financial position. The purpose may be to mislead bankers, existing shareholders or the market so as to obtain a rights issue, to raise substantial equity and loan finance, to raise a share price, to attract customers, or to meet business targets and budgets. ii. Non-management employees may manipulate company records to facilitate false payments, misreport their own performance, falsify expenditure incurred on behalf of the company, or simply commit theft by stealing equipment or services from the company. iii. External parties, including customers, suppliers, contractors or a third party unrelated to the company may commit financial crimes. For example, customers can falsify their claims for compensation. Suppliers and contractors can submit false claims by way of over-invoicing for goods or services. Other third parties can hijack the identity of the company by making a phishing website. For other criminals, financial crime is the inevitable sequel to crimes such as burglary or extortion, which produce property that must be laundered before they can benefit from it. For terrorists, financial crimes can contribute to funding their activities. 4. Why do people commit financial crime? In simple terms, people commit financial crime when a motive coincides with an opportunity. While there is no excuse for any type of crime, including financial crime, there are a number of generally accepted motives for committing financial crime. The various factors below are not mutually exclusive; fraudsters can be driven by one or more of the following motives.12 z Greed is a common motive, owing to a perceived need to have a luxury lifestyle or extra spending money. Most offenders continue their criminal activities because they enjoy the benefits of the money. z Financial difficulties provide a powerful motivation to commit crime, e.g. a need for money to resolve family or personal financial problems such as mounting gambling debts or drug addiction problems. z Boredom is one of the motives for committing fraud. The famous example is the ‘pipe and slippers fraudster’ who did not smoke, drink, gamble or own a car despite having 10 driving licences. He created nine different identities with 11 banks and opened 90 accounts. He also created a sophisticated card index system with each identity and took a driving test using each of the nine identities. z Beating the system is another motive for committing fraud. A common image of a fraudster beating the system is that of a lonely and alienated hacker breaking into the computer system of a bank or a company. Hackers may perceive an additional ego boost if they become more expert in their closed community. 12. Micheal Hyland and Sue Thornhill, Fraud Manager’s Reference Guide, 2007. 20  Unit 1: What is Financial Crime? z Revenge is another factor, often caused by perceived exploitation of employees, unfair compensation, frustrated ambition, low morale due to a redundancy programme, or demotion of individuals following a reorganisation or takeover. z Fear of detection has been known to generate a considerable amount of complicated false accounting which was initially intended just to hide an honest mistake. It is also the reason why criminals launder the proceeds of many crimes and why terrorists use criminal methods to obtain secure funding. z Pressure to perform is a key factor in business situations. For example, a managing director falsifies a company’s financial position and inflates the company’s worth to raise substantial equity and loan finance. z Easy access to information whilst not a direct motive, might provide the opportunity to defraud. Providers, billing agents, claims processors, analysts, information technology staff, mailroom staff and many others may have ample opportunity to defraud. Most people do not succumb to the temptation to commit fraud even though they could. Nevertheless, when somebody with the information and authorisation necessary to commit fraud faces a personal financial crisis, feels harmed by the organisation or wants to live beyond their means, they may turn to fraud. Understanding the factors motivating criminals is important for the prevention and detection of financial crime. 21  Unit 1: What is Financial Crime? Learning outcomes By the end of this unit you should: z understand that financial crime encompasses white-collar crime, corporate crime, occupational crime and economic crime z be able to describe the basic characteristics of the eight commonest types of fraud z be able to define insider dealing and recognise the main forms that it takes z be able to define market abuse z understand the concept money laundering and understand why the traditional model is limited in its usefulness z be able to outline the measures that financial services firms can take to limit their exposure to money laundering z understand the risk posed by terrorists’ use of financial services firms in their funding operations z appreciate the broad similarities between money laundering and terrorist financing, and z be aware of the wide range of people who commit financial crimes and of the various motivations that drive them. 22  Unit 1: What is Financial Crime? Tasks 1. Within your organisation, find out whether fraud is defined in any company policies (such as the disciplinary policy). 2. Identify whether your organisation has been the subject of any common types of fraud. 3. Investigate the concept of ‘predicate offences’ under money laundering laws. What does the Financial Action Task Force (FATF) have to say on this matter? 23