Anti-money laundering modules for Masters of Economic Governance programme of the OSCE Academy

1. Introduction to AML/CFT
OSCE, • Murod Khusanov
OSCE Bishkek Academy – 2022
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2. What do you think is money laundering?
What kind of criminal actions exist to generate
illegal income?
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3. osce.org
Drug trafficking
• The trade in illicit drugs is estimated to be worth $400 billion a year, and it
accounts for 8% of all international trade
• Around 90% of the non-pharmaceutical-grade opiates on the world market
originated in Afghanistan
• Export value is $2,4 bln. (2011), which is 15% of GDP (market is worth $55
bln.)
• Annual drug related turnover of hawala (informal money transfer system)
estimated at $800 million
• Only 3-10% of all drugs being trafficked through Central Asia is arrested
The drugs being trafficked by 2 routes:
• Balkan route, through Turkey
• Central Asia and Russia (since mid-90s)
http://www.worldometers.info/drugs/

4. osce.org
Human trafficking
• 800,000 people trafficked across borders every
year
• 70% of trafficked people are female and 50%
are children
• Generates over $32 billion dollars per year
• More than 4 million refugees fled out of Syria
and many of them smuggled through Europe are
emerging new industry for smugglers

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Corruption

6. Dirty money entering financial
systems
2% to 5%* of world’s gross
domestic product*
Low $1.38 Trillion**
High $3.45 Trillion**
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7. What does expression ‘money laundering’ means
Laundry net of Al Capone
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8. Why to launder money?
• Hiding wealth: criminals can hide illegally accumulated wealth to
avoid its seizure by authorities
• Avoiding prosecution: criminals can avoid prosecution by distancing
themselves from the illegal funds
• Evading Taxes: criminals can evade taxes that would be imposed
on their earnings
• Becoming Legitimate: criminals may use laundered money to
establish legal and profitable business
• Embezzling funds: criminals may use complicated schemes in order
to organize embezzlement of budget or corporate funds

9. osce.org
 What is Money Laundering ?
➔ Following conduct, when committed intentionally, shall be
regarded as money laundering:
▪ the conversion or transfer of property knowing that such
property is derived from criminal activity or from an act of
participation in such activity, for the purpose of concealing or
disguising the illicit origin of the property or of assisting any
person who is involved in the commission of such activity to
evade the legal consequences of his action;
▪ the concealment or disguise of the true nature, source, location,
disposition, movement, rights with respect to, or ownership of
property, knowing hat such property is derived from criminal
activity or from an act of participation in such activity;
▪ the acquisition, possession or use of property, knowing, at
the time of receipt, that such property was derived from
criminal activity or from an act of participation in such activity;

10. What is Money Laundering ?
Any act or attempted act to conceal
the true origin and ownership of the
proceeds of criminal activities
United Nations
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11. The Consequences
• Undermining Financial Systems: Money Laundering expands the
black economy, undermines the financial system and raises questions of
credibility and transparency
• Expanding Crime: Money Laundering encourages crime because it
enables criminals to effectively use and deploy their illegal funds
• ‘Criminalising' Society: criminals can increase profits by reinvesting the
illegal funds in businesses
• Reducing Revenue and Control: Money Laundering diminishes
Government revenue and weakens Government control over the
economy
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12. “The economic and political influence of
criminals can weaken the social fabric, collective
ethical standards, and ultimately the democratic
institutions of society” and “enables criminal
activity to continue.”
Financial Action Task Force (FATF)
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13. Why to launder money?
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https://www.youtube.com/watch?v=RhsUHDJ0BFM

14. ML stages
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15. osce.org
Typical money laundering scheme
Criminal incomes
Placement
‘Dirty money’
integrated into the
financial systems
Layering
Money transfer
to ‘X’ company
Offshore bank
Loan to ‘Y’
company
Payment on
false invoices
to ‘Z’ company
by ‘Y’
company
Integration
Purchase of
luxury property,
financial and
commercial
investments
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16. Placement
Physical placement of cash funds into mobile
financial instruments, geographical distancing from
the places of origin.
Placements are carried out in traditional financial
institutions, non-traditional financial institutions,
retail or completely out of the country
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17. Placement
smurfing (splitting amount to small operations) and
structuring of operations
alternative remittances
wire transfers
conversion
physical carriage of cash
gambling
insurance instruments
legal business
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18. Construction business
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19. Layering
disassociate the illegal funds from the source of
the crime by purposely creating a complex of
financial transactions aimed at concealing any trail
as well as the source and ownership of funds
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20. Layering
wire transfers
offshore banks
shell companies
trusts
walking accounts
intermediaries
couriers, money mules
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21. Typical layering scheme
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22. Integration
Integration of the "cleaned" money into the economy is
accomplished by the launderer making it appear to have
been legally earned. By this stage, it is exceedingly difficult
to distinguish legal and illegal wealth
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23. Integrations
credit or debit cards
consultants’ assistance
corporate financing
purchase of property
legal business
import and export operations
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24. Mixture of funds
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25. Placement-Layering-Integration
Features:
• involvement of offshore companies and banks
• big loans by unknown companies
• unusual financing of business
• unjustified write-offs of corporate loans
• overpricing or under-pricing in export contracts or operations with properties
• big number of cash transactions below (but close to) reporting thresholds
• unusual profit of business
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26. Exercise
Imagine that you are working for public official in Kyrgyzstan who is offered $2
million as a bribe for his/her action in favor of local businessman. He/she is happy
to take this money, but has a problem of using this money without raising
questions regarding their source.
Your task is to help your boss conceal origin of money and successfully invest in
country’s economy using the weaknesses in the AML/CFT regime as described in
Mutual Evaluation report.
Please, follow ‘placement-layering-integration’ stages
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27. Financing of terrorism
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28. osce.org
Financing of terrorism
Funding requirements
Terrorist attacks do not require big amount of funding.
But bigger amount of money is required for constant funding of to promote
a militant ideology, pay operatives and their families, arrange for travel,
train new members, forge documents, pay bribes. Often, a variety of
higher-cost services, including recruitment, propaganda and ostensibly
legitimate social or charitable activities are needed to provide a veil of
legitimacy for organizations that promote their objectives through
terrorism

29. osce.org
ISIS
Some data about Islamic State in 2015
•30,000 - 50,000 militants were fighting with the Islamic State
•$2,000,000,000 was the approximate value of the Islamic State's cash and
assets
•$3,000,000 was the estimated daily revenue of the Islamic State
• Oil trade from captured oil refineries in Syria and Iraq
• Human trafficking
• Kidnapping and extortion
• Bank looting and robbery
• Taxes from businesses and population on captured territories
• External donations

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▪ with the intention that they should be used or
▪ in the knowledge that they are to be used …
 What is Terrorist Financing ?
➔ Terrorist financing means the provision or collection of funds, by
direct or indirect means

31. osce.org
▪ … in full or in part to carry out the following offences:
 attacks upon a person’s life which may cause death;
 attacks upon the physical integrity of a person;
 kidnapping or hostage taking;
 causing extensive destruction to a Government or public facility,
a transport system, an infrastructure facility, including an information
system, a fixed platform located on the continental shelf, a public place
or private property likely to endanger human life or result in major
economic loss;
 seizure of aircraft, ships or other means of public or goods transport;
 manufacture, possession, acquisition, transport, supply or use
of weapons, explosives or of nuclear, biological or chemical
weapons, as well as research into, and development of, bio-
logical and chemical weapons;
 release of dangerous substances, or causing fires, floods or explosions
the effect of which is to endanger human life;
 interfering with or disrupting the supply of water, power or any other
fundamental natural resource the effect of which is to endanger human
life;
 threatening to commit any of the acts listed in above bullet points!

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▪ The aforementioned intentional acts, which, given their nature
or context, may seriously damage a country or an international
organisation where committed with the aim of:
 seriously intimidating a population, or
 unduly compelling a Government or international organisation to
perform or abstain from performing any act, or
 seriously destabilising or destroying the fundamental political,
constitutional, economic or social structures of a country or an
international organisation,
▪ … shall be deemed to be terrorist offences.
 aggravated theft with a view to committing one of the
aforementioned terrorist offences,
 extortion with a view to the perpetration of one of the
aforementioned terrorist offences,
 drawing up false administrative documents with a view to
committing one of the aforementioned terrorist offences and
participating in a terrorist group.
▪ Moreover, the following are so called “terrorist-linked” offences:

33. Terrorism financing scheme
Receive
Accumulation
Distribution to
terroristic cells
Distribution to
terroristic
organizations
Conversion
But is it so ideal?!...

34. Financing of terrorism, new trends
Receive
Accumulation
Conversion

35. osce.org
Financing of terrorism
“Conventional”
Money Laundering
Placement:
Depositing illegal
funds on
bank accounts
Layering:
Moving funds
between banks
to conceal
the source
Integration:
Acquisition of
legal assets
Financing
of Terrorism
Placement:
Introduction of
legal assets into
the financial system
Layering:
Moving funds (often
small amounts) be-
tween banks to
conceal the source
Distribution:
Funds (often small
amounts) to finance
terrorist activities
€ $ $ €
Bank accounts Bank accounts
Legal assets
“Conventional”
Money Laundering
Placement:
Depositing illegal
funds on
bank accounts
Placement:
Depositing illegal
funds on
bank accounts
Layering:
Moving funds
between banks
to conceal
the source
Layering:
Moving funds
between banks
to conceal
the source
Integration:
Acquisition of
legal assets
Integration:
Acquisition of
legal assets
Financing
of Terrorism
Placement:
Introduction of
legal assets into
the financial system
Layering:
Moving funds (often
small amounts) be-
tween banks to
conceal the source
Layering:
Moving funds (often
small amounts) be-
tween banks to
conceal the source
Distribution:
Funds (often small
amounts) to finance
terrorist activities
Distribution:
Funds (often small
amounts) to finance
terrorist activities
€ $ $ €
Bank accounts Bank accounts
Legal assets
€ $ $ €
Bank accounts Bank accounts
Legal assets
€
€ $
$ $
$ €
€
Bank accounts Bank accounts
Legal assets

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Financial profile of 9/11 terrorists
• Accounts opened in cash in average of $4,000
• Typically used P.O. box as an address and changed frequently
• Regularly sent and received wire transfers to/from other countries
below reporting requirements
• They were making one large deposit and withdraw cash in small
amounts
• No normal living expenses (rent, utilities, insurance etc.)
• No consistency in the timing of deposit or withdrawals
• Did not use savings account or safe-deposit boxes
• High ratio of cash withdrawals

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However…
• If algorithm is developed with 99% accuracy…
• And it could identify assumable 500 terrorists living in UK
• The algorithm would identify 495 terrorists…
• But also 500,000 customers as suspicious out of 50 million adults

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Financing of terrorism (Fund raising)
CHARITY ORGANIZATIONS
Black-washing phenomenon
• Used for fund raising in developed as well as developing countries in the
Middle East
• Lighter regulatory requirements (considered as non-financial sector)
• Charities (Zakats) are common in Islamic countries
• and thus charities attractive for abuse for terroristic activities
Three types of financing of terrorism through charity organizations (FATF)
• Diversion of funds through fraud – for example, donors are told that they are donating
money for orphans, and the charity then uses the funds to fund terrorists. This can occur
alongside charitable work and within an otherwise legitimate charity.
• The use of an entirely bogus or sham organization that poses as a legitimate charity as a
front organization for terror groups.
• Broad exploitation – for example, the charity raises money to feed orphans and actually
does so but does it through a designated terrorist organisation.

39. osce.org
Financing of terrorism
OTHER SOURCES OF FINANCING
• Through legitimate businesses (especially cash intensive)
• Self-funding (family, savings, loans, other non-criminal incomes)
• Raising funds from criminal proceeds:
• Drug trafficking
• Financial frauds
• Kidnapping and extortion
• Multiple activities

40. osce.org
International standards preventing ML/FT
➔ starting from the publication of the FATF 40 (before
40+9) Recommendations
➔ leading to the adoption of national AML/CFT legislations
has added a new dimension to the efforts against
money laundering and terrorist financing in the region
 The whole process
 Especially the implementation of the FATF Recommendations into the
national law of the countries will help to create a state-of-the-art legal
framework which is in full accordance with international standards
 The provisions of the national AML/CFT legislation is making considerable
impact on the business of financial institutions, as the measures will form an
integral part of the risk management systems and processes of the
aforementioned institutions

41. osce.org
Provisions of FATF requirements
Policies
• National co-operation
and co-ordination
• Assessing risks and
applying risk-based
approach
Criminalization and
confiscation
• Money laundering
offence
• Confiscation and
provisional measures
• Terrorism financing
offence
• Financial sanctions
Preventive measures
• Customer due
diligence
• Specific customers
and activities
• Reliance on third
parties, group control
and high-risk
countries
• Reporting on
suspicious activities
• Designated non-
financial Businesses
and Professions
(DNFBPs)

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Provisions of FATF requirements (cont’d)
Transparency
• Beneficial
ownership of
legal persons
and
arrangements
Authorities and
institutional
measures
• Regulation and
supervision
• Operational and
law-enforcement
• Sanctions
International co-
operation
• International
instruments
• Mutual legal
assistance
• Extradition

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Compliance obligations for Financial Institutions
AML/CFT
policies
Audit
CDD and
KYC
procedures
Reporting
and record
keeping
Training and
staff
awareness

44. Thank you!
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