AML-CFT certificate course 1.pdf

HISTORICAL PERSPECTIVE OF MONEY LAUNDERING Money laundering has a rich historical context that spans centuries. This illicit practice has evolved alongside advancements in financial systems, global trade, and technology. Understanding the historical perspective of money laundering provides valuable...

HISTORICAL PERSPECTIVE OF MONEY LAUNDERING Money laundering has a rich historical context that spans centuries. This illicit practice has evolved alongside advancements in financial systems, global trade, and technology. Understanding the historical perspective of money laundering provides valuable insights into its roots, development, and the ongoing efforts to combat this financial crime. Historians offer different theories to explain the source of the term money laundering. Lets explore some of this activities and how they were exploited for money laundering purposes. Traditional money transfer systems "Hawalas," "hundis," and "fei-chen" were informal money transfer systems with historical roots that precede the formalization of modern financial structures. While these systems were not originally designed for money laundering, their informal nature and lack of regulatory oversight have made them susceptible to exploitation by individuals engaged in illicit financial activities, contributing to the broader historical context of money laundering practices. Hawala - Originating in the Middle East and South Asia, the hawala system is an informal and traditional method of transferring funds. In a hawala transaction, money does not physically cross borders; instead, a network of hawaladars (hawala brokers) facilitates the transfer by balancing their accounts. Its the informal nature and lack of a formal paper trail that have made the hawala susceptible to exploitation by criminals seeking to move money discreetly. Some individuals engaging in illegal activities have used hawalas to circumvent formal financial systems, making it challenging for authorities to trace and regulate these transactions. Hundis- Are traditional instruments used in informal money transfer systems, particularly in South Asia. A hundi is essentially a promissory note that facilitates the transfer of funds from one party to another without physically moving money. The anonymity and lack of formal documentation make them attractive to those wishing to conduct illicit financial transactions. Criminals have exploited the hundi system to move funds across borders without leaving a clear paper trail, making it difficult for authorities to trace the source or destination of the funds. Fei-Chen-The term "fei-chen" refers to a traditional Chinese informal money transfer system. It involves the exchange of goods, services, or cash without the involvement of formal financial institutions. Like hawalas and hundis, the fei-chen system, while initially designed for legitimate purposes, has been abused by individuals engaged in illicit activities. The lack of formal documentation and the reliance on personal relationships within the network makes it challenging for authorities to monitor and regulate transactions. The 2000 BCE Chinese Merchants The practices of Chinese merchants in the early 2000 BCE, documented as hiding their wealth from the state to avoid taxation or confiscation by moving it to remote provinces or even outside of China, can be seen as precursors to the concept of money laundering. However, it's important to note that the term "money laundering" itself is a relatively modern phrase and applying it directly to historical practices requires some contextual understanding. Concealing the Origins of Wealth - the act of hiding wealth from taxation and potential confiscation shares a common element with modern money laundering - the need to obscure the true origin of assets. Transferring Wealth to Remote Locations - the strategy employed by these merchants, moving wealth to remote provinces or outside of China, mirrors contemporary money laundering tactics. Money launderers often seek to move funds across borders or to jurisdictions with less stringent regulations to make tracking and detection more difficult. Avoiding State Scrutiny - Money laundering typically involves avoiding scrutiny from law enforcement and regulatory authorities. In the ancient Chinese context, merchants were likely motivated by a desire to prevent state intervention in their wealth. This aligns with the broader concept of concealing assets to evade unwanted attention. While the practices of Chinese merchants in the early 2000 BCE share certain characteristics with modern money laundering, applying the term directly may oversimplify the historical context. Nevertheless, these historical examples provide insights into longstanding efforts by individuals to safeguard their wealth from state intervention, a theme that has evolved over time into the complex and regulated field of money laundering we recognize today. Mafia Activities during Prohibition (1920s-1930s): The term "money laundering" is often associated with the American Mafia (Al Capone era) activities during the Prohibition era, which lasted from 1920 to 1933. During this time, the production, sale, and transportation of alcoholic beverages were prohibited in the United States, leading to the rise of organized crime syndicates. These criminal organizations engaged in illegal activities such as bootlegging and smuggling thus facing the challenge of legitimizing their profits. To accomplish this, they funneled their illicit funds through legitimate businesses like laundromats, casinos, nightclubs, and restaurants for purposes of mixing their illegal earnings with the legitimate earnings received from these businesses. The term "money laundering" was metaphorically used to describe the process of making "dirty" or illegal money appear "clean" or legitimate. Watergate Scandal (1970s): The term money laundering gained further prominence during the Watergate scandal in the early 1970s. The scandal involved political corruption, and the funds used for illegal activities were subjected to attempts at concealment and disguise. Investigative journalists and law enforcement agencies started using the term "money laundering" to describe the complex financial transactions and efforts to obscure the origins of the funds associated with the Watergate scandal. THE FIGHT AGAINST AML-CFT The fight against money laundering began to take shape in the mid-20th century, as governments and international organizations recognized the need to address the increasingly sophisticated techniques employed by criminals to legitimize the proceeds of illicit activities. Several key events and developments mark the initiation of the global effort to combat money laundering: The United States of America The Bank Secrecy Act (1970) The United States played a pivotal role in establishing the legal framework for combating money laundering. In 1970, the U.S. government enacted the Bank Secrecy Act (BSA) (Currency and Foreign Transactions Reporting Act) to address concerns related to tax evasion and money laundering. The BSA introduced reporting requirements for financial institutions, compelling them to report certain transactions and activities that could be indicative of money laundering. Comprehensive Crime Control Act (1984) The Comprehensive Crime Control Act (1984) was the first comprehensive revision of the U.S. criminal code since the early 1900s and it enhanced the Government’s ability in fighting drug trafficking. It also included money laundering under the umbrella of the Racketeer Influenced and Corrupt Organisations (“RICO”) Statutes which allowed Government to seize the proceeds of illegal activity as well as impose significant civil and criminal penalties for each violation. Money Laundering Control Act (1986) In 1986, the United States enacted the Money Laundering Control Act, which criminalized money laundering as a federal offense. This legislation expanded the scope of illegal financial activities that could be prosecuted and strengthened law enforcement's ability to combat money laundering. Anti-Drug Abuse Act (1988) This Act was an amendment of the 1986 Act which further expanded the definition of financial institutions as well as reduced the size of transactions subject to reporting. The Act also created the policy goal of a drug-free America; established the Office of National Drug Control Policy; and restored the use of the death penalty by the federal government. The Annunzio-Wylie Anti-Money Laundering Act (1992) Named after its sponsors the Annunzio-Wylie Anti-Money Laundering Act (1992) was passed to further strengthen government’s ability to fight money laundering by creating the Bank Secrecy Act Advisory Group (BSAAG) and also making it possible to terminate a bank’s charter or insurance if the institution was involved in transmitting illegal money. Money Laundering Suppression Act (1994) This Act required even stricter guidelines for financial institutions to, among other initiatives, “review and enhance training” related to money laundering, “develop anti-money laundering examination procedures,” and properly report suspected cases to law enforcement. It also required Money Service Businesses (MSBs) like currency dealers to be properly registered, made it a requirement that each MSB must register a controlling person and made it a federal crime to operate an unregistered MSB. Money Laundering and Financial Strategy Act (1998) This Act identified non focused efforts at the federal, state and local levels as a major problem in the fight against money laundering activities. It therefore required that the development and implementation by the Secretary of the Treasury of a national money laundering and related financial crimes strategy to combat money laundering and related financial crimes. The resulting effect was that it helped to coordinate and standardize anti- money laundering policies and procedures. USA Patriot Act (2001) Following the 2001 bombing of the World Trade Centre congress passed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act commonly known as the USA Patriot Act. This act primarily focused on counter-terrorism measures, but also included provisions that significantly strengthened AML efforts. The Act essentially amended the Money Laundering Control Act of 1986 and the Bank Secrecy Act of 1970. it provided 3 key goals vis a) Strengthening banking rules with regards to money laundering, specifically international money laundering. b) Strengthening banking rules with regards to money laundering, specifically international money laundering. c) Fighting currency counterfeiting and smuggling – which included a provision to quadruple the penalty for counterfeiting foreign currency. Intelligence Reform & Terrorism Prevention Act (2004) Enacted as a response to the 2001 terrorism act in the US, this Act established the position of Director of National Intelligence (DNI), the National Counterterrorism Center (NCTC), the National Counter-Proliferation Center, and the Privacy and Civil Liberties Oversight Board. It allowed for the establishment of additional national intelligence centers at the discretion of the Director of National Intelligence. It modified the mission statement of the Department of Homeland Security (DHS) by adding a requirement to “ensure that the civil rights and civil liberties of persons are not diminished by efforts, activities, and programs aimed at securing the homeland it also required the Department of Homeland Security (DHS) to take over the conducting of pre-flight comparisons of airline passenger information to Federal Government watch lists for international and domestic flights. Anti-Money Laundering Act (AMLA), 2020 Enacted on January 1, 2021, as part of the National Defense Authorization Act (NDAA), it made a variety of changes to the AML landscape intended to strengthen, modernize, and streamline the existing AML regime by promoting innovation, regulatory reform, and industry engagement. Among other provisions, AMLA establishes nationwide anti-money laundering priorities, brings new industries under AML law, and mandates the establishment of a federal beneficial ownership registry. The International Arena Financial Action Task Force (FATF) - 1989: The global response to money laundering gained momentum with the creation of the Financial Action Task Force (FATF) in 1989. The FATF is an intergovernmental organization that was formed to develop and promote policies to combat money laundering and terrorist financing. The establishment of the FATF marked a significant step in fostering international cooperation and setting standards for anti-money laundering (AML) efforts. The organization's recommendations, commonly known as the "40 Recommendations," became influential in guiding countries in developing their AML and counter-terrorist financing (CTF) regimes. EU Money Laundering Directives (1990s): The European Union (EU) also took steps to combat money laundering by issuing a series of directives in the 1990s. These directives required member states to implement measures to prevent the use of the financial system for money laundering purposes. Subsequent directives, such as the Third EU Money Laundering Directive (2005) and the Fourth EU Money Laundering Directive (2015), further enhanced AML regulations across EU member states. Global Expansion of AML Efforts: Throughout the late 20th century and into the 21st century, the fight against money laundering expanded globally. Many countries enacted or enhanced their AML laws, established financial intelligence units (FIUs), and increased international cooperation through treaties and agreements. The fight against money laundering continues to evolve as criminals adapt to new technologies and financial instruments. The international community remains committed to addressing this issue through ongoing collaboration, updated regulations, and advancements in technology and information sharing. Botswana’s Journey on the AML-CFT Proceeds from Serious Crime Act Botswana AML-CFT journey started in 1990 when the Proceeds from Serious Crime Act. The purpose of the Act was to deprive persons convicted of serious crimes of the benefits or rewards gained from such crimes, and to deal with the problems of money laundering, and matters incidental thereto or connected therewith. Section 14(1) states that a person shall be deemed to have engaged in money laundering if he engages, directly or indirectly, in a transaction that involves money, or other property, that is the proceeds of a serious offence, whether committed in Botswana or elsewhere, or if he receives, possesses, conceals, disposes of, or brings into Botswana, any money, or other property that is the proceeds of a serious offence, whether committed in Botswana or elsewhere, and the person knows, or ought reasonably to know, that such money or other property is derived or realised, directly or indirectly, from some sort of unlawful activity. Section 14(2) specified the offence for money laundering for an individual to imprisonment for a term not exceeding three years or to a fine not exceeding P10 000, or both, or if the offender is a body of persons, then, every person who at the time of the commission of the offence was a director, manager or partner of such body shall be liable to a fine not exceeding P25 000. This Act was amended several times before being repealed and replaced by the Proceeds and Instruments of Crimes Act of 2014 also amended severally with the latest being 2022. Corruption and Economic Crime Act, 1994 This Act was passed to deal with corruption related crimes. It’s seen as part of the effort to deal with money laundering since illicit funds obtained from corrupt practices are most likely laundered to disguise their origins. The Act has also been amended severally with the latest being 2022. The Banking Act, 1995 In 1995 the Banking Act was passed & it established the Bank of Botswana and gave it the power to regulate and issue of Bank notes and coins; to provide for certain matters connected with banking, currency and coinage, and for matters connected therewith and incidental thereto. The Act does directly deal with money laundering activities through sections 11(vi), 21(4) & 32(d). This Act has also been several amended. Banking (Anti-Money Laundering) Regulations. These regulations were issued by the Minister of Finance & Development Planning in 2003 and could be said to be the first serious attempt in the war against money laundering in Botswana. The regulations addressed anti-money laundering measures, Know You Customer (KYC) principles, record keeping, reporting of suspicious activities, staff training and other measures aimed at preventing and identifying money laundering. Financial Intelligence Act, 2022 This Act was first enacted in 2009 and has been amended severally to align it with the international best practices. The purpose of the Act was to establish the Financial Intelligence Agency and constitute the National Coordinating Committee on Financial Intelligence as a high level committee; provide for the reporting of suspicious transactions and other cash transactions;  provide for mutual assistance with comparable bodies outside Botswana in relation to financial information and for matters connected therewith and incidental thereto. to provide for third parties to perform certain customer due diligence measures on behalf of specified parties; to enable the Financial Intelligence Agency to initiate an analysis of information based on information in its own possession or information received from other sources to establish a suspicious transaction, and for matters connected therewith and incidental thereto. THE FINANCIAL ACTION TASK FORCE Is an independent intergovernmental organization established in 1989 with the primary objective of combating money laundering and terrorist financing on a global scale. Headquartered in Paris, France, the FATF operates as a policy-making body that sets international standards and promotes effective measures to address the threat of illicit financial activities. Key aspects of the Financial Action Task Force: Formation and Objectives: The FATF was created in response to growing concerns about the internationalization of money laundering and the need for coordinated efforts to combat this financial crime. Its initial focus was on developing policies and recommendations to prevent the use of the global financial system for money laundering and terrorist financing. The FATF is a collaborative body that includes member countries and jurisdictions. Its membership stands at 40 members; 38 countries (jurisdictions) and 2 regional organisations (the Gulf Cooperation Council and the European Commission). In addition to its members, the FATF also collaborates with several observer organizations and regional groups. Role and Functions: The primary role of the FATF is to set international standards and promote the implementation of effective measures to combat money laundering, terrorist financing, and other threats to the integrity of the international financial system. The FATF achieves its objectives through the development of recommendations, commonly known as the "40 Recommendations," which provide a comprehensive framework for anti- money laundering (AML) and counter-terrorist financing (CTF) efforts. Recommendations and Evaluation Process: The FATF's 40 Recommendations cover a broad range of issues, including customer due diligence, reporting of suspicious transactions, international cooperation, and the freezing of assets related to terrorism. These recommendations are periodically updated to address emerging risks and challenges. The organization conducts mutual evaluations of member and non-member jurisdictions to assess their compliance with the FATF standards. These evaluations help identify areas for improvement and ensure that countries implement effective AML and CTF measures. Global Influence: The FATF's influence extends beyond its member jurisdictions, as its standards and recommendations are widely recognized and adopted by countries around the world. Many nations align their national AML and CTF regimes with the FATF's guidelines to enhance international cooperation and financial integrity. Risk-Based Approach: The FATF emphasizes a risk-based approach to AML and CTF measures, recognizing that resources should be allocated based on the level of risk posed by different sectors and activities. This approach allows for a more targeted and effective response to the evolving nature of financial crime. FATF 40 Recommendations They set out a comprehensive and consistent framework of measures which countries should implement in order to combat money laundering and terrorist financing, as well as the financing of proliferation of weapons of mass destruction. Countries have diverse legal, administrative and operational frameworks and different financial systems, and so cannot all take identical measures to counter these threats. The FATF Recommendations, therefore, set an international standard, which countries should implement through measures adapted to their circumstances. The FATF Standards comprise the Recommendations themselves and their Interpretive Notes, together with the applicable definitions in the Glossary. We set below in a tabular format the 40 recommendations and their classification.  Classification Recommendation AML/CFT Assessing risks & applying a risk-based approach (R1) POLICIES AND COORDINATION National cooperation and coordination (R2) MONEY Money laundering offence (R3) LAUNDERING Confiscation and provisional measures (R4) AND CONFISCATION TERRORIST Terrorist financing offence (R5) FINANCING AND Targeted financial sanctions related to terrorism and terrorist financing (R6) FINANCING OF PROLIFERATION Targeted financial sanctions related to proliferation (R7) Non-profit organisations (R8) PREVENTIVE Financial institution secrecy laws (R9) MEASURES Customer due diligence (R10) Record keeping (R11) Politically exposed persons (R12) Correspondent banking (R13) Money or value transfer services (R14) New technologies (R15) Wire transfers (R16) Reliance on third parties (R17) Internal controls and foreign branches and subsidiaries (R18) Higher-risk countries(R19) PREVENTIVE Reporting of suspicious transactions (R20) MEASURES Tipping-off and confidentiality (R21) DNFBPs: Customer due diligence (R22) DNFBPs: Other measures (R23) Transparency and beneficial ownership of legal persons (R24)  Classification Recommendation TRANSPARENCY Transparency and beneficial ownership of legal arrangements (R25) AND BENEFICIAL OWNERSHIP OF LEGAL PERSONS AND ARRANGEMENTS POWERS AND Regulation and supervision of financial institutions (R26) RESPONSIBILITIES Powers of supervisors (R27) OF COMPETENT AUTHORITIES Regulation and supervision of DNFBPs (R28) AND OTHER Financial intelligence units (R29) INSTITUTIONAL MEASURES POWERS AND Responsibilities of law enforcement and investigative authorities (R30) RESPONSIBILITIES Powers of law enforcement and investigative authorities (R31) OF COMPETENT AUTHORITIES Cash couriers (R32) AND OTHER Statistics (R33) INSTITUTIONAL Guidance and feedback (R34) MEASURES Sanctions (R35) INTERNATIONAL International instruments (R36) COOPERATION Mutual legal assistance (R37) Mutual legal assistance: freezing and confiscation (R38) Extradition (R39) Other forms of international cooperation (R40) EASTERN AND SOUTHERN AFRICA ANTI-MONEY LAUNDERING GROUP (ESAAMLG) The Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) is a regional organization established to enhance the capacity of its member countries in combating money laundering and the financing of terrorism. Formed in 1999, ESAAMLG is one of the regional bodies affiliated with the Financial Action Task Force (FATF), contributing to the global effort to address financial crimes. Key features of ESAAMLG include: ESAAMLG consists of member countries from the Eastern and Southern Africa region. Member countries work collaboratively to strengthen their anti-money laundering (AML) and counter-terrorist financing (CTF) frameworks, share information, and foster regional cooperation. Objectives: The primary objectives of ESAAMLG are aligned with international standards set by the FATF. These objectives include promoting the implementation of effective AML and CTF measures, enhancing the capacity of member countries to identify and combat financial crimes, and fostering collaboration among regional stakeholders. Mutual Evaluations: Like the FATF's mutual evaluation process, ESAAMLG conducts assessments of its member countries to evaluate their compliance with AML and CTF standards. These mutual evaluations help identify areas for improvement and support the development of tailored strategies to address specific risks within the region. Training and Technical Assistance: ESAAMLG provides training programs and technical assistance to its member countries to enhance their understanding of AML and CTF issues. By building the capacity of financial institutions, regulatory bodies, and law enforcement agencies, ESAAMLG aims to strengthen the overall resilience of the region's financial system. Coordination with International Organizations: ESAAMLG collaborates with international organizations, including the FATF and other regional AML bodies, to align its efforts with global standards and initiatives. This coordination helps ensure consistency in AML and CTF measures and facilitates the exchange of information and best practices. Risk-Based Approach: ESAAMLG emphasizes the importance of a risk-based approach in addressing AML and CTF challenges. This approach allows member countries to allocate resources effectively, focusing on areas with the highest risk of being exploited for financial crimes. Periodic Meetings and Reports: The organization holds regular meetings to discuss emerging AML and CTF issues, share information, and coordinate regional initiatives. ESAAMLG also publishes reports and updates on the progress of its member countries in implementing AML and CTF measures. MUTUAL EVALUATION OF BOTSWANA In 2007, Botswana underwent a World Bank Mutual Evaluation, using the 2004 FATF Methodology. The evaluation determined that Botswana demonstrated full compliance with three recommendations, substantial compliance with six recommendations, partial compliance with thirteen recommendations, non-compliance with twenty-seven recommendations, and one recommendation was deemed non-applicable. A subsequent procedure was implemented between 2009 to March 2016, culminating in an on-site visit conducted from June 13 to June 24, 2016. This visit aimed to assess Botswana's adherence to the FATF 40 Recommendations and evaluate the effectiveness of Botswana's Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) system. Evaluation Findings A summary of the findings of this evaluation are as follows:- a) The AML/CFT regime is still under development, with authorities yet to fully comprehend their responsibilities and build capacities to address ML/TF issues. b) While domestic coordination and cooperation are generally satisfactory, there is room for improvement through a shared understanding of the country's ML/TF risks and the signing of Memoranda of Understanding (MoUs) among authorities. c) Competent authorities in Botswana exhibit varying capacities and understandings of their AML/CFT responsibilities. For instance, NBFIRA has shown an emerging understanding of its AML/CFT supervisory role but faces limitations in implementation due to inadequate specialized human resources. d) Although Botswana's legal framework is robust, particularly concerning the confiscation of proceeds of crime, its implementation is notably limited, as more attention is directed towards investigating and prosecuting predicate offenses. e) Significant deficiencies in the legal framework for Terrorist Financing (TF) include the non-criminalization of individual terrorists, disproportionate penalties, documentation that does not cover legal persons, and differing levels of understanding of offenses and risks among competent authorities responsible for investigating and prosecuting TF. f) Authorities have failed to determine which Non-profit Organizations (NPOs) could be vulnerable to TF risks, and there is a lack of awareness about possible exposure to TF risks. g) There is no common understanding of ML/TF risks at the national level, as the country was conducting its first National Risk Assessment (NRA), involving various public and private sector entities to develop a National Strategy. h) The Financial Intelligence Agency (FIA) receives limited reports from financial institutions, mainly from banks, and does not receive cross-border cash and Business Names Index (BNI) declaration reports from the Botswana Unified Revenue Service (BURS). i) There is minimal use of financial intelligence by the Botswana Police Service (BPS), Directorate on Corruption and Economic Crime (DCEC), and BURS to initiate or support ML investigations, with law enforcement agencies preferring to pursue predicate offenses. j) Except for NBFIRA, which demonstrated an emerging understanding of ML/TF risks applying to its regulated entities, Bank of Botswana (BoB) and FIA did not exhibit a consistent understanding of ML/TF risks among regulated entities. k) The Financial Intelligence Act (FI Act) lacks a risk-sensitive approach to the implementation of AML/CFT obligations and does not cover most AML/CFT obligations, resulting in limited application and implementation of mitigating controls. l) The legal framework does not require the identification and verification of the identity of legal persons and legal arrangements, nor does it mandate the collection and retention of information on beneficial ownership. m) Although the FI Act empowers supervisory bodies to issue sanctions for non- compliance with AML/CFT obligations, these sanctions are not dissuasive or proportionate and have not been consistently applied. n) While the legal system facilitates international cooperation in mutual legal assistance (MLA) and extradition matters, the non-criminalization of all predicate offenses restricts the scope of international cooperation provided. Recommended Actions The ESAAMLG made various recommendations to be actioned upon with the aim of getting Botswana to comply with the FAFT 40 Recommendations. The recommendations are summarized below:- a) Criminalize, at the very least, the remaining predicate offenses to encompass all designated categories of offenses in the FATF Glossary. b) Enhance efforts to conduct more investigations on money laundering and foster increased international cooperation pertaining to money laundering. c) Implement a more effective mechanism to oversee the movement of requests for both Mutual Legal Assistance (MLA) and extradition between the Director of Public Prosecutions (DPP) and the Ministry of Foreign Affairs, ensuring consistency and reconciliation of the shared request statistics. d) Establish clear processes and procedures for handling MLA requests, including acknowledgment, allocation, progress tracking, etc. e) Institute a specialized unit within the DPP dedicated to managing international cooperation matters. f) Ensure that the specialized unit is adequately staffed and trained to handle international cooperation matters efficiently. g) Adopt and adhere to proper procedures concerning extradition matters to prevent challenges to requests granted by the courts in the requesting jurisdiction. h) Enhance the turnaround time for executing requests, especially extradition requests. Technical Compliance Ratings and Conclusion Botswana’s technical compliance ratings in the May 2017 report indicated that out of the 40 recommendations it was non-compliant in 23, it was partially compliant in 14, it was largely compliant in 2, it had zero compliance and 1 recommendation was not applicable. This therefore led to Botswana being put on an enhanced status which is a traditional ESAAMLG policy for members with significant shortcomings. After the adoption of the Mutual Evaluation Report (MER) in May 2017 and Botswana’s grey listing by FAFT in October 2018, the country took measures aimed at addressing the technical compliance deficiencies identified and as a result of this progress, 21 Recommendations were re-rated (upgraded) to largely compliant and compliant during the April 2021 session. Despite showing improvements Botswana remained in enhanced follow-up and had to continue informing the ESAAMLG of the progress made in improving and implementing its AML/CFT measures. Botswana’s Blacklisting by the European Commission On the 13th February 2020 the European Union (EU) blacklisted Botswana which meant that a) EU entities were obliged to conduct enhanced customer due diligence on all business transactions involving Botswana entities. b) The ease of doing business in Botswana was constrained thus impacting on BITC’s objective of attracting foreign business into Botswana, cross-border transactions, and financial transactions flows. This blacklisting, however, did not prohibit specified parties from making international transactions but only faced increased scrutiny within the EU. It did also not affect Botswana’s engagement with the rest of the world engagements. Botswana’s delisting by FAFT In December 2020, as part of its initiatives to be delisted from the FATF grey list and to improve its standing on the EU blacklist, Botswana voluntarily subjected itself to an assessment by the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG). ESAAMLG, an affiliate member of the FATF, was tasked with analyzing Botswana's advancements in rectifying the technical compliance deficiencies previously identified. Additionally, Botswana sought re-evaluation of its technical compliance ratings to facilitate removal from both the EU blacklist and the FATF grey list. Subsequently, in January 2021, ESAAMLG released the 'Anti-money laundering and counter-terrorist financing measures - Botswana, 4th Enhanced Follow-up Report and 2nd Technical Compliance Re- rating' (referred to as the "follow-up report"). This comprehensive report assessed Botswana's progress in addressing the previously pinpointed technical compliance shortcomings. The document also provided re-ratings where notable progress had been achieved. On 21st October 2021 during its plenary session the FAFT resolved to remove Botswana from the grey list of jurisdictions. This decision came as a relief to botswana given that its grey listing automatically meant its inclusion in the European Union’s and the United Kingdom’s lists of high-risk countries. In February 2022 the European Union resolved to remove Botswana from the blacklisting thus the country was no longer required to face enhanced due diligence measures from its trading partners. INTRODUCTION Defining money laundering Money laundering is differently defined across different jurisdictions and below we give some of the definitions. International Compliance Association Money Laundering - is the generic term used to describe the process by which criminals disguise the original ownership and control of the proceeds of criminal conduct by making such proceeds appear to have derived from a legitimate source - The International Monetary Fund (IMF) Money laundering is a process in which assets generated or obtained by criminal activities are concealed or moved to create a link between the crime and the assets which is difficult to understand. The U.S Custom Service Money laundering is the legitimization of proceeds from the illegal activity. The Organisation of Economic Co-operation Development (OECD) The attempt to conceal or disguise the ownership or source of the proceeds of criminal activity and to integrate them into the legitimate financial systems in such a way that they cannot be distinguished from assets acquired by legitimate means. Typically, this involves the conversion of cash-based proceeds into account-based forms of money, Section 14 (1) – Proceeds of Serious Crime (Repealed) - Botswana A person shall be deemed to engage in money laundering if  he engages, directly or indirectly, in a transaction that involves money, or other property, that is the proceeds of a serious offence, whether committed in Botswana or elsewhere, or he receives, possesses, conceals, disposes of, or brings into Botswana, any money, or other property that is the proceeds of a serious offence, whether committed in Botswana or elsewhere, or the person knows, or ought reasonably to know, that such money or other property is derived or realised, directly or indirectly, from some sort of unlawful activity. Why is money laundering illegal? Money laundering is illegal for several reasons, primarily because it facilitates and supports criminal activities, undermines the integrity of financial systems, and poses significant risks to the global economy. Here are some key reasons why money laundering is considered illegal: Concealing Criminal Origins: Money laundering allows individuals and criminal organizations to hide the illicit origins of their funds. This process makes it difficult for law enforcement to trace and investigate the proceeds of criminal activities such as drug trafficking, corruption, terrorism, fraud, and other unlawful actions. Supporting Organized Crime: Money laundering is often associated with organized crime syndicates. By providing a means to legitimize the proceeds of criminal activities, money laundering enables criminal organizations to enjoy the profits and continue their illegal operations. Undermining Financial Systems: Money laundering can compromise the integrity of financial institutions and systems. When illicit funds are introduced into the financial system, it can distort economic activities, affect market stability, and erode public confidence in the financial sector. Funding Terrorism: Money laundering can be used to finance terrorist activities. Terrorist organizations may use the same techniques as criminals to disguise the sources and destinations of funds, making it challenging for authorities to track and prevent the financing of terrorism. Eroding Rule of Law: Money laundering undermines the principles of transparency and accountability in financial transactions. This erosion of the rule of law can have broader societal implications, affecting the overall stability and trust in legal and financial systems. Global Impact: Money laundering is often a transnational crime, with funds flowing across borders. Its global nature makes it necessary for international cooperation to combat the problem effectively. Various international organizations, such as the Financial Action Task Force (FATF), work to set standards and promote collaboration among countries to address money laundering on a global scale. Governments and regulatory bodies worldwide have enacted laws and regulations to criminalize and combat money laundering. These laws typically require entities to implement anti-money laundering (AML) measures, conduct due diligence on customers, and report suspicious transactions to authorities. Penalties for money laundering can include fines, imprisonment, and the forfeiture of illicitly gained assets. The collective effort to combat money laundering aims to preserve the integrity of financial systems, protect societies from criminal activities, and promote the rule of law. The Financial Action Task Force (FATF), an intergovernmental organization focused on combating money laundering and terrorist financing, provides that money laundering involves three main stages namely placement, layering and integration: Placement: The introduction of "dirty money" into the financial system. This may involve breaking down large amounts of cash into smaller, less suspicious amounts, and then depositing them into financial institutions. Layering: The process of separating the illicit proceeds from their source by creating complex layers of financial transactions designed to obscure the audit trail and make tracing the origins difficult. Integration: The reintroduction of "cleaned" money into the economy, making it appear as if it comes from a legitimate source. This process can be graphically presented as here below:- REGULATORY FRAMEWORK FOR AML AND FINANCIAL CRIMES IN BOTSWANA The Financial Intelligence Act, 2022 This is an Act to re-enact with amendments the Financial Intelligence Act; to continue the establishment of the Financial Intelligence Agency and re-constitute the National Coordinating Committee on Financial Intelligence as a high level committee; to provide for third parties to perform certain customer due diligence measures on behalf of specified parties; to enable the Financial Intelligence Agency to initiate an analysis of information based on information in its own possession or information received from other sources to establish a suspicious transaction, and for matters connected therewith and incidental thereto. Purpose of Financial Intelligence Act: The purpose of this Act can be summarized as follows:- a) Combating money laundering through identification and preventing the laundering of illicit funds and the tracing of the origins of suspicious transactions and activities. b) Preventing terrorist financing by detecting and preventing the flow of funds to support terrorist activities and establishing mechanisms to freeze and confiscate assets linked to terrorism. c) Enhancing financial system integrity by promoting transparency and accountability and strengthening measures to deter financial crimes. d) Adhering to international standards and recommendations, such as those set by FATF and facilitating international cooperation with comparable organizations to combat transnational financial crimes. e) Contributing to national security by preventing the misuse of the financial system for criminal or illicit purposes. Functions of Financial Intelligence Act: a) Establishing a Financial Intelligence Agency (FIA) to function as the central entity responsible for receiving, analyzing, and disseminating financial intelligence. b) Mandating reporting requirements for financial institutions and designated non- financial businesses and professions to promptly report suspicious transactions to the FIA.  c) Mandating that financial institutions adopt measures for customer due diligence, verifying client identities, and evaluating risks associated with specific transactions. d) Granting authorities, the power to conduct investigations and enforce actions against individuals or entities engaged in money laundering or terrorist financing. e) Authorizing authorities to freeze and seize assets suspected to be connected to money laundering or terrorist financing. f) Implementing regulations and safeguards to ensure the confidentiality of sensitive financial information while enabling the exchange of information among relevant authorities. g) Advocating for training and capacity-building initiatives to enhance the expertise of professionals engaged in the prevention of financial crimes. The FIA regulations The Financial Intelligence Agency (FIA) regulations are a set of rules and guidelines designed to govern the operations and activities of Botswana’s FIA, which plays a crucial role in combating money laundering, terrorist financing, and other financial crimes. The purpose and functions of FIA regulations have been spelled out under Section 63(2) of the Act as follows a) Translating the overarching goals and directives of the broader AML and CTF legislation into specific operational protocols for the FIA. b) Establishing a framework to ensure the FIA's adherence to national and international standards and recommendations, as stipulated by entities like FATF. c) Defining meticulous procedures governing the receipt, analysis, and dissemination of financial intelligence concerning suspicious transactions and activities. d) Detailing measures to uphold the confidentiality of information received and processed by the FIA, while allowing for legal sharing with relevant authorities. e) Offering guidance on how the FIA can collaborate and exchange information with both domestic and international counterparts, including other FIUs and law enforcement agencies. f) Advocating for a risk-based approach to AML and CTF endeavors, enabling the FIA to allocate resources strategically and concentrate efforts on higher-risk areas and entities.  g) Furnishing guidelines regarding reporting obligations for specified parties and accountable institutions. h) Providing guidelines and oversight on the regulatory obligations of accountable/supervisory institutions. FATF 40 Recommendations This serve as a comprehensive set of international standards and measures aimed at combating money laundering (ML), terrorist financing (TF), and the proliferation of weapons of mass destruction. The purpose of these recommendations is to provide a framework for countries to strengthen their legal, regulatory, and operational systems to effectively address the threats posed by illicit financial activities. The primary purposes of the FATF are:- a) Establishing a globally recognized set of standards and best practices to combat money laundering, terrorist financing, and related financial crimes. b) Ensuring consistency and uniformity in anti-money laundering and counter-terrorist financing measures across countries, thereby reducing vulnerabilities in the global financial system. c) Providing a robust framework to prevent the misuse of the financial system for illicit activities, including money laundering and terrorist financing. d) Promoting international cooperation and collaboration among countries in the fight against cross-border financial crimes. e) Advocating for the implementation of a risk-based approach, allowing countries and financial institutions to tailor their measures based on the specific risks they face. f) Recommending the adoption of effective legal and institutional frameworks to criminalize and combat money laundering, terrorist financing, and related offenses. g) Providing guidelines for implementing robust customer due diligence measures to ensure the identification and verification of customers and beneficial owners. h) Recommending measures for financial institutions to maintain appropriate records and report suspicious transactions to relevant authorities. i) Encouraging countries to enact laws and regulations that allow for the freezing and confiscation of assets associated with money laundering and terrorist financing.  j) Fostering international cooperation in legal matters, including extradition, mutual legal assistance, and information exchange, to facilitate the prosecution of financial crimes. k) Advocating for effective supervision and regulation of financial institutions to ensure their compliance with anti-money laundering and counter-terrorist financing measures. l) Addressing the vulnerabilities in the non-profit sector and recommending measures to prevent terrorist financing abuses in these organizations. m) Recognizing the importance of adapting to technological advancements and incorporating measures to address the challenges posed by virtual assets, cryptocurrencies, and other innovations. n) Promoting coordination and cooperation among various authorities within a country to enhance the effectiveness of the anti-money laundering and counter-terrorist financing regime. Banking Acts and Regulations The pivotal role of ensuring financial stability within the country is undertaken by the Bank of Botswana (Bank), which oversees and regulates banks and other financial institutions. This mission is guided by crucial legislative instruments, including the Bank of Botswana Act (Cap. 55:01), Banking Act (Cap. 46:04), Banking Regulations 1995, Bureau de Change Regulations 2004, and relevant directives, policies, and guidelines. In its commitment to the financial sector, the Bank strives to foster market integrity, competition, fair business practices, and a high standard of governance. This objective is realized through continuous consultation and transparent communication with stakeholders. The Bank is firmly committed to upholding a high level of professional conduct in alignment with international regulatory and accounting standards, ensuring effective supervision of the banking industry. The operational functions of Bank of Botswana are:-  a) Establish transparent criteria, guidelines, and entry requirements through its licensing policy. b) Regularly formulate and update prudential policies and standards. c) Monitor key aspects such as solvency, liquidity, large exposures, insider loans, provisioning, and risk-management strategies, as well as the adequacy of management and governance structures to ensure the robust functioning of banks. d) Implement effective systems for off-site surveillance and on-site examination, encompassing reporting, accounting, auditing, and disclosure standards. e) Ensure prompt supervisory action and adherence to banking and other relevant laws governing the operations of banks in Botswana. f) Monitor and investigate unlicensed and illegal deposit-taking activities and practices. NBFIRA Act and Regulations NBFIRA derives its mandate to regulate and supervise Non-Bank Financial Institutions (NBFIs) sector from Section 4 of the NBFIRA Act (2016). The principal objective of the Regulatory Authority is to foster the following: Safety and soundness of the NBFIs, The highest standards of conduct of business by the NBFIs, Fairness, efficiency, and orderliness of the NBFIs, Stability of the financial system, Reduction and deterrence of financial crime. The Financial Intelligence Act grants NBFIRA the powers to supervise and monitor the NBFI sector's compliance with the Financial Intelligence Act (2022) as well as implementing the necessary measures to prevent and deter money laundering, terrorism, and proliferation financing (ML/TF/PF). Some of the Regulatory Authority's supervisory roles, as prescribed under the Fl Act (2022) include: To regulate and supervise NBFIs through a risk-based approach for compliance with the NBFIRA act (2016),  In consultation with the Financial Intelligence Agency, establish and issue guidance notes, and provide assistance for NBFIs to comply with the Act, Maintain relevant statistics of compliance measures implemented and sanctions imposed on its regulated entities, To conduct risk assessment on regulated entities to understand sectoral vulnerabilities and threats. Proceeds and Instruments of Crime Act The purpose and objective of this Act is to deprive persons convicted of certain crimes of the benefits or rewards gained from such crimes; to deprive persons of property suspected to be a proceed or instrument of crime, to deal with issues such as money laundering, racketeering and other incidental and connected matters. In summary, the purpose and objectives of this legislation are as follows:- Identifying and preventing the laundering of proceeds derived from criminal activities through financial systems. Establish mechanisms for reporting suspicious transactions to relevant authorities. Provide legal mechanisms for the confiscation and forfeiture of assets acquired through criminal activities. Enable the recovery of unlawfully obtained assets by law enforcement agencies. Disrupt criminal organizations by targeting their financial infrastructure and ill-gotten gains thus deterring individuals and organizations from engaging in criminal activities. Facilitate international cooperation and collaboration in the investigation and prosecution of transnational crimes and aligning national laws with international standards, such as those established by the Financial Action Task Force (FATF). Strengthen the legal framework for addressing financial crimes and provide law enforcement agencies with tools and legal authority to investigate and prosecute individuals involved in money laundering and related offenses. Encourage financial institutions and businesses to adopt ethical practices and due diligence measures to prevent involvement in money laundering.  Promote transparency and accountability in financial transactions and safeguard the integrity of financial systems by preventing illicit funds from entering and circulating within the economy. SUPERVISORY AUTHORITIES These are entities tasked with overseeing and regulating various sectors to ensure compliance with established rules, standards, and regulations. These authorities play a crucial role in maintaining the integrity, stability, and fairness of the industries they supervise. They typically have the authority to set guidelines, enforce compliance, and conduct investigations to prevent malpractices, fraud, and systemic risks. Their responsibilities often extend to promoting market transparency, fostering healthy competition, and ensuring that businesses adhere to ethical and legal standards. These authorities may collaborate with international organizations, share information with counterparts in other jurisdictions, and actively participate in setting global standards to address cross-border challenges. Effective supervision by these entities is essential for building trust, promoting financial stability, and mitigating the potential negative impacts of economic activities on society at large. Schedule II of the Financial Intelligence Act lists the following 12 entities as supervisory authorities and allows the FIA to act as a supervisory authority for organisations that do not have the same:- a) The Bank of Botswana established under the Bank of Botswana Act, Cap. 55:01 b) The Real Estate Advisory Council established under the Real Estate Professionals Act, Cap. 61:07 c) The Gambling Authority established under the Gambling Act, Cap. 19:01 d) The Law Society of Botswana established under the Legal Practitioners Act, Cap. 61:01 e) Non-Bank Financial Institutions Regulatory Authority, established under the Non- Bank Financial Institutions Regulatory Authority Act, Cap. 46:08 f) Registrar of Societies established under the Societies Act, Cap. 8:01 g) Botswana Institute of Chartered Accountants established under the Accountants Act, Cap. 61:05 h) The Botswana Accountancy Oversight Authority established under the Financial Reporting Act, Cap. 46:10 i) The Diamond Hub j) The Director of Cooperative Development established under Co-operative Societies Act, Cap. 42:04 k) The Master of the High Court l) The Department of Mines SPECIFIED PARTIES. This refers to individuals, entities, or groups identified by regulatory authorities or governing bodies due to their involvement in activities that require heightened scrutiny or monitoring. These designations are often made in the context of anti-money laundering (AML) and counter-terrorist financing (CTF) efforts to mitigate the risk of illicit financial activities. Regulatory frameworks typically outline guidelines for identifying specified parties and may include individuals associated with politically exposed persons (PEPs), high-risk business sectors, or those involved in transactions that raise concerns about potential money laundering or terrorist financing. Specified parties could also include entities from jurisdictions with inadequate AML/CTF controls. Financial institutions and other accountable entities are obligated to exercise enhanced due diligence when dealing with specified parties. This may involve more thorough customer verification, monitoring transactions closely, and reporting any suspicious activities to the relevant authorities. By focusing on specified parties, regulatory bodies aim to strengthen the prevention and detection of financial crimes, contributing to the overall integrity of the financial system. Schedule I of the Financial Intelligence Act lists the following 23 entities as specified parties. a) 1. An attorney as defined in the Legal Practitioners Act, Cap. 61:01, when preparing for or carrying out transaction for clients concerning the following — i. buying and selling of real estate; ii. managing of client money, securities or other assets; iii. management of bank, savings or securities accounts; iv. organization of contributions for creation, operation or management of companies; and v. creating, operating or management of legal persons or arrangements and buying and selling of business entities. b) An accountant as defined under the Accountants Act, Cap. 61:05, when preparing for or carrying out transaction for clients concerning the following —  i. buying and selling of real estate; ii. managing of client money, securities or other assets; iii. management of bank, savings or securities accounts; iv. organization of contributions for creation, operation or management of companies; and c) creating, operating or management of legal persons or arrangements and buying and selling of business entities. d) A registered professional as defined under the Real Estate Professionals Act, Cap. 61:07, when involved in transactions for client concerning buying and selling of real estate. e) A bank as defined under the Banking Act, Cap.46:04 f) A bureau de change as defined under the Bank of Botswana Act, Cap.55:01 g) A building society as defined under the Building Societies Act, Cap. 42:03 h) A casino as defined under the Gambling Act, Cap. 19:01 i) A Non-Bank Financial Institution as defined in the Non-Bank Financial Institutions Regulatory Authority Act, Cap. 46:08 j) A person running a lottery under the Lotteries and Betting Act, Cap.19:02 k) The Botswana Postal Services established under the Botswana Postal Services Act, Cap. 72:01 l) A precious stones dealer as defined under the Precious and Semi-Precious Stones (Protection) Act, Cap. 66:03 m) A semi-precious stones dealer as defined under the Precious and Semi-Precious Stones (Protection) Act, Cap. 66:03 n) Botswana Savings Bank established under Botswana Savings Bank Act, Cap. 56:03 o) Citizen Entrepreneurial Development Agency p) Botswana Development Corporation q) National Development Bank established under the National Development Bank Act, Cap. 74:05 r) A Car dealership s) A Money or value transfer services provider t) An electronic Payment Service Provider u) A trust and company service provider v) A savings and credit co-operative w) A precious metal dealer as defined under the Unwrought Precious Metals Act, Cap. 20:03 x) A virtual asset service provider. APPLICATION OF RELEVANT LEGISLATION FOR SUPERVISORY AUTHORITIES The FIA has several key obligations and responsibilities for supervisory authorities whether in the financial sector or other industries, to ensure the proper functioning, integrity, and stability of the sectors they oversee. a) Regulatory and supervisory Oversight: responsible for formulating and enforcing regulations, rules, and standards that govern the conduct of entities within their jurisdiction. This includes setting guidelines for AML, licensing, operations, and risk management. b) Monitoring and Compliance: actively monitor the activities of the entities under their purview to ensure compliance with established regulations. This involves conducting regular audits, examinations, and assessments to verify adherence to legal and ethical standards. c) Risk Assessment: Identifying and assessing risks within the supervised industries is a crucial obligation. This includes evaluating systemic risks that could impact the stability of the sector and implementing measures to mitigate these risks. d) Enforcement Actions: When violations of regulations are identified, supervisory authorities have the responsibility to take appropriate enforcement actions. This may include issuing fines, sanctions, or, in extreme cases, revoking licenses or initiating legal proceedings. e) Collaboration and Information Sharing: Supervisory authorities often collaborate with domestic and international counterparts to share information and best practices. This helps address cross-border challenges, promote consistency, and enhance the effectiveness of regulatory efforts. f) Education and Awareness: Promoting AML awareness and understanding of regulatory requirements is another obligation. This includes providing guidance to entities under supervision and educating the public on AML, financial literacy and regulatory matters. g) Statistical data: Maintain statistics on compliance measures adopted and sanctions imposed on specified party including referrals of information to the FIA. APPLICATION OF RELEVANT LEGISLATION FOR SPECIFIED PARTY. The obligations of a specified party are usually defined by supervisory authorities or governing bodies, especially in the context of anti-money laundering (AML) and counter- terrorist financing (CTF) efforts. The FI Act however does specify under section 14 some of the obligations of specified parties. This can be summarized as follows:- a) Obligation to conduct a risk assessment and take appropriate measures to manage and mitigate the risks identified. b) Obligation to implement programmes to combat the commission of financial offences commensurate to it’s size. c) Obligation to implement group-wide programmes to counter the risk of commission of financial offences. d) implement and maintain a customer acceptance policy, internal rules, programmes, policies, procedures or controls that will protect its systems. e) Obligation to conduct enhanced due diligence measures in accordance with its risk management system. f) Develop and maintain audit functions to evaluate any policies, procedures and controls it has developed. g) Obligation to keep records of all its transactions in accordance to the Act. h) Obligation to ensure that their employees are adequately trained and aware of AML and CTF obligations. This helps in preventing unintentional violations and fostering a culture of compliance. i) Obligation to report transactions involving specified parties to relevant regulatory authorities. This includes suspicious activity reports (SARs) and other disclosures that may indicate potential illicit activities. DEFINITION Is a critical process employed by businesses, to verify and understand the identity of their clients or customers. KYC aims to prevent financial crimes such as money laundering, terrorist financing, and fraud by ensuring that businesses have a clear understanding of who their customers are and the nature of their financial activities. The Financial Intelligence Act prohibits specified parties from entering into any business relations without undertaking due diligence measures. OBJECTIVES OF A KYC POLICY Ensuring that only legitimate and bona fide customers are accepted - This is a fundamental principle that involves a comprehensive process to verify the identity of customers, assess the legitimacy of their activities, and mitigate the risk of fraudulent or illicit financial transactions. a) Proper identification of customers - This is a critical component of the Know Your Customer (KYC) procedures, aimed at ensuring the integrity of financial transactions, preventing fraud, and complying with regulatory requirements. b) A clear understanding of the possible risks posed by customers - This is a crucial aspect of risk management and compliance, particularly within the framework of Know Your Customer (KYC) policies. This understanding helps businesses and financial institutions assess, categorize, and address potential risks associated with their customer base. c) Ensuring the availability of explicit customer acceptance guidelines – This is a critical aspect of a robust Know Your Customer (KYC) policy that serves as a foundational framework for entities to evaluate and determine whether to accept a customer, emphasizing compliance with regulatory standards and risk management. d) Able to monitor customer transactions and identify normal & abnormal transactions – This is a crucial component of effective risk management and compliance. The process is often a part of a broader framework known as transaction monitoring, which is designed to identify and address potentially suspicious or illicit activities. e) The establishment and effective implementation of appropriate procedures are crucial for the smooth functioning, compliance, and risk management of various processes within an organization. This holds true across different domains, including finance, healthcare, manufacturing, and more. RISKS MITIGATED BY KYC POLICIES. (KYC) policies play a crucial role in mitigating various risks associated with financial transactions and business relationships. These policies are implemented by organizations to verify the identity of their customers and ensure compliance with regulatory requirements. The key risks that KYC policies help to mitigate are: Reputation Risk – these are risks caused by allowing the entity to be used for illegal activities. KYC procedures may involve checking the associations and affiliations of customers. This helps in preventing businesses from getting involved with entities that may harm their reputation. Operational risk – refers to the potential for direct or indirect losses resulting from inadequate or failed internal processes, management practices, or systems within an organization. This type of risk encompasses a wide range of factors that can disrupt the normal functioning of business operations. Operational risk is not solely tied to external events or market fluctuations; rather, it arises from internal weaknesses or deficiencies. Legal risk – refers to the potential for adverse legal consequences and financial losses that an organization may face due to its involvement in activities that are deemed illegal or result in legal disputes. This type of risk arises from the uncertainty and potential financial impact of legal actions, including lawsuits, regulatory investigations, or compliance failures. Financial risk - refers to the potential for financial losses arising from uncertainties and adverse events that impact an organization's fiscal well-being. In the context of poor knowledge of customers, financial risk is particularly associated with the failure to recover amounts due from customers or advancing money to the wrong party. Concentration risk – refers to the potential for adverse consequences arising from having a significant portion of financial exposure concentrated in a single customer, counterparty, industry, or asset class. In the context of allowing a single customer to either owe or be owed a large amount, concentration risk becomes particularly relevant. Regulatory risk – refers to the potential for adverse consequences arising from an organization's failure to comply with the laws, regulations, and standards governing its industry or operations. This risk is particularly significant as it can lead to sanctions, fines, legal actions, and reputational damage. KEY ELEMENTS OF A KYC POLICY This is a set of procedures and processes designed to verify and identify the identity of customers, assess their risk profiles, and ensure compliance with anti-money laundering (AML) and other regulatory requirements. The key elements of this policy include customer acceptance policy, customer identification policy, Customer verification policy, Accounts and transactions monitoring policy and Risk management policy. Customer acceptance - is a crucial aspect of risk management, particularly in the financial industry, where the risk of dealing with illegal money or engaging in illicit activities poses significant threats. Customer acceptance policies are designed to establish a framework for evaluating and accepting customers based on their risk profiles, compliance with legal requirements, and alignment with the entity's risk appetite. Customer identification - Establishing the identity of customers is central to the KYC policy both for the customer acceptance or rejection decision and for the ongoing monitoring of customer accounts and transactions. By identifying customers effectively, the business is able to deal with them in the appropriate manner. A customer identification policy will entail collecting customer information such as name, address, date of birth, etc, verifying customer identity through official documents (ID cards, passports, utility bills) and conducting enhanced due diligence (EDD) for higher-risk customers. Customer verification - is a critical component of the Know Your Customer (KYC) process, which is designed to ensure that organizations have accurate and reliable information about their customers' identities. The verification process is essential for preventing identity theft, fraud, and other illicit activities. Accounts and transactions monitoring - is a crucial aspect of a comprehensive Know Your Customer (KYC) policy. This process involves regularly scrutinizing customer accounts and transactions to detect and review unusual activities, especially those associated with high-risk customers. The goal is to identify potentially suspicious behavior, money laundering, or other illicit financial activities. Risk management – it plays a crucial role in safeguarding financial institutions and businesses from the risks associated with money laundering and other criminal activities. Effectively managing these risks is essential for maintaining the integrity of financial systems, ensuring compliance with regulatory requirements, and protecting against potential legal and reputational consequences. Know Your Customer (KYC) policies serve as a fundamental starting point for implementing sound risk management practices in the context of anti-money laundering (AML) efforts. CUSTOMER DUE DILIGENCE (CDD) Is a critical component of the broader Know Your Customer (KYC) framework and anti- money laundering (AML) compliance efforts. CDD refers to the process of thoroughly assessing and understanding the identity, background, and financial activities of a customer. The objective is to mitigate the risk of money laundering, terrorist financing, fraud, and other illicit activities. CDD is a key regulatory requirement in many jurisdictions and is essential for financial institutions and businesses to ensure compliance with anti-money laundering laws. Section 16(1) of the Financial Intelligence Act obligates specified parties to conduct customer due diligence measures under the following circumstances:- a) When establishing a business relationship with a customer; b) When carrying out an occasional transaction equal to or in excess of the prescribed amount; c) When carrying out a transaction or occasional transaction equal to or in excess of the prescribed amount on behalf or on the instruction of a customer or any person, whether conducted as a single transaction or several transactions that appear to be linked; d) When carrying out a domestic or international wire transfer. e) When there is doubt about the veracity or adequacy of previously obtained customer identification data; and f) Where there is suspicion of the commission of a financial offence. Key Components of Customer Due Diligence: Customer Identification: The first step in CDD is to establish the identity of the customer by use of reliable and independent documentation, such as government-issued IDs, passports, or utility bills, to verify the customer's identity. Nature of Business or Relationship: It is then important to understanding the customer's business, purpose of the relationship, and the nature of their transactions by collecting information about the customer's business activities, expected transaction volumes, and the source of their funds. Risk Assessment: It is critical to evaluate the level of risk associated with the customer based on various factors by considering the customer's industry, geographical location, transaction patterns, and any red flags that may indicate higher-risk behavior. Ongoing Monitoring: By continuously monitoring customer accounts and transactions for unusual or suspicious activities and implementing automated systems to detect anomalies, set thresholds for transaction monitoring, and conduct periodic reviews of customer information. Enhanced Due Diligence (EDD) When dealing with higher-risk customers, implement enhanced due diligence measures by conducting additional investigations, verifying information more rigorously, and monitoring high-risk customers more closely. Occasions when CDD cannot be performed. While CDD is a crucial process for entities to understand their customers, assess the risks associated with them, and ensure compliance with anti-money laundering (AML) regulations, there are situations where performing CDD may be challenging or even impossible. Examples include:- Inability to verify identity - Some customers may not have sufficient or valid identification documents, making it difficult to verify their identity or others may provide inaccurate or fraudulent information during the identification process.  Non-Cooperative Customers - Some customers may refuse to provide necessary information for the CDD process, hindering the establishment of a comprehensive customer profile or others may impede the effectiveness of the CDD process. Complex Ownership Structures - In cases where the customer is a legal entity with complex ownership structures, determining the ultimate beneficial owners may be challenging and/or others may conceal ownership through nominee directors or shareholders to complicate the CDD efforts. Remote or Online Transactions - In online or remote transactions, the lack of physical presence may make it difficult to verify the identity of the customer adequately thus the risk of impersonation or identity theft may be higher in virtual or online transactions. High-Risk Jurisdictions - Operating in jurisdictions with limited access to reliable information or weak regulatory frameworks may pose challenges in performing thorough CDD. Also, in some cases political or regulatory instability in certain regions can hinder the ability to conduct effective CDD. Emerging Risks - The emergence of new and sophisticated risks, such as cyber threats or digital identity fraud, may outpace traditional CDD measures. Other challenges include rapid advancements in technology that may present challenges in adapting CDD processes to effectively address emerging risks. Legal or Privacy Restrictions - Stringent data protection laws may limit the extent to which customer information can be collected and processed for CDD purposes while certain legal barriers may restrict the sharing of information between institutions or across borders. Non-Face-to-Face Transactions - In cases of fully digital onboarding, where customers are not physically present, verifying identity documents may be challenging while technical issues or limitations with biometric authentication methods may impact the reliability of identity verification. When faced with challenges in performing CDD, entities may need to assess the associated risks and determine appropriate risk mitigation measures. This might include enhanced due diligence (EDD) for higher-risk customers, additional monitoring, and, in extreme cases, deciding not to establish a business relationship with the customer if risks cannot be adequately managed. It is essential for organizations to stay updated on industry best practices and regulatory requirements to address evolving challenges in the CDD process. BENEFICIAL OWNERSHIP (BO) Refers to the individuals that ultimately own, control, or benefit from a legal entity such as a company, trust, or partnership. It is a crucial concept in financial regulations and anti- money laundering (AML) efforts, as understanding the true ownership structure of entities helps prevent illicit financial activities, such as money laundering and fraud. Section 2 of the Financial Intelligence Act defines a BO as a natural person who ultimately owns or controls a customer or a natural person on whose behalf a transaction is being conducted, including a natural person who exercises ultimate effective control over a legal person or arrangement. In a company A beneficial owner is a natural person, who directly or indirectly through any contract, arrangement, understanding, relationship or otherwise ultimately owns or has a controlling ownership or exercises ultimate effective control through positions held in the incorporated body or is the ultimate beneficiary of a share or other securities in the body corporate; In a trust or other legal arrangements a) Is the settlor, trustee or ultimate beneficiary of the trust or legal arrangement or has the power, alone or jointly with another person or with the consent of another person, to — i. Dispose of, advance, lend, invest, pay or apply trust property or property of the legal arrangement, ii. vary or terminate the trust or legal arrangement, iii. add or remove a person as a beneficiary or to or from a class of beneficiaries. iv. appoint or remove a trustee or give another person control over the trust or legal arrangement, or v. direct, withhold consent or to overrule the exercise of a power referred to in subparagraphs (i) – (iv); b) Is the ultimate beneficiary of proceeds of a life insurance policy or other related investment services when an insured event covered by the policy occurs; or c) A transaction is conducted on his or her behalf. Determining a Beneficial Owner Body Corporate A body corporate is any duly registered legal entity including private and public companies. To determine ownership/control you may either consider the voting rights, shares held or where this are no known or available then application of other means of ownership/control as shown below may be considered. Voting Capital Client type Shares Other means of ownership/control Rights or profits Body corporate Any individual who exercises ultimate including private control over the management of the >25% >25% N/A & public body corporate, or who controls the companies body corporate Partnerships Refers to business structures in which two or more individuals or entities collaborate and share responsibilities, resources, profits, and losses to achieve common business goals. Partnerships are a popular form of business organization due to their flexibility and simplicity. To determine ownership/control you may either consider the voting rights, Capital or profit-sharing ratio or where this are not known or available then application of other means of ownership/control as shown below may be considered. Voting Capital or Other means of Client type Shares Rights profits ownership/control entitled to entitled to Any individual who exercises ultimate Partnerships or controls or controls control over the partnership >25% >25% management or significant influence Trusts These are legal arrangements where a person or entity (the settlor or grantor) transfers assets to another party (the trustee) for the benefit of specific individuals or entities (the beneficiaries). Trusts are commonly used for estate planning, wealth management, and asset protection. They provide a flexible and efficient way to manage and distribute assets while allowing for specific instructions and conditions to be followed. To determine ownership/control the application of other means of ownership/control as shown below may be considered. Voting Capital or Other means of Client type Shares Rights profits ownership/control Any individual who exercises ultimate Trusts control over the partnership management or significant influence Other legal entities Apart from partnerships and trusts, there are various other legal entities that individuals and businesses can choose when organizing and operating their affairs. The appropriate legal structure depends on factors such as the nature of the business, its size, liability considerations, and tax implications. Examples include Joint ventures, Sole proprietorships, non-profit organisations, cooperatives etc. To determine ownership/control the application of other means of ownership/control as shown below may be considered. Client Voting Capital or Shares Other means of ownership/control type Rights profits Any individual who benefits from the Other property of the entity where no individual legal beneficiaries are identified, the class of entities persons in whose main interest the entity or arrangement was set up or operates,  Client Voting Capital or Shares Other means of ownership/control type Rights profits any individual who exercises control over the entity/arrangement Estates of deceased Individuals When an individual passes away, their assets, debts, and legal responsibilities form what is commonly referred to as their estate. The process of handling the affairs of a deceased individual is known as estate administration or probate. The treatment of estates varies depending on factors such as the presence of a valid will, the type of assets involved, and local laws. To determine ownership/control the application of other means of ownership/control as shown below may be considered. Voting Capital or Other means of Client type Shares Rights profits ownership/control Estates of deceased The executor or administrator of the estate Individuals Any Other Cases Where all possible means of identifying the beneficial owner of a body corporate have been exhausted and recorded then the following process may be used to determine the beneficial ownership. Voting Capital or Other means of Client type Shares Rights profits ownership/control The individual who ultimately owns or All other cases controls the client, or on whose behalf a transaction is being conducted the  Voting Capital or Other means of Client type Shares Rights profits ownership/control senior individual responsible for management. NB (Note reasons why the business was unable to obtain adequate information on the beneficial owner, and considering whether it may be appropriate to cease acting or file an SAR). INTRODUCTION Identification and reporting of suspicious transactions is one of the foundation of an effective money laundering and terrorism financing control program. Reporting institutions should have internal procedures that enables employees who have identified suspicions transaction or activity to subsequently report them to the Anti-Money Laundering Reporting Officer who upon investigations would subsequently report them to the Financial Intelligence Agency using the goAML tool. Section 2 of the Financial Intelligence Act defines a “suspicious transaction” as a transaction which a) is inconsistent with a customer’s known legitimate business, personal activities or with the normal business for the type of account which the customer holds; b) gives rise to a reasonable suspicion that it may involve the commission of a financial offence; c) gives rise to a reasonable suspicion that it may involve property connected to the financing of an act of terrorism, or to be used to finance an act of terrorism or the financing of the proliferation of arms of war or NBC weapons, whether or not the property represents the proceeds of an offence; d) is made in circumstances of unusual or unjustified complexity; e) appears to have no economic justification or lawful objective; f) is made by or on behalf of a person whose identity has not been established to the satisfaction of the person with whom the transaction is made; or g) gives rise to suspicion for any other reason; REPORTING REGIME This is a key component of anti-money laundering (AML) efforts within the financial sector. Its purpose is to detect and report transactions or activities that may indicate potential involvement in criminal or illicit activities. The key components of an effective SAR regime are as listed below:- Internal procedures – The first process should be the appointment of a designated officer responsible for receiving reports, evaluating the veracity of each report and where in the opinion of the AMLCO such a report raises suspicion of ML/TF/PF then an external SAR report would be filed with the FIA. Identification of Suspicious Activity – the establishment of systems and procedures to monitor and detect unusual or suspicious transactions. The systems and procedures criteria for identifying suspicious activity should include transactions inconsistent with a customer's normal behavior, large and rapid fund movements, or patterns associated with money laundering or terrorist financing. Obligation to Report - where a transaction or series of transactions that raise suspicions are identified, the entity is obligated to file a Suspicious Activity Report (SAR) with the FIA. Such reports will typically include detailed information about the transaction, the individuals involved, and any additional relevant details. Timeframe for Reporting – the FIA regulations prescribe specific timeframes within which entities must file SARs after the identification of any suspicious activity/transaction. This timeframe is designed to ensure timely reporting and prompt action to regulatory authorities. Confidentiality and Immunity - SARs should be generally treated as confidential as both the entity and the employees are often protected from legal liability for reporting suspicious activities in good faith. This confidentiality is crucial to encourage open reporting without fear of retaliation. Regulatory Oversight and Analysis – The FIA receives SARs and plays a critical role in analyzing the reported information. The FIA may collaborate with law enforcement agencies to investigate suspicious activities and take appropriate actions, such as freezing assets or prosecuting individuals involved. Feedback Mechanism - Financial institutions may receive feedback from the FIA regarding the SARs they submit. This feedback loop helps improve the effectiveness of the reporting process by refining criteria and enhancing the institution's ability to identify suspicious activities. Technology and Data Analysis - the leveraging of advanced technologies, including data analytics and artificial intelligence, to enhance the efficiency and accuracy of identifying suspicious activities is highly encouraged. Training and Compliance Programs - providing training to employees involved in the detection and reporting of suspicious activities and the establishment of compliance programs to ensure that staff members are aware of their obligations and can effectively identify and report suspicious transactions is also highly recommended as part of the reporting regime. Global Cooperation - Given the international nature of financial transactions, many jurisdictions encourage or mandate cooperation between financial institutions and regulatory bodies across borders to combat cross-border money laundering and other financial crimes. The SARs regime is an essential tool in the broader AML framework, helping to safeguard the financial system by enabling timely detection and reporting of potentially illicit activities. It relies on collaboration between financial institutions and regulatory authorities to effectively combat money laundering, terrorist financing, and other financial crimes. KEY ELEMENTS OF A SAR a) Suspicion – it encapsulates a psychological state that surpasses mere speculation but falls short of being grounded in evidence-based knowledge. It reflects a tangible sense of doubt or uncertainty, where individuals hold a definite belief that something might be awry yet lack the concrete proof to substantiate their concerns. In this mental state, there exists a positive feeling of apprehension or mistrust, often accompanied by a slight opinion about a person, situation, or activity. This sense of suspicion operates in the absence of sufficient evidence, prompting individuals to adopt a cautious approach. While it denotes a state of heightened awareness and wariness, it is distinct from conviction, as it acknowledges the need for further information to either confirm or dispel the suspicions. Suspicion plays a pivotal role in decision-making processes, particularly in contexts like law enforcement or compliance, where it triggers actions such as investigation or the filing of reports to address potential risks. b) Proceeds – this encompasses a diverse range of forms, extending beyond the conventional notion of monetary gains. While criminal activities often yield financial benefits in the form of illicit profits, proceeds can also manifest as cost savings resulting from activities such as tax evasion or the deliberate neglect of legal requirements. These less overt advantages contribute to the complexity of identifying and combating criminal proceeds. The term encompasses not only direct financial gains but also indirect benefits that may not immediately appear as traditionally associated with criminal activities. Understanding the various forms of proceeds is essential for law enforcement and regulatory bodies seeking to address the multifaceted nature of financial crimes, ensuring a comprehensive approach to tracking, seizing, and preventing the illicit gains derived from unlawful activities. c) Crime - as defined in Botswana, encompasses behavior that constitutes a criminal offense within the jurisdiction or would be considered an offense had it occurred abroad but fallen under the legal purview of Botswana. This definition reflects the legal framework that classifies certain actions as unlawful, signaling a breach of established laws and regulations. Criminal conduct is not limited solely to activities occurring within the national borders; it extends to actions committed overseas that would be prosecutable if they had transpired within Botswana. This broad scope underscores the extraterritorial reach of the legal system in addressing criminal behavior and reinforces the commitment to holding individuals accountable for offenses committed both domestically and internationally, ensuring a comprehensive and effective approach to maintaining law and order. DETERMINING IF A SAR IS REQUIRED? Determining whether a Suspicious Activity Report (SAR) is required involves a careful assessment of financial transactions or activities that may raise suspicions of money laundering or other illicit behavior. Entities employ risk-based approaches and customer due diligence to identify red flags indicating potential suspicious activity. Factors such as unusual transaction patterns, large and unexplained fund movements, inconsistent account behavior, or involvement of high-risk customers are key considerations. Additionally, any transactions that deviate from the normal business activities or exhibit signs of attempting to evade reporting thresholds may trigger the need for a SAR. A thorough evaluation of these indicators, coupled with adherence to regulatory guidelines and internal policies, guides the decision-making process. Regular training of staff to recognize suspicious patterns and maintain vigilance is crucial in ensuring effective identification and reporting of activities warranting a SAR, contributing to the broader efforts in combating financial crimes. Examples of questions employees or those evaluating suspicious activities may raise to help them in decision-making. Step 1 Do I have knowledge or suspicion of criminal activity? or Am I aware of an activity so unusual or lacking in normal commercial rationale that it causes a suspicion of ML/TF/PF? If the answers are in the affirmative go to step 2 Step 2 Do I know or suspect that a benefit arose from the activity in step 1? If the answer is in the affirmative go to step 3 Step 3 Do I think that someone involved in the activity, or in possession of the proceeds of that activity, knew or suspected that it was criminal? If the answer is in the affirmative go to step 4 Step 4 Can I identify the person (or persons) in possession of the benefit? or Do I know the location of the benefit? or Do I have information that will help identify the person (or persons)? or Do I have information that will help locate the benefits? If the answer is in the affirmative file a SAR and if in doubt always report concerns to the AMLCO. When filing an external SAR the AMLCO who is solely responsible for determining whether internal reports may be forwarded to FIA should consider whether a) consent is required from law enforcement for the business relationship or any aspect of it to continue, and b) how client business should be conducted while a consent decision is being awaited. Key considerations for AMLCO on SAR Do I know or suspect or have reasonable grounds for either, that someone is engaged in ML/TT/PF? Do I think that someone involved in the activity, or in possession of the proceeds of that activity, knew or suspected that it was criminal? From the contents of the internal SAR, can I identify the suspect or the whereabouts of any laundered property, arms of war, Nuclear, Biological or Chemical weapons? Is an application for consent required? Do I believe, or is it reasonable for me to believe, that the contents of the internal SAR will, or may help identify the suspect or the whereabouts of any laundered property or financed weapons? Can I provide the information essential to an external SAR without disclosing information acquired in privileged circumstances? ESSENTIAL ELEMENTS OF AN EXTERNAL SAR The key elements typically found in an SAR report include: Name of reporter – The name, designation/position and contact details of the person filing the SAR. Date of the report – The SAR report should have the date on which it was filed. Contact information of Reporting Institution - Contact details of the reporting institution to facilitate communication with regulatory authorities if further information is needed. Identity and information of parties involved - detailed information about the individuals or entities involved in the suspicious activity, including names, addresses, and any available identification details. Description of the Suspicious Activity - A comprehensive description of the suspicious activity, providing context and details about the transact