ICA International Advanced Certificate in Anti Money Laundering PDF

ICA International Advanced Certificate in Anti Money Laundering Course Manual Edition G208/15482 FOREWORD The responsibility we carry in our day- to-day roles plays an integral part in protecting our firms by stopping criminals laundering their dirty money and benefiting from their cr...

ICA International Advanced Certificate in Anti Money Laundering Course Manual Edition G208/15482 FOREWORD The responsibility we carry in our day- to-day roles plays an integral part in protecting our firms by stopping criminals laundering their dirty money and benefiting from their crimes. Your studies will provide you with the tools and competencies that you need to deter, detect and prevent financial crime and ultimately save lives. James Rickett Global Lead - Anti Money Laundering and Sanctions Compliance PRELIMINARY Principal Authors Pekka Dare Sue Thornhill Contributing Authors William B Howarth Andrew Chiles Series Editor Andrew Chiles James Rickett First Edition July 2022 Fifteenth Edition July 2022 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. Throughout the course you will find links to external websites. These links are provided as a convenience and for informational purposes only and do not imply on the part of ICA any endorsement or guarantee of any of the organisations or information (including the right to display such information) found on their respective websites. Any comments or enquiries regarding the linked websites or their content should be directed to the owners of the site. External links are selected and reviewed regularly by ICA. Although we make every effort to ensure these links are accurate, up to date and relevant, ICA is not responsible for any of the content of external websites, or the accuracy of such content. This is because: ICA does not produce them or maintain/update them, ICA cannot change them, they can be changed without ICA’s knowledge or agreement. © 2024 International Compliance Association G208/15482 CONTENTS Unit 1: What are the money laundering and terrorist financing risks that must be managed? 1 1. What is money laundering? 2. Terrorist financing 3. Proliferation financing 4. Financial and economic sanctions Unit 2: The International Bodies and Standard Setters 26 1. The role of international bodies in anti money laundering (AML) and combating the financing of terrorism (CFT) 2. Key international organisations 3. The work of international bodies and its relevance for AML practitioners Unit 3: National Legal and Regulatory Frameworks 42 1. The impact of the FATF Standards and Recommendations on domestic frameworks 2. US primary legislation and regulation 3. United Kingdom 4. Jersey strategy on money laundering and terrorist financing 5. Singapore 6. People’s Republic of China 7. India 8. United Arab Emirates (UAE) Unit 4: Taking an AML/CFT Risk-Based Approach and Managing the Risks 63 1. What is a risk-based approach? 2. Determining the risks 3. Management of AML/CFT risks 4. AML roles and responsibilities 5. Escalation to senior management 6. Exiting relationships Unit 5: Initial and ‘Ongoing’ Customer Due Diligence (CDD) 85 1. What is customer due diligence (CDD)? 2. The risk-based approach to CDD 3. The practical application of CDD 4. Simplified due diligence (SDD) and lower-risk situations 5. Higher-risk situations and enhanced due diligence (EDD) 6. Identifying and verifying identity 7. The extent of additional information to be collected 8. ‘Ongoing CDD’ and monitoring relationships 9. Testing the CDD process CONTENTS Unit 6: Monitoring Activity and Transactions 126 1. The developing standards for monitoring transactions and activity 2. Risk-based transaction monitoring and filtering framework 3. International standards and wire transfer requirements 4. Sanctions lists and screening Unit 7: Recognising and Reporting Suspicions 144 1. The international requirements 2. Currency Transaction Reporting 3. EU and UK Requirements 4. What is meant by suspicion and reasonable grounds to suspect? 5. Setting reporting rules and parameters 6. The SAR/STR process and its documentation 7. Balancing the needs of law enforcement with breach of customer confidentiality Unit 8: The Vulnerabilities of Specific Services and Products 169 1. Introduction 2. Retail banking services 3. Private banking 4. Correspondent banking 5. Lending and credit 6. International trade and trade finance 7. Foreign exchange and money transfer services 8. Trust and corporate service providers 9. Insurance 10. The gaming industry 11. Internet payment systems 12. Virtual assets and virtual asset service providers Unit 01 What Are The Money Laundering and Terrorist Financing Risks That Must Be Managed? Learning Objectives The purpose of this unit is to: 1. define what constitutes money laundering 2. explain how and why criminal property is laundered, including its links to corruption and tax evasion 3. define terrorist financing 4. examine the methods employed by those financing terrorism 5. explain proliferation financing, and 6. examine what sanctions are, their international role and why they are important. 1. What is money laundering? Definition Money laundering The process of disguising the illegal origins and ownership of criminal property to make it appear to have come from a legitimate source. Criminal activity is often undertaken to generate revenue or provide benefit to those undertaking the activity. Laundering the property allows the criminals to use and enjoy the proceeds of their criminality without exposing themselves by attracting the attention of law enforcement. 1.1 How is money laundered? Criminally derived property can be laundered through an infinite number of methods, involving all financial services and products. No financial sector product or service is too simple or too complex to be used for a money laundering scheme. 1.1.1 Three-stage model The laundering process has often been described as taking place in three stages. Placement: 1 the placement of funds generated from crime into the financial system, either directly or indirectly. Layering: the process of separating illicit proceeds from their source by creating 2 complex ‘layers’ of financial transactions designed to disguise the audit trail and provide anonymity. Integration: the provision of apparent legitimacy to criminally derived wealth. If the layering process has succeeded, integration schemes place the 3 laundered proceeds back into the economy in such a way that they re-enter the financial system and appear to be legitimately earned or acquired funds. 1.2 A modern assessment of money laundering Traditionally, money laundering was associated with making physical cash which was criminally derived appear legitimate. The modern assessment, however, recognises that the majority of money laundering involves assets which are abused and manipulated through weaknesses in our financial system. The modern assessment recognises that money laundering can involve various types of assets, including real estate, luxury goods, investments, and digital currencies, among others. Criminals exploit vulnerabilities in financial systems to conceal the origins and ownership of these assets, making it difficult to trace and identify the illicit proceeds. 2 Whilst the three-stage model provides a useful Misconception Reality basis for awareness and training in relation to the Money laundering is Money laundering includes motivations and methods of money laundering, solely about money. the laundering of all types it is, nevertheless, an over-simplification. This is of tangible and intangible because it is rare for a single financial institution property that has derived from crime. Should the or its employees to see, or be able to identify, all proceeds start as money three stages related to a single case. It is not even which is then converted into necessary for criminals to use all three stages of something else, say a car or the model to legitimise criminal property. shares, etc., then the car and shares are still part of the laundering activity. Criminals could use a number of institutions, products and services in different jurisdictions Money laundering is Criminals may use and currencies to disguise their activity. However, a process by which unsophisticated methods this may not always be the case. Consider the criminals seek to to launder the proceeds of ‘wash’ or ‘clean’ their crime, such as simply putting following example. criminal property, so stolen money into their bank it appears different account or spending it at to its original form. the supermarket with no To do this, they will intention to ‘wash’ or ‘clean’ use many different the criminal property. Example type of products, services, currencies and jurisdictions. Proceeds always start Although it is a fact that A criminal deposits the proceeds of a off as cash. many crimes generate cash, drug deal into their bank account. The e.g., drug trafficking, there following day they withdraw some of the are many that do not. Fraud money. in its various forms rarely generates cash initially. Laundering is always Not so. There will be many about ‘money on the occasions when funds will move’. be invested for a long period of time, possibly in a simple savings account, in a portfolio of shares or possibly even in a pension plan. Funds are increasingly invested in real estate. As the proceeds of crime were turned into a credit onto the account, the bank has The object of Criminals in possession of been used for money laundering even laundering is to proceeds are self-laundering. though the property does not appear to hide and disguise Many will deposit proceeds be ‘washed’ or have changed appearance. ownership and origin, directly into their own therefore criminals bank account to fund living never launder in their expenses or savings. This is own name. still money laundering. Laundering always The local drug dealer, involves large sums, small-time burglar or other because only the ’jobbing’ criminals rarely sophisticated criminal generate large amounts needs to hide and at any one time, but the disguise their criminal proceeds still need to be This demonstrates why the traditional proceeds. laundered. three-stage model does not always adequately fit all scenarios. Money launderers are If only this were true. easy to spot. Successful criminals will look like any other successful The term money laundering is itself misleading. entrepreneur/high-net-worth Let’s consider why and examine other money individual. laundering misconceptions. 3  Key Learning In its widest definition, money laundering occurs whenever there is any form of relationship or arrangement involving property derived from criminal activity. In circumstances where an institution or practitioner in the regulated sector enters into a relationship involving criminally derived property, it/they will be engaged in laundering activity – although not necessarily committing a criminal offence. 1.3 Predicate offences Definition Predicate offence Any crime that is a part of a greater crime. In a money laundering context this would be an offence that creates monetary proceeds. For example, fraud could be a predicate offence to money laundering if a monetary benefit was obtained from the fraud. In Unit 2, we will look in some detail at the work of the Financial Action Task Force (FATF), which makes a number of recommendations for dealing with money laundering. FATF Recommendation 3 – Money Laundering Offence – requires that ‘countries should apply the crime of money laundering to all serious offences, with a view to including the widest range of predicate offences’. The Interpretive Note to Recommendation 3 states that: Predicate offences may be described by reference to all offences; or to a threshold linked either to a category of serious offences; or to the penalty of imprisonment applicable to the predicate offence (threshold approach); or to a list of predicate offences; or a combination of these approaches. (See ref 1) What this means in practice is that the predicate offences to money laundering could include every crime, or crimes that hit certain thresholds such as a monetary benefit or resulting in a certain sized prison sentence – or even a list of predicate crimes decided by that country. Alternatively, it could be a combination of all these approaches. Whichever approach is adopted, each country should, at a minimum, include a range of offences within each of FATF’s designated categories of offences. There are 21 categories of offences that are derived from the FATF 40 Recommendations outlined in the following diagram. (See ref 1) 4 When deciding the offences to be covered under each of the categories listed above, each country may decide, in accordance with domestic law, how it will define those offences and the nature of any particular elements of those offences that make them serious offences. Different jurisdictions have taken different approaches to this; for example, the UK and Germany have adopted an ‘all crimes’ approach, meaning any property derived from any type of criminal activity is subject to those countries’ domestic money laundering legislation. Alternatively, other jurisdictions have targeted anti money laundering (AML) efforts as ‘specified unlawful activities’ (SUAs), for example, the US has 250 SUAs on its list. 1.4 Money laundering and corruption Definition Corruption ‘The abuse of entrusted power for private gain’ (See ref 2) 5 Corruption and money laundering are strongly linked. This link is two-way, as corruption allows criminal property to be laundered more effectively and any financial benefit gained through corruption needs laundering, so that the corrupt act itself is not uncovered. Anti-corruption activity is often focused on those who hold public office such as government officials. However, a large amount of corruption also goes on in the private sector without any public sector involvement. Corrupt acts can also be carried out by people who hold very little ‘power’, in its traditional meaning. For instance, a bribe paid to a border official to allow a vehicle to pass through the border unchecked. Transparency International outlines four main costs of corruption, let’s consider these in more detail: (See ref 2) Political On the political front, corruption is a major obstacle to democracy and the rule of law. In a democratic system, offices and institutions lose their legitimacy when they’re misused for private advantage. This is harmful in established democracies, but even more so in newly emerging ones. It is extremely challenging to develop accountable political leadership in a corrupt climate. Economic Economically, corruption depletes national wealth. Corrupt politicians invest scarce public resources in projects that will line their pockets rather than benefit communities, and prioritise high-profile projects such as dams, power plants, pipelines and refineries over less spectacular but more urgent infrastructure projects such as schools, hospitals and roads. Corruption also hinders the development of fair market structures and distorts competition, which in turn deters investment. Social Corruption corrodes the social fabric of society. It undermines people’s trust in the political system, in its institutions and its leadership. A distrustful or apathetic public can then become yet another hurdle to challenging corruption. Environmental Environmental degradation is another consequence of corrupt systems. The lack, or non-enforcement, of environmental regulations and legislation means that precious natural resources are carelessly exploited, and entire ecological systems are ravaged. From mining, to logging, to carbon offsets, companies across the globe continue to pay bribes in return for unrestricted destruction. The measures taken by countries to combat money laundering and terrorist financing are powerful tools that are also useful in the fight against corruption. Substantial amounts of criminal proceeds are generated from corruption offences such as bribery, embezzlement, trading in influence and abuse of position in both the public and the private sectors. Corruption offences are generally committed for the purpose of obtaining private gain. The proceeds of corruption are often laundered so that they can be enjoyed without fear of detection or confiscation. Corrupt officials and individuals take great pains to disguise their identity and the original source of the illicit proceeds in order to place such proceeds into the legitimate economy without detection. Likewise, often in corruption cases, bribe payers tend to disguise the financial link between themselves and the corrupt officials, including the destination of the funds, by using money laundering schemes. 6 1.4.1 The United Nations Convention against Corruption (UNCAC) The UNCAC is the only legally binding international anti-corruption instrument. It recognises the importance of fighting money laundering in the anti-corruption context by requiring states to criminalise money laundering and adopt effective measures to prevent it, and by urging the recovery of the proceeds of corruption and the establishment of financial intelligence units (FIUs). The US Foreign Corrupt Practices Act and the UK Bribery Act are two of the leading pieces of global anti- corruption legislation which have led to other countries, such as France and South Korea, to improving their own efforts through legislation to combat corruption. 1.4.2 US Foreign Corrupt Practices Act (FCPA) The FCPA (1977) generally prohibits the payment of bribes to foreign officials to assist in obtaining or retaining business. The Act can apply to prohibited conduct anywhere in the world and extends to publicly traded companies and their officers, directors, employees, stockholders and agents. ‘Agents’ can include third-party agents, consultants, distributors, joint-venture partners and others. The Act applies to: US nationals, citizens or residents acting anywhere in the world US businesses acting anywhere in the world foreign business trading securities on the US exchange, and non-US national or legal entity acting in the US. Since the amendments made in 1998, the anti-bribery provisions of the FCPA now also apply to foreign firms and persons who cause, directly or through agents, an act that enables a corrupt payment to take place within US territory, including when bribery payments are made in US dollars. It’s important to note the provisions in the FCPA that exclude foreign officials from prosecution and exclude the liability of US corporations and citizens for payments meant to secure the performance of ‘routine government action’. In effect, the latter recognises the role that low-level official corruption plays in facilitating US business by allowing the payment of ‘grease money’. The provisions of the FCPA are usually enforced through civil measures by the Securities and Exchange Commission (SEC), although prosecutions and other enforcement action by the US Department of Justice (DOJ) for criminal violations of the substantive prohibitions are quite common. Examples of enforcement actions include the following from the SEC website. (See ref 3) Flutter Entertainment plc paid a $4 million civil penalty for violating provisions of the FCPA in connection with approximately $8.9 million in payments to consultants in Russia in support of the company’s operations and its efforts to have poker legalised in that country. Rio Tinto plc agreed to pay a $15 million civil penalty to resolve charges that it violated the books and records and internal accounting control provisions of the FCPA in connection with the payment of $10.5 million to a consultant to help the company retain mining rights. Honeywell International Inc. agreed to pay more than $81 million to settle the SEC’s charges that it violated the anti-bribery, books and records and international accounting violations of the FCPA arising out of bribery schemes in Brazil and Algeria. 7 1.4.3 UK Bribery Act 2010 Tax evasion schemes generally involve either The UK Bribery Act consists of a framework of two some form of deliberate misrepresentation main offences. Section 1 of the Act covers active or deceitful concealment of earnings. Activity bribery, i.e., the giving, promising, and offering of this kind may either be a specific statutory of a bribe. Section 2 covers passive bribery, criminal offence within the tax laws of a requesting or agreeing to receive or accept a particular jurisdiction, for example in Australia bribe, whether in the UK or overseas. and Guernsey, or be capable of constituting a common-law offence of fraud or forgery, false The Act also created a discrete offence of accounting or cheating the revenue, as in the UK. bribery of a foreign public official (section 6) and introduced a new corporate offence of negligently Unlike most predicate crimes, tax evasion taints failing to prevent bribery (section 7). legitimately earned money that is undeclared, thus rendering it the ‘proceeds of crime’. The The Act applies to: treatment of foreign tax evasion for money UK nationals, citizens or residents worldwide laundering purposes is therefore an issue of enormous importance, particularly for UK businesses worldwide those financial centres whose customers are foreign subsidiaries of UK businesses predominantly based ‘offshore’ within the context performing services for the UK parent of ‘all crimes’ money laundering legislation. company, and 1.5.1 Offshore tax evasion non-UK nationals or legal entities acting in the UK. Small payments to facilitate action – ‘grease’ Definition payments – are also considered offences under the Act. The UK Bribery Act, unlike the US FCPA, Offshore tax evasion does not exclude such payments. Additionally, The UK government defines offshore tax to be considered a bribe under the Act, the evasion in the following terms: individual or entity that offered the bribe must have intended to bring about or to reward an Offshore evasion is using a non-UK improper practice of a function or activity. jurisdiction with the objective of evading UK Organisations are required to put in place tax. This includes moving UK gains, income adequate policies and procedures to prevent or assets offshore to conceal them from bribery. Consequences for committing an offence HMRC; not declaring taxable income or under the act include individual prison sentences gains that arise overseas, or taxable assets of up to 10 years, unlimited fines, and forfeiture kept overseas; and using complex offshore of related income and accrued interest related to structures to hide the beneficial ownership the bribery offence. of assets, income or gains. (See ref 4) If you are interested in learning more about corruption, consider studying the ICA Specialist Whilst we use a UK definition, globally offshore Certificate in Bribery and Corruption. financial structures and tax havens are used by individuals and businesses to hide money 1.5 Money laundering and tax evasion and assets to avoid the payment of tax. By circumventing the payment of such taxes, they are taking funding away from vital public services intended, for example, for a country’s health Definition service. Tax evasion The illegal non-payment or under- payment of taxes. 8 The link between a poor AML framework and tax evasion is well established. Consider the following infographic: Inadequate Weak legal regulation frameworks Criminal activities Weak Lack of interagency transparency co-operation Illicit financial flows involving tax evasion Combatting tax evasion The Organisation for Economic Co-operation and Development (OECD) has been instrumental in seeking to use AML legislation to criminalise tax evasion. They set out Ten Global Principles that countries should follow to combat tax crime. The principles recognise that: …the fight against tax crimes is increasingly global, and requires jurisdictions to engage in timely international co-operation in order to successfully deter, detect, investigate, and prosecute tax crimes and other financial crimes, and recover the proceeds of these crimes. (See ref 5) Of particular note is Principle Seven, which requires nations to ‘designate tax crimes as a predicate offence for money laundering’. On an international basis, the way in which tax evasion is combated is similar in nature to efforts taken to prevent money laundering. Measures detailed by international and national bodies follow similar themes to build an effective framework that prevents tax evasion. These largely centre on information sharing and having common standards. Measures include: the development of international tax standards to enable tax compliance offshore and create a level playing field sharing tax information between jurisdictions to ensure tax compliance through tax enforcement initiatives and partnerships between jurisdictions, for example, Australia, Canada, Netherlands, the UK and the US have formed the Joint Chiefs of Global Tax Enforcement which brings together their respective tax fraud enforcement organisations to share intelligence and expertise supporting developing countries that want to implement tax standards increasing tax payers’ (both individuals and businesses) awareness of their tax obligations developing the financial services understanding and ensuring their controls are robust criminalising tax offences through legal frameworks and penalties, and developing international and national strategies to address tax crimes. 9  1.6 Why is money laundering prevention important? Money laundering, as well as terrorist financing Example and proliferation financing can have a damaging effect on financial sectors and the global economy. The International Monetary Fund (IMF) EU tax fraud scheme provides a useful summary of why preventing The European Public Prosecutor’s Office these crimes is so vital: (EPPO) carried out a joint operation, known as Operation Admiral, with 14 These crimes can make countries less stable, which EU countries into an estimated €2.2 in turn, can weaken law and order, governance, billion tax evasion. The cross-border regulatory effectiveness, foreign investments, and investigation focused on a VAT (value international capital flows. added tax) fraud scheme based on the sale of electronic goods. Money laundering and terrorism financing activity in The scheme was a Carousel or Missing one country can have serious adverse effects across Trader Intra-Community Fraud (MTIC), borders and even globally. Countries with weak which works in the following way: or ineffective controls are especially attractive for money launderers and financiers of terrorism. These Company A sells goods across the criminals seek to conceal their criminal activities border to Company B in a transaction by exploiting the complexity of the global financial exempt from paying VAT. Company A system, the differences between national laws, and then delivers the goods to warehouses in the speed at which money can cross borders. (See ref 7) another country. Company B will sell the goods online to the final customers who In respect of the wider social and economic pay the VAT on the purchase. Company B reasons, FATF advises that criminals are has then taken the money for the goods continuously looking for new routes for as well as the VAT that should have been laundering their funds: paid to the tax authorities. Following this, the funds are then laundered by Generally, money launderers tend to seek out the organised criminals to disguise their countries or sectors in which there is a low risk of illegal origins. detection due to weak or ineffective anti-money laundering programs. Because the objective of The EPPO’s investigation found that the money laundering is to get the illegal funds back scheme involved 26 EU member states in to the individual who generated them, launderers addition to 10 non-EU member countries usually prefer to move funds through stable financial including China, Singapore, the UAE and systems.... the US. The sharing of intelligence, much of which would have been gathered from financial institutions, allowed law Economies with growing or developing financial enforcement to identity and build the centers, but inadequate controls are particularly picture of the scheme as well as recover vulnerable as established financial center countries funds and arrest those involved. implement comprehensive anti-money laundering regimes. The EU’s chief prosecutor noted the importance of cross-border collaboration: Differences between national anti-money laundering ‘When it comes to VAT fraud, from a systems will be exploited by launderers, who tend national perspective, the damages can to move their networks to countries and financial be assessed as relatively small or non- systems with weak or ineffective countermeasures. existent, or even remain undetected. You need a helicopter view, to see the whole However, it must be kept in mind that even well- picture’. regulated financial centres with stringent AML/ counter financing of terrorism (CFT) regimes still For more information on this case visit remain vulnerable. the EPPO website. (See ref 6) 10 As with law abiding individuals and entities, 2. Terrorist financing criminals will also seek out politically stable jurisdictions with sound reputations for secure 2.1 What is terrorist financing? investment. Nevertheless: …as with the damaged integrity of an Definition individual financial institution, there is a damping effect on foreign direct investment when a country’s Terrorist financing commercial and financial sectors are perceived to The provision or collection of funds with be subject to the control and influence of organized the intention that they should be used crime. (or in the knowledge that they are to be used) to carry out acts that support What this means is that the bad money will drive terrorists or terrorist organisations or to out the good. Where a country is dependent commit acts of terrorism. on international aid, this may also be adversely affected, particularly if the levels of financial crime are also accompanied by, or linked to, high levels Global action to combat terrorism and terrorist of corruption. financing has been placed on an equal footing with preventing money laundering. International The possible social and political costs of money conventions and standards are in place requiring laundering, if left unchecked or dealt with countries to take the necessary action and to ineffectively, are serious. criminalise terrorist financing. These conventions also require that terrorist financing must be Organized crime can infiltrate financial institutions, designated as an underlying (i.e., predicate) acquire control of large sectors of the economy offence for money laundering. through investment, or offer bribes to public officials and indeed governments. The UN Convention for the Suppression of Terrorist Financing prohibits any person(s) from The economic and political influence of criminal directly or indirectly, unlawfully and wilfully organizations can weaken the social fabric, collective providing or collecting funds with the intention ethical standards, and ultimately the democratic they should be used, or in the knowledge that institutions of society. In countries transitioning they are to be used, to further acts of terrorism. to democratic systems, this criminal influence can undermine the transition. Most fundamentally, The international standards and conventions money laundering is inextricably linked to the require individual countries and jurisdictions to: underlying criminal activity that generated it. [Successful] laundering enables criminal activity to continue [and criminals to be seen to prosper]. (See ref 8) 11  ratify and implement UN instruments for suppressing terrorist financing criminalise the financing of terrorism and associated money laundering freeze and confiscate terrorist assets report suspicious transactions related to terrorism make provisions for international cooperation ensure that wire transfers and those who provide such services are regulated ensure that non-profit organisations cannot be misused to fund terrorist activities, and police and regulate cross-border cash movements. Forskel mellem Money laundering og terrorist financing Money laundering is the process of making dirty money appear clean, whereas terrorist financing often involves clean money being used for criminal purposes. This is because terrorist funds often have been legally acquired or donated. Ligheder ml. money laundering og terrorist financing Money laundering and terrorist financing do, however, have several features in common. The source and destination of money used to support terrorism has to be disguised, in the same way that the source of laundered funds must be disguised. Both will generally require the assistance of the financial sector. Many terrorist groups are known to have links with criminal organisations and in many cases derive funding from such organisations. Many of the techniques used to disguise the destination of terrorist funds are identical to those used to launder the proceeds of crime. The difficulty for the financial sector comes in dealing with both the risk of handling property derived from crime and the detection of money that is derived from a legitimate source that may be used to fund acts of terror, for example, charitable donations. Money laundering professionals must be fully aware of how organisations can take effective measures to combat both. Terrorist groups can employ sophisticated techniques to move funds between jurisdictions. To manage their finances, they draw on the services of professionals such as bankers, accountants and lawyers and take advantage of a range of financial services products. Terrorist organisations also frequently have surplus funds to invest or place on deposit until they are needed. These may be parked in a bank account, invested in financial products or invested in real estate to be used for housing terrorist cells and materials. 12 Although the total funds controlled by terrorist The terrorism landscape and the way terrorism organisations and individuals may be significant, is funded is constantly evolving and changing; it takes relatively little funding to finance an whilst in the past we have seen terrorist groups individual attack. Detecting the transmission of such as ISIS dominate the headlines, now we are such relatively small sums as they move through increasingly seeing right-wing extremism. the financial system is challenging. Nonetheless, the effort to disrupt the flow of money to 2.2 The threat of terrorism terrorists, both domestically and internationally, Terrorist groups is an important element of counterterrorism. Terrorist groups develop when multiple Tracking the flow of funds also provides individuals share a political, religious or information on links, profiles and movements, ideological belief and use acts of terror to force which help to build up an intelligence picture of or influence society to change their ideals. Some the way terrorists and terrorist organisations well-known examples included Al-Qaeda, ISIS and operate. Boko Haram. Terrorists need funds to carry out terror attacks. Lone-actor While individual attacks can produce great Lone actor terrorists, also known as lone wolves, damage at low financial cost, a significant are individuals who commit acts of terrorism financial infrastructure is required to sustain in support of a terrorist group, movement or international terrorist networks and promote ideology alone. They do this outside of any their goals. Funds are required for promoting command structure and without the assistance of a militant ideology, paying operatives and their any terrorist group. Often lone actors are self- families, arranging for travel, training new radicalised through propaganda on the Internet members, forging documents, paying bribes rather than having direct contact with terrorist and acquiring weapons, as well as staging groups. attacks. Often a variety of higher-cost services, including propaganda and ostensibly legitimate ‘social activities’, are needed to provide a veil of 2.3 How is terrorism financed? legitimacy for organisations that promote their Terrorism can be funded from both legitimate objectives through terrorism. and illegitimate income. When legitimate sources are used it may not be clear to a financial sector firm at what stage the legitimate earnings became terrorist assets. Example The cost of funding terrorism According to the US Commission into 9/11, Al-Qaeda was assessed as having spent some $30 million per year prior to 9/11 on funding operations, maintaining its training and military apparatus, contributing to the Taliban and its high-level officials, and sporadically contributing to related terrorist organisations. The materials necessary for staging specific attacks are highly diverse and include, for example, vehicles, improvised bomb- making components, maps and surveillance materials. 13 Let’s consider some of the ways terrorism can be financed. Illegitimate/criminal sources Legitimate sources Extortion, often of local populations Charities and fundraising Cross-border smuggling of goods Donations (both charitable, private that can be sold for profit donors and crowdfunding) Drug trafficking or the imposition of Cryptocurrencies levies on drug suppliers and dealers Gambling (including Fraudulent activity, including Internet gambling) counterfeiting and identity fraud Self-funded through employment Robbery and theft income and bank loans Kidnapping for ransom Legitimate businesses Manufacture and sale of counterfeit products State-sponsored terrorism 2.4 Movement of funds There will be considerable overlap between the movement of terrorist funds and the laundering of criminal assets. Nonetheless, law enforcement agencies advise that there are three main methods by which terrorist funds are moved: i. cross-border cash couriers ii. hawala and other alternative remittance systems, and iii. use of the formal financial system. 2.4.1 Alternative remittance systems (ARS) An alternative remittance system is any system that is used for transferring money from one location to another while generally operating outside the formal banking regime. ARS includes systems named according to the particular ethnic group that they are designed to service, e.g., hawala in India and hundi in Pakistan. The common characteristic of such systems is that their objective is the transfer of funds between different countries using a variety of informal methods and tools. Often the system does not entail the exposure of the individual transaction to the formal banking system. An advantage to a terrorist financer of using ARS is that it leaves no discernible audit trail, as communications between brokers and agents are often in code or by way of tokens. Typically, no funds will be exchanged during the transaction, but the accounts between the brokers/agents will be balanced on a periodic basis. Hawala is a name for a type of ARS. Let’s look at the following example to see how hawala could be used for terrorism purposes. 14 How Hawala Works Hawala is the legal but informal means of transferring money across the globe. Step 1: In country A Step 2: Hawaladar A to B Sender gives cash to hawala agent. Agent Hawaladar tells counterpart in country B gives sender a code. how much cash has been received. Step 3: Sender to recipient Step 4: In country B Sender passes the code to the recipient, Recipient gives code to hawaladar, who saying how much cash was handed in. hands over cash (minus fees). Example Hawala used for terrorist funding In March 2023, India’s National Investigation Agency (NIA) uncovered an extensive hawala network which was funding the Popular Front of India’s (PFI) terror activities. Funds believed to be used for propaganda, training and buying firearms are said to have been channelled from the UAE and moved across southern India before ending up in the bank accounts of suspected terrorists. After law enforcement searched eight locations, they found digital devices and documents with the details of transactions the equivalent of tens of thousands of US dollars. (See ref 9) 15 Although ARS such as hawala operate outside of the regulated financial sector, there may be a point in which the sender, broker or recipient will need to interact with the financial sector. For example, the brokers (hawaladars in the example above) may need to periodically balance their books using money service businesses or the banking sector. It’s important to note that most customers use ARS such as hawala for legitimate purposes. Hawala provides a valuable service in many countries where the formal banking system is not fully developed or is too expensive. Unfortunately, the informality and relative anonymity that hawala offers also makes it valuable to criminals and terrorist organisations. Often many ARS providers operate other businesses, typically retail businesses such as travel agencies, pawnshops and grocery stores, alongside their operations. In doing so, criminal ARS operators can combine legitimate cash with criminally derived funds. 2.4.2 Virtual assets With financial services putting in place robust processes to mitigate the risk of terrorist financing, the use of virtual currencies and assets has become a popular mechanism of funding. Certain characteristics associated with virtual currencies, such as the ease of value transfer across borders and their pseudonymity, renders them attractive to criminals. Example Cryptocurrency used to finance terrorism A total of $10,661 is alleged to have been transferred via New York City to Syria using the cryptocurrency Bitcoin. The funds were sent to Islamist terrorist group Hay’at Tahrir al-Sham for the purpose of funding a new training camp and weapons. The main suspect is believed to have received payments from supporters around the world via Western Union, MoneyGram and cryptocurrencies. The funds were then accessed in Syria using Bitcoin wallets controlled by the terrorist organisation. (See ref 10) 2.4.3 Non-profit organisations (NPO’s) NPOs, such as charities, can be used by terrorists to raise and move funds globally. The abuse or misuse of such organisations can happen in different ways, such as the diversion of legitimate donations to terrorist groups to the creation of completely fake NPOs. Crowdfunding is another way terrorists can obtain money from a large number of donors. Because charities receive donations from a variety of sources and are not always subject to the same level of supervision, they are attractive to terrorist groups. Additionally, many charities, particularly those that engage in humanitarian activities, are active in unstable areas and conflict zones and this also serves to put the integrity of their operations at risk. 16  Example Charity used to transfer funds to terrorists [In February 2022] the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) [placed sanctions on] World Human Care, a non-governmental organization established by the Indonesia-based … terrorist group Majelis Mujahidin Indonesia (MMI) to provide financial support for MMI extremists in Syria under the guise of humanitarian aid. … MMI’s “charitable organization,” World Human Care, has been used as a front to raise funds to support violent extremist activity. While World Human Care has engaged in some legitimate humanitarian activities, the main objective of the organization was to serve as a cover to raise funds for MMI sympathizers in Syria. In early 2016, World Human Care transferred money to Syria not only for humanitarian needs but also for weapons and fighters there. In one instance, World Human Care sent funds and equipment to a Southeast Asian foreign terrorist fighter in Syria... “The United States is taking this action to expose and disrupt MMI’s deceptive efforts to use a purported ‘humanitarian organization’ for illicit purposes as a front for collecting and transferring funds,” said Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E. Nelson. (See ref 11) 2.4.4 Misuse of financial sector The international network of financial services allows money to be moved with ease. As with money laundering, complex layers of transactions can be carried out in a matter of minutes. Terrorists use the financial sector to store and move funds globally. It also gives them the opportunity to blend terrorist transactions with normal financial activity to avoid drawing attention to the future act. When controls are bypassed, or the financial business is controlled or owned by terrorists, it becomes increasingly difficult to identify terrorist transactions. For a more in-depth look at terrorist financing, consider the ICA Specialist Certificate on Counter Terrorist Financing. Example Use of the financial system to transmit terrorist funds The terrorists who carried out the 9/11 attacks were able to blend into the global financial system undetected. The 19 hijackers opened 24 accounts and a review of the related transactional activity revealed: direct transfers to and from foreign jurisdictions, e.g. the UAE, Saudi Arabia, Germany the majority of the withdrawals were from debit cards and occurred immediately following a deposit into the account fewer cheque than card transactions were affected the transactions were generally below reporting requirements, and a series of withdrawals were made at the same ATM machines by groups of the hijackers. 17 3. Proliferation financing 3.1 What is proliferation financing? Definition Proliferation financing The act of providing funds or financial services which are used, in whole or in part, for the manufacture, acquisition, possession, development, export, trans-shipment, brokering, transport, transfer, stockpiling or use of nuclear, chemical or biological weapons and their means of delivery and related materials (including both technologies and dual use goods used for non-legitimate purposes), in contravention of national laws or, where applicable, international obligations. (See ref 12) Proliferation has many forms but ultimately involves the transfer and export of technology, goods, software services or expertise that could be used in nuclear, chemical or biological weapon-related programmes, including delivery systems. If appropriate safeguards are not in place for sensitive materials, technology, services and expertise, then they can become accessible to individuals and entities seeking to profit from acquisition and resale, or for intended use in weapons of mass destruction (WMD) programmes. Concerns over proliferation financing are not restricted to nuclear, chemical and biological weapons; they also extend to the proliferation of conventional weapons. United Nations Security Council (UNSC) Resolution 1540 requires jurisdictions to take ‘effective measures to establish domestic controls to prevent the proliferation of nuclear, chemical or biological weapons and their means of delivery.’ Guidance by FATF outlines the ways that countries, financial institutions, designated non-financial businesses and professions (DNFBPs) and virtual asset service providers (VASPs) should put in place processes to ‘identify, assess, understand and mitigate their proliferation financing risks.’ Private sector entities may do so within the framework of their existing targeted financial sanctions and/ or compliance programmes, and are not expected to establish duplicative processes for proliferation financing risk assessment or mitigation. (See ref 13) Definition Dual-use items Types of goods, software and technology that are normally used for civilian purposes but that may have military applications, or may contribute to the proliferation of WMDs. 3.2 Dual-use items Dual-use items destined for proliferation use are difficult to identify, even when detailed information on a particular good is available. Regardless of the amount of information provided for a particular good, highly specialised knowledge and experience are often needed to determine whether a good may be used for proliferation. A good example is chlorine – the chemical used to purify our swimming pools. With the right expertise, chlorine could be used to make dangerous chemical weapons. Dual-use items can be described using common terms with many uses – such as ‘pumps’ – or in very specific terms with more specific proliferation uses – such as metals with certain characteristics. 18 Further, many goods are only regarded as dual-use if they measure up to very precise performance specifications. With the pace of technology constantly changing and evolving, so arises the need to review what may be considered dual-use items. 3.3 The risks arising from proliferation financing Proliferators abuse both the formal and informal sectors of the international financial system and may also deal in cash. Proliferation support networks use the international financial system to carry out transactions and business deals, often acting through illicit intermediaries, front companies and illegal trade brokers to hide the ultimate end user of a product, or the ultimate use of the product. These procurement networks have become significantly more complex over time. Forskel ml. proliferation og money laundering Proliferation differs from money laundering in the fact that proliferators may derive funds from both criminal activity and/or legitimately sourced funds. This means that transactions related to proliferation financing may not exhibit the same characteristics as conventional money laundering. Furthermore, the number of customers or transactions related to proliferation activities is likely to be markedly smaller than those involved in other types of criminal activity such as money laundering. Financial measures are seen to contribute to counter-proliferation objectives by: preventing the provision of financial services for the development of WMDs and their means of delivery preventing financing for individual shipments related to WMD proliferation contributing to stopping funding and to seizing funds under specific circumstances if sufficient information is available in time protecting the international financial system from abuse by proliferators, and by reinforcing export controls by addressing aspects of the illegal transfers of proliferation-sensitive goods that take place outside the jurisdiction of the country where the illegal export has occurred, such as the financial activities of an associated front company or an end-user located in a second jurisdiction. Financial institutions should incorporate the risk of proliferation financing within their controls to combat money laundering and terrorist financing and apply these to firms that might manufacture or trade in dual- use goods. 19 4. Financial and economic Sanctions may also relate to banned goods. It is, for instance, generally illegal to import or sanctions export anti-personnel landmines, laser weapons 4.1 What are sanctions? or certain items that could be used for torture. Sanctions are measures implemented to attempt Travel bans are a common form of targeted to change the behaviour of a targeted country sanction. or regime where diplomatic efforts have failed, or to restrict the funding of individuals, entities 4.2 Why are sanctions important? or groups associated with criminal or terrorist Financial sector institutions act as a front-line activity. defence against money laundering, terrorist financing and proliferation financing. To do this, The United Nations Security Council is the institutions have regulatory requirements to principal international sanctions-setting body. comply with the relevant sanctions regimes within The European Union and the Arab League are the countries in which they operate. examples of relevant regional sanctions-setting bodies. Through a programme of detection and avoidance, firms need to be able to ensure that Sanctions and prohibitions may take the form of they are not doing business that is connected economic, trade, travel or financial restrictions. to individuals, entities or countries subject to sanctions. These controls should apply to both Sanctions may be issued against: international and domestic sanctions regimes. In many instances, AML, CFT, proliferation and countries/ sanctions controls operate together as part of jurisdictions an integrated programme of financial crime (for example, prevention initiatives. sanctions related to both residence or 4.3 United Nations sanctions physical presence framework in a jurisdiction, as well as nationals of a country anywhere in the world) Key Learning To ensure that a robust sanctions- individuals compliance control framework is in for example, place and operating effectively, financial designated persons institutions must understand the (in the US these are products and services they offer, identify known as Specially areas where they may be vulnerable Designated Nationals to the risk of sanctions breaches, and – SDNs) put controls in place to mitigate these sanctions risks. entities (for example, They also need to have effective systems sanctions against a and controls to ensure that requirements specific bank) are met in all their operating jurisdictions. trading activities Under Chapter VII of the UN Charter, the Security (for example, Council (UNSC) can take enforcement measures shipments to and to maintain or restore international peace and from countries to security. To effect change where other efforts which sanctions have failed, the UNSC can impose sanctions apply). relating to arms embargoes and travel; place restrictions on the provision of financial 20 services; establish import/export bans on 4.4.1 European Union regime certain commodities; and impose civil aviation Actively promoting economic cooperation, human restrictions. rights and democracy within the framework of the Common Foreign and Security Policy (CFSP), Some of these sanctions have, on occasion, the EU applies sanctions or restrictive measures had an adverse impact on vulnerable groups of in pursuit of the specific CFSP objectives set out in people in the affected jurisdictions and the UNSC the Treaty of the European Union. has responded by refining the sanctions it has imposed by, for example: For example: targeting sanctions, such as freezing diplomatic sanctions, i.e., expulsion or blocking the funds of those who of diplomats, severing diplomatic ties, suspension of official visits perpetuate the prohibited behaviour suspension of cooperation with a third country incorporating humanitarian exemptions in the resolutions, and/or boycotts of sporting or cultural events using ‘smart sanctions’ – sanctions designed trade sanctions, i.e., general, to affect only a specific area of a country’s specific or arms embargoes activities, such as those imposed to prevent the economic and financial sanctions, e.g., trade in conflict diamonds in African countries, freezing funds or economic resources, where illicit diamonds have been sold to fund prohibitions to financial transactions, conflict. restrictions on export credits or investment The UN sanctions regime will respond to new or restrictions on admission to a member state, and emerging developments, for instance, in light of political unrest in a country, they may impose visa or travel bans. sanctions to restrict the finances and movement of key persons. Sanctions imposed by the EU must be complied with by: A significant UN sanction was UNSC Resolution 1373 of 2001. This requires member states to those within the jurisdiction of the EU freeze the assets of those involved in terrorist EU nationals in any location acts and prohibit the provision of funds and financial services to them. UNSCR 1540 is also of companies and organisations incorporated significance; it aims to prevent the proliferation of under the law of a member state, and WMDs to and by non-state actors. branches of EU companies in third countries; on board aircraft or vessels under a member state’s jurisdiction. Key Learning 4.4.2 Arab League sanctions All UN member states are required under The Arab League is an intergovernmental international law to freeze the funds and organisation of Arab states in the Middle East and economic resources of any legal person(s) North Africa. Like the EU they can impose a range named in the UN lists and to report any of economic, trade, travel, and other sanctions to suspected name matches to the relevant alter the behaviour of fellow states. authorities. Let’s consider the following example. 4.4 Regional sanctions framework As mentioned previously, two examples of regional organisations that impose sanctions regimes are i. the European Union, and ii. the Arab League. 21  conduct by UK persons, including anyone in territorial waters UK nationals outside the UK, and Example bodies incorporated or constituted under any part of UK law. Arab League sanctions Reinstated in 2023, Syria was previously The types of sanctions imposed by the UK include suspended from the Arab League trade sanctions, financial sanctions, travel bans following government crackdowns on and aircraft and shipping sanctions. Generally, all pro-democracy protests leading to UK institutions must: the Syrian Civil War. After the US and EU applied sanctions the Arab League comply with government direction deepened Syria’s international isolation on financial sanctions in the by imposing the following economic jurisdictions in which they operate sanctions. where they operate outside the UK, comply Transactions with the Syrian with the Office for Financial Sanctions central bank were cut off. Implementation (OFSI) (Consolidated) Financial Sanctions List and OFSI Prohibition Notices, Funding by Arab governments for where permitted to do so by local law, and projects in Syria was halted. whether or not they are Financial Conduct A ban was imposed on travel by senior Authority (FCA)-regulated or subject to the Syrian officials to other Arab countries. Money Laundering Regulations, either: Assets relating to the for manual checking: register with the government were frozen. OFSI update service (directly or via a third party, such as a trade association), or Arab central banks were required to monitor transfers to Syria, for automated checking: ensure with the exception of remittances that relevant software includes from Syrians abroad. checks against the relevant list and that this list is up to date. 4.5 National sanctions frameworks Depending on individual political regimes, Key Learning countries or jurisdictions may establish their own domestic sanctions. Financial institutions are Where a regulated firm fails to comply required to identify and comply with sanctions with its obligations to freeze funds and obligations imposed by the country where not to provide assistance to suspected they are located, or which otherwise apply to terrorists or listed persons, it is open to them because of their nationality or place of prosecution unless a licence has been incorporation, or for any other reason. obtained from HM Treasury. In certain circumstances, the management of the 4.5.1 United Kingdom firm can also be prosecuted. In the UK, the Sanctions and Anti-Money Laundering Act 2018 is the primary piece of The Office of Financial Sanctions legislation giving the legal basis for the UK to impose, update and remove sanctions. Implementation (OFSI) OFSI is the lead UK government department on UK sanctions apply to the whole of the UK financial sanctions. It is responsible for: including Northern Ireland and the British domestic legislation on financial sanctions Overseas Territories and Crown Dependencies. the implementation and administration These requirements include: of domestic financial sanctions 22  the implementation and administration 4.5.2 United States of international financial sanctions in the In line with US foreign policy and national security UK, including those relating to terrorism goals, the Office of Foreign Assets Control (OFAC) sanctions imposed on individual states of the US Department of the Treasury administers and enforces economic and trade sanctions working with the Foreign and against targeted foreign countries and regimes; Commonwealth Office on the design of designated terrorists and terrorist organisations; individual financial sanctions regimes international narcotics traffickers; those engaged and listing decisions at the UN and EU in activities related to the proliferation of WMDs; working with international partners to and other threats to the national security, foreign develop the international frameworks policy or economy of the US. for financial sanctions, and OFAC is able to impose controls on transactions licensing exemptions to financial sanctions and freeze foreign assets under those US where permitted. sanctions that are based on UN mandates and involve close cooperation with other In practice OFSI: governments. issues notices and notifications advising of It is a rigid programme which has far-reaching the introduction, amendment, suspension implications for firms globally by virtue of its or lifting of financial sanctions regimes, extraterritorial (criminal jurisdiction) reach. with a view to making bodies and Compliance with OFAC is required by all: individuals likely to be affected by financial sanctions aware of their obligations US persons, including all US citizens and permanent resident aliens no provides the consolidated list of matter where they are located financial sanctions targets persons and entities physically processes applications for licences to release present in the US frozen funds or to make funds available to designated/restricted persons, and US incorporated entities and their foreign branches responds to reports and queries from financial institutions, companies and members of the US-origin goods, and public about financial sanctions. US-origin transshipments. The UK Department for Business and Trade While US sanctions do not apply to non-US is responsible for UK trade sanctions. These firms outside the US, the use of the US dollar sanctions are designed to restrict the export currency automatically attracts OFAC regulations. and communication of sensitive technology or US prosecutors take the view that if a financial strategic goods, with the aim of preventing WMD transaction has been cleared in the US (notionally proliferation as well as countering international all US dollar payments pass through New York), threats such as terrorism. the US has jurisdiction over the activity. Key Learning As part of its enforcement efforts, OFAC publishes a list of ‘Specially Designated Nationals’, known as the SDN List, whose assets are blocked, and firms, Firms that deal with the US dollar, or including US persons, are generally prohibited that trade with or have operations in the from doing business with them. US, must have in place policies globally incorporating the requirements of OFAC’s sanctions regime. Any failure by firms to comply with these requirements is likely to lead to strict enforcement action by the US authorities and significant financial penalties. 23  Case Study Violation of OFAC sanctions Background: British American Tobacco Plc (BAT) was required to pay over $508 million for violations of sanctions against the Democratic People’s Republic of Korea (North Korea) and WMD proliferators. Over a seven-year period the tobacco and cigarette manufacturer conspired to send over $250 million in profits from a North Korean joint venture through US financial institutions and used unknowing US banks to receive and process payments from the sale of tobacco to the country. Failings The company’s main failings related to the following areas. BAT and its subsidiaries wilfully conspired to transfer hundreds of millions through US banks where North Korean banks had an interest. BAT concealed the North Korea-related business by receiving payments through complex remittance structures that relied on front companies and intermediaries. BAT ignored requests from banks for information and requested any mention of North Korea be removed from its transactional documents. Senior management knew about the conspiracy and failed to act appropriately. Impact The government of North Korea is known to use money obtained through international trade to fund its nuclear and missile programmes, which many believe have the underlying intention to be used to attack other nations. Learning points Senior management need to drive the culture of compliance to sanctions requirements. If senior management do not set the right example the rest of the organisation will not adopt a positive culture of compliance. Firms should assess their sanctions risk exposure and re-evaluate it on an ongoing basis. This will help to identify and mitigate the sanctions risks to which they are exposed. (See ref 14) 4.5.3 People’s Republic of China The Chinese Ministry of Foreign Affairs and the Ministry of Commerce are the two main authorities who administer sanctions measures in China. The Anti-Foreign Sanctions Law introduced in 2021 is the primary law for the Chinese government to impose its sanctions. The law was established to be used as a countermeasure to economic sanctions placed on China by other countries. Sanctions are placed on individuals and entities who China believes are taking ‘discriminatory restrictive measures’ against China. These individuals and entities are placed on an Unreliable Entity List. China’s Export Control Law outlines export controls to protect national security and interests as well as meeting international obligations relating to non-proliferation. These export controls relate to dual-use items, nuclear products and various other technologies and items. Failure to implement sanctions by Chinese authorities could result in criminal penalties including prison sentences, fines and confiscation of any financial benefit. Further information, analysis and insight on the topics discussed in this unit can be found on your Learning Hub. 24  Learning Outcomes By the end of the unit you should be able to: understand what money laundering is and appreciate the range of underlying predicate offences recognise how and why criminal proceeds are laundered, including the three-stage model and its limitations define terrorist financing and how it resembles, and differs from, money laundering understand the variety of methods used to finance terrorism and how it can involve both legitimately earned and criminally sourced money understand what is meant by proliferation financing and the risks associated with it explain what sanctions are, know the bodies that impose them and understand the role of sanctions in international relations and law, and describe a variety of different types of sanction and explain how they are implemented in a variety of sanctions regimes. 25 Unit 02 The International Bodies and Standard Setters Learning Objectives The purpose of this unit is to: 1. provide an overview of the roles of international bodies that combat money laundering and terrorist financing 2. advise on international initiatives to counter money laundering and terrorist financing, and 3. explain the ways in which the work of international bodies benefits AML practitioners. 1. The role of international Initiatives by international bodies bodies in anti money prompt regional action laundering (AML) and combating the financing of terrorism (CFT) It is internationally recognised that attempts to combat organised and serious crime requires cooperation and consistency across national boundaries. Global efforts to prevent money laundering are only as strong as the weakest national AML framework. International initiatives designed to encourage, and in some cases Global pressure, national governments into taking initiative measures to prevent criminal property from being laundered within their borders are therefore essential. Initiatives by international bodies such as the Financial Action Task Force (FATF) prompt regional action, such as EU Directives, which in turn results in national legislation. International bodies have played a crucial role in the development of AML and CFT laws and standards. They have established globally Regional recognised legal definitions of money laundering action and terrorist financing and created internationally accepted standards of good practice for regulated entities. They continuously identify trends and emerging threats in these areas and recognise the links between money laundering and the threat to international peace, stability and economic growth. Laws criminalising the handling of criminal proceeds aim to deprive criminals of the benefits obtained from their illegal activities. Economies supported by criminal proceeds are highly unstable and pose significant risks to National neighbouring countries and those with close economic ties. International action against legislation money laundering is in part driven by the fear of economic destabilisation caused by over- exposure to illegally derived funds, as seen in the emergence of ‘Narco States’ in South America. 27 2. Key international organisations A host of organisations are engaged in AML and CFT, but the following bodies are recognised as being the key players. 2.1 International Monetary Fund (IMF) The objective of the IMF is to promote global economic stability by enhancing international monetary cooperation, trade and sustainable growth. Recognising the impact of financial crime on these objectives, as part of its role, the IMF provides support to the international efforts to combat money laundering and the financing of terrorism. To achieve this, the IMF carries out the following functions. Guidance, technical and financial assistance The IMF provides guidance and technical assistance to countries to strengthen their AML/CFT frameworks. Through such methods the IMF helps countries develop comprehensive legal and regulatory frameworks, build effective supervisory systems and strengthen countries’ financial intelligence units (FIUs). 1 They also provide financial assistance to support member countries to improve their AML/CFT frameworks. Often this is the case whereby the IMF provides a country financial assistance to help stabilise its economy; as part of the conditions to receive the funds, a country could be required to use part of the funds to strengthen their AML/CFT measures. Assessments The IMF’s Financial Sector Assessment Program (FSAP) provides an in-depth assessment of a country’s financial sector, incorporating AML and CFT within its assessment. It also carries out AML/CFT assessments to evaluate a country’s compliance with international standards, such as those of the Financial Action Task Force (FATF). These assessments identify weaknesses and 2 provide advice for improvement. Unlike FATF, the IMF does not seek to set international AML standards; instead, it plays a vital role in evaluating jurisdictional compliance with them. Where money laundering or terrorist financing cases are so serious as to threaten a country’s economic stability, the IMF has issued a framework that advises on how countries can fight back. Collaboration The IMF collaborates with other international bodies, such as FATF, to further promote 3 and enforce global AML and CFT standards. By working closely, they ensure consistency in international efforts to prevent financial crime. They also work with countries to detect crime and develop policies to enhance nations’ transparency. Analysis The IMF collates and analyses how developments in the financial sector impact AML and CFT 4 measures, for example virtual currencies, financial technology (FinTech) and the impact of new strategies for corruption. 28 2.2 The United Nations iii. work to assist states in the ratification and The United Nations Global Programme against implementation of the relevant international Money Laundering (GPML), part of the United treaties, the development of domestic Nations Office on Drugs and Crime (UNODC), was legislation on drugs, crime and terrorism, and established to assist member states to comply the provision of secretariat and substantive with the UN Conventions and other instruments services to the treaty based and governing that deal with money laundering and terrorist bodies. financing. 2.2.1 The UN Conventions The GPML helps member states to: A UN Convention is an agreement between introduce legislation against money member countries that is legally binding. There laundering and terrorist financing have been several UN Conventions that deal with money laundering and terrorist financing; among develop and maintain strategies to combat the most significant are: money laundering and terrorist financing the United Nations Convention against encourage AML and CFT policy development Trafficking in Narcotics and Psychotropic Substances (the Vienna Convention) raise public awareness about money the United Nations Convention against laundering and terrorist financing, and Transnational Organised Crime (the Palermo Convention) act as a coordinator of joint AML/CFT the United Nations Convention against initiatives by the UN with other international Corruption (UNCAC), and organisations. the United Nations Convention for the Suppression of the Financing of Terrorism. In collaboration with the United Nations Drug Control Programme (UNDCP) Legal Advisory 2.2.2 UN Security Council Resolutions (UNSCRs) Section, the GPML has developed model laws UNSCRs are legally binding decisions adopted for both common law and civil law legal systems by the UN Security Council to address threats to to assist countries in setting up their AML/CFT international peace and security. UNSCRs play a legislation in full compliance with international critical role in shaping international responses to legal instruments against money laundering and global conflicts and crises. For example, several terrorist financing. resolutions have addressed financing of terr