Money laundering is the process of making illegally obtained money appear legal. This document discusses how criminals first place illegal funds into the financial system through various techniques like structuring deposits to avoid reporting requirements, using alternative remittance systems, or purchasing assets or insurance policies. It then explains how launderers further layer the funds by moving them through many transactions to obscure their source and make the money harder to trace back to criminal activity. Kenya's new anti-money laundering law aims to regulate these processes but questions remain over successful implementation.

1. Laico Regency Hotel, Nairobi
14 April 2011
Presented by:
Gilbert Mwalili CA CIA
Convener – RM&IAWP ICPAK
Director – Absolute Business Systems
www.abs-africa.net

3.  Every year, huge amounts of funds are generated
from illegal activities such as drug trafficking, tax
evasion, people smuggling, theft, arms trafficking
and corrupt practices. These funds are mostly in
the form of cash.
 The criminals who generate these funds need to
bring them into the legitimate financial system
without raising suspicion. The conversion of cash
into other forms makes it more useable. It also
puts a distance between the criminal activities and
the funds.

4.  ‘Money laundering’ is the name given to the
process by which illegally obtained funds are given
the appearance of having been legitimately
obtained.
 By some estimates, more than USD1.3Trillion of
illegal funds are laundered worldwide each year!
 This is more than the total output of an economy
the size of the United Kingdom. Of the world-wide
total, an estimated USD100Million (Kshs.8.3Billion)
is laundered in Kenya.

6. There are several reasons why people launder money.
These include:
◦ 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 earnings from the funds
◦ increasing profits: criminals can increase profits by
reinvesting the illegal funds in businesses
◦ becoming legitimate: criminals can use the
laundered funds to build up a business and provide
legitimacy to this business

7. ◦ 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 tax revenue
and weakens government control over the
economy

9.  The passing of the anti-money laundering law comes
in the wake of the release of a U.S. State Department
report saying $100 million of earnings from drug
trafficking are laundered in Kenya’s financial system
annually.
 In February 2010, the Financial Action Task Force on
Money Laundering (FATF) published a list of 28 high
risk jurisdictions in an effort to combat money
laundering.
 Kenya was among 20 countries whose AML regimes
had deficiencies though the governments had
commitments for improvement.
 It is evident in light of this that Kenya’s passage of
the law is not based on principle or will to fight the
vice but on fear of being labeled a pariah state. This
therefore does leave us to question whether there will
be successful implementation of this legislation.

10.  The Act establishes a Financial Reporting Centre
(FTC) which is expected to be the regulator.
 Supervisory bodies:
(a) Central Bank of Kenya;
(b) Insurance Regulatory Authority;
(c) Betting & Licensing Control Board;
(d) Capital Markets Authority;
(e) Institute of Certified Public Accountants of Kenya;
(f) Estate Agents Registration Board;
(g) Non-Governmental Organizations Co-ordination
Board ;
(h) Retirement Benefits Authority.

11.  Financial Institutions;
 Designated non-financial businesses and
professions;
The public is also affected, as any person
who moves physical cash of USD10,000 or
more has certain reporting obligations.

12. Financial Institutions:
“financial institution” means any person or entity, which conducts
as a business, one or more of the following activities or
operations—
(a) accepting deposits and other repayable funds from the public;
(b) lending, including consumer credit, mortgage credit,
factoring, with or without recourse, and financing of commercial
transactions;
(c) financial leasing;
(d) transferring of funds or value, by any means, including both
formal and informal channels;
(e) issuing and managing means of payment (such as credit and
debit cards, cheques, travellers' cheques, money orders and
bankers' drafts, and electronic money);
(f) financial guarantees and commitments;

13. (g) trading in—
(i) money market instruments, including cheques,
bills, certificates of deposit and derivatives;
(ii) foreign exchange;
(iii) exchange, interest rate and index funds;
(iv) transferable securities; and
(v) commodity futures trading;
(h) participation in securities issues and the
provision of financial services related to such
issues;

14. (g) trading in— cont’d
(i) individual and collective portfolio management;
(j) safekeeping and administration of cash or liquid
securities on behalf of other persons;
(k) otherwise investing, administering or managing
funds or money on behalf of other persons;
(l) underwriting and placement of life insurance and
other investment related insurance; and
(m) money and currency changing;

15. Designated non-financial businesses
“designated non-financial businesses or professions” means
—
(a) casinos (including internet casinos);
(b) real estate agencies;
(c) dealing in precious metals;
(d) dealing in precious stones;
(e) accountants, who are sole practitioners or are partners
in their professional firms;
(f) non-governmental organisations; and
(g) such other business or profession in which the risk of
money laundering exists as the Minister may, on the
advice of the Centre, declare.

16. Reporting entities have various regulatory obligations
under the AML Act. These include:
◦ Monitor and report suspected money laundering
activity;
◦ File reports on all cash transactions exceeding
USD10,000;
◦ Identification and verification of customer
identities;
◦ Lodging International Funds Transfer Instruction
(IFTI) Reports, Threshold Transaction Reports
(TTRs),Suspicious Matter Reports (SMRs);
◦ Establish and maintain internal reporting
procedures; and
◦ Record-keeping requirements of up to 7yrs.

17. The Act also requires the Minister to pass regulations
that require Reporting entities fulfil various
regulatory obligations. These include:
◦ implementing an AML compliance program;
◦ train employees in recognition and handling of
suspicious activities;
◦ to provide for an independent audit of its
monitoring procedures;
◦ Establish and maintain internal reporting
procedures to make employees aware of domestic
laws relating to money laundering and the
procedures and related policies established by
them pursuant to the AML Act.

19.  Handling or helping – 14yr jail and/or fine not
exceeding Shs.5M or vale of property involved
whichever is higher.
 Supervisory bodies failure to report – a
staff member liable to 3yr jail term and/
or fine not exceeding Shs.1M. Shs.5M fine for
the institution.
 Leaking information being reported to FTR –
Shs.10M fine for the institution or amount
equivalent to the value of property. 7yrs jail for
the staff who leaks and/or fine of Shs.2.5M.

22. At this stage, illegal funds or assets are first
brought into the financial system.
This ‘placement’ makes the funds more liquid.
For example, if cash is converted into a bank
deposit, it becomes easier to transfer and
manipulate.
Money launderers place illegal funds using a
variety of techniques, which include depositing
cash into bank accounts and using cash to
purchase assets.

23. Placement techniques:
◦ smurfing and structuring
◦ alternative remittance
◦ electronic transfer
◦ asset conversion
◦ bulk movement
◦ gambling
◦ insurance purchase.

24. Smurfing and structuring
 Smurfing is a common placement technique. Cash from illegal
sources is divided between 'deposit specialists' or 'smurfs' who
make multiple deposits into multiple accounts (often using
various aliases) at any number of financial institutions. In this
way, money enters the financial system and is then available for
layering. Suspicion is often avoided as it is difficult to detect any
connection between the smurfs, deposits and accounts.
 Structuring involves splitting transactions into separate amounts
under US$10,000 to avoid the transaction reporting
requirements of the AML Act. Many money launderers rely on
this placement technique because numerous deposits can be
made without triggering the cash reporting requirements.
However, it can backfire if an attentive financial institution
notices a pattern of deposits just under the reportable threshold.
This can lead to reporting such activity to under the suspicious
activity provisions of these instruments. Structuring is a criminal
offence itself, as well as an indicator of other potentially illegal
activity.

25. Alternative remittance
 ‘Alternative remittance’ refers to funds
transfer services usually provided within
ethnic community groups and known by
names particular to each culture. Generally
such services accept cash, cheques or
monetary instruments in one location and pay
an equivalent amount to a beneficiary in
another location. In some communities this
form of money transfer is commonly known
as hawala, hundi, chuyen tien, yok song
geum, or pera padala.

26. Alternative remittance is a common placement
technique. For example:
 Onyancha brings a large sum of illegal cash to an
alternative remittance provider. Larry specifies
the identity and location of the recipient and the
alternative remittance provider arranges for the
funds to be sent overseas. Onyancha may or may
not receive a receipt for the transaction.
 The recipient, Sukuma Wiki, goes to the
counterpart of the alternative remittance provider
in the overseas location. The counterpart
provides the specified amount of cash (less any
transfer charges) to Sukuma. Again, no
documents may be involved.

27. Electronic transfer
 Electronic transfer is a common placement technique.
◦ Onyancha takes cash to an electronic funds transfer
agency such as Western Union/M-Pesa/ZAP/YU-Cash
etc and requests a transfer of funds to Sukuma Wiki in
the Uganda.
◦ Sukuma Wiki goes to the Transfers branch in Uganda,
presents her identification and collects the funds.
 In the money laundering context, this technique
involves the transfer of money through electronic
payment systems that do not require sending funds
through formal bank accounts. This method is also
known as wire transfer.

28. Electronic transfer
 Electronic transfers can be compared to alternative
remittances in that both are person-to-person
transfers that do not require sending funds
through the formal banking system.
 Criminals make use of the electronic financial
system because it enables the transfer of large
denominations of money instantly locally or to
offshore jurisdictions. This speedy disbursement of
funds to and between foreign jurisdictions makes
the transactions difficult to investigate and trace
back to the source.

29. Asset conversion
 Asset conversion is a common placement technique.
◦ Onyancha gives cash from his illegal operations to a
trusted friend.
◦ The friend uses the cash to purchase diamonds from
his friendly jeweller and hands these diamonds over to
Onyancha.
 Asset conversion simply involves the purchase of goods.
Illegal money is converted into other assets, such as real
estate, diamonds, gold and vehicles, which can then be
sold.
 Generally, money launderers prefer to purchase high-
value items that are small and easy to sell or transport
to another country. Often these assets will be purchased
in the name of a friend to avert suspicion.

30. Bulk movement
 Bulk movement is a common placement technique.
◦ Onyancha generates a large amount of cash from his
illegal business in Kenya. He boxes a large stack of
cash in Computer CPU’s.
◦ The cash and watermelons are transported across to
the Tanzania as part of a larger export shipment of
Computers.
 Bulk movement involves the physical transportation and
smuggling of cash and monetary instruments, such as
money orders and cheques.
 Often money launderers use their cash to purchase less
bulky items such as jewellery and other expensive
goods. The criterion is that the items must be of high
value and small, making them physically easy to
smuggle as well as relatively easy to reconvert into cash
at the point of destination.

31. Bulk movement
 Bulk shipments of illegally
obtained funds (or goods
acquired with the funds)
are smuggled across
borders concealed in
private vehicles,
commercial trucks and air
and maritime cargo. They
may also be carried by
couriers travelling on
commercial airlines, trains
and buses. Further, they
can also be sent through
parcel delivery and
express mail services.

32. Gambling
 Gambling is a common placement technique.
◦ Fraudulent Onyancha and friends make periodic visits to a
local club where they insert illegal money into gaming
machines.
◦ After spending an evening enjoying the local band and
night life, they cash out their money. This money can now
be justified as ‘winnings’ from the local club.
 Gambling is used to launder money by inserting
illegal money into gaming machines and cashed
out as proceeds from gambling. Funds that appear
to be winnings can easily be used to justify unusual
spikes in income.

33. Other types of gambling techniques include:
◦ claiming gaming machine prizes/payouts whilst
not being the legitimate prize-winner (that is, not
the player who has accumulated the subject
credits or turnover)
◦ exchanging cash for or purchased gaming prizes/
payouts from legitimate prize winners
◦ exchanging cash for prize-winning cheques. This
may be coordinated by ‘spotters’ who look for
winners. They target problem gamblers who may
want their winnings straight away and are willing
to receive 95% of the face value of the ticket

34. Other types of gambling techniques include:
◦ exchanging cash for prize-winning gaming
machine tickets.
◦ negotiating cash loans to other members/patrons
for the purposes of gambling.
◦ engaging in activity that may otherwise be
considered illegal or contrary to responsible
gambling activities. For example, some machines
pay a 98% return. Patrons may work in groups on
networked machines, cover as many betting
options as possible and win as a group.

35. Insurance purchase
 Insurance purchase is a common placement
technique.
◦ Maembe Life Insurance sells life insurance
products through a large number of independent
agents including Twisted Spoon Insurance
Brokers. Onyancha buys life insurance policies
from Twisted Spoon Insurance Brokers.
◦ Onyancha later redeems these policies and
requests that the funds be transferred to a bank
account.

36. Insurance purchase
 Illegal money is used
to buy insurance
policies and
instruments, which
can be 'cashed in' at
a later date. The end
result is that the
illegal funds have
been legitimised by
being ‘washed’
through a legitimate
insurance business.

37. Insurance purchase
 ‘Single premium’ insurance products can be
particularly vulnerable. They involve a single
payment 'up-front' and the ability to immediately
purchase a fully paid instrument. To a money
launderer, these products are attractive because
they:
◦ involve a one-time payment
◦ have a cash surrender value
◦ may be transferable
 Insurance is sold through many channels. Any of
these channels may be tapped by money
launderers to place illegal funds.

38.  School fees deposited in school
bank account for relatives;
 ‘Chama’ contributions;
 Financing small businesses such
as butcheries, kiosks, Mtumba
business;
 Proceeds of corruption;
 Proceeds of violent crime.

39. To conceal the illegal origin of the placed funds
and thereby make them more useful, the funds
must be moved, dispersed and disguised i.e.
Layering.
At this stage, money launderers use many
different techniques to layer the funds. These
include using multiple banks and accounts, having
professionals act as intermediaries and transacting
through corporations and trusts. Funds may be
shuttled through a web of many accounts,
companies and countries in order to disguise their
origins.

40. Funds can be hidden in the financial system
through a web of complicated transactions
using different techniques of layering
including:
◦ electronic funds transfers
◦ offshore banks
◦ shell corporations
◦ trusts
◦ walking accounts
◦ intermediaries.

41. Electronic funds transfers
 Typically, layers are created by moving
money through electronic funds transfers
into and out of domestic and offshore bank
accounts of fictitious individuals and shell
companies.
 Given the large number of electronic funds
transfers daily and the sometimes limited
information disclosed about each transfer, it
is often difficult for authorities to
distinguish between clean and dirty money.

42. Offshore banks
 Offshore banks are banks that allow for the
establishment of accounts from non-resident
individuals and corporations. A number of
countries have well-developed offshore
banking sectors. In some cases, these
banking sectors follow loose anti-money
laundering regulations.

43. Offshore banks
 Offshore banks are popular with money
launderers (for layering funds), tax evaders and
corrupt officials. Money launderers also like to
keep funds in offshore banks because their fixed
term deposit accounts provide interest income.
 Some offshore centres combine loose anti-money
laundering procedures with strict bank secrecy
rules. Criminals can easily maintain and transfer
funds from banks in these centres because
details of client activities are generally denied to
third parties, including most law enforcement
agencies.

44. Shell corporations
 Using shell corporations is a common layering technique.
◦ Onyancha sets up Mama Mboga Trading Co. under the laws
of Kenya.
◦ Mama Mboga Trading Co. opens bank accounts with
various banks.
◦ Smurfs working for Onyancha transfer illegal funds to the
Mama Mboga Trading Co. accounts.
◦ Mama Mboga Trading Co. transfers these funds to other
accounts or invests them in securities.
 A shell corporation is a company that is formally established
under applicable corporate laws but does not actually
conduct a business. Instead, it is used to engage in fictitious
transactions or hold accounts and assets to disguise the
actual ownership of these accounts and assets.

45. Shell corporations
 Sophisticated money launderers use a complex maze of shell
corporations in different countries. Most money transfers take
place through these shell corporations. At times, money is
transferred through numbered accounts rather than through
named accounts.
 To further avoid unwanted attention, money launderers build the
transaction history of the shell corporation so that it looks as if it
has been in business for a long time.
 In many countries (particularly offshore banking centres), the
reporting and record-keeping requirements for corporations are
quite minimal, which makes it easy to disguise ownership of the
corporation.
 In a number of countries, ownership in corporations can be
represented by 'bearer shares’. In these corporations, the holder
of the bearer share certificate is regarded as the owner of the
shares. This makes it easy to disguise and transfer ownership.

46. Trusts
 Using trusts is a common layering technique.
◦ Onyancha establishes a business trust by appointing a
corporate trustee and drawing a deed of trust, which
names Mwenyeji Trading Co. as a beneficiary.
◦ Onyancha transfers funds to the corporate trustee and
under the deed of trust, Mwenyeji Trading Co. is
empowered to directly use and invest the funds.
 Trusts are legal arrangements for holding funds or
assets for a specified purpose. These funds or assets
are managed by a trustee for the benefit of a specified
beneficiary or beneficiaries.

47. Trusts
 Trusts can act as layering tools because they enable the
creation of false paper trails and transactions. Trusts are
principally governed by a deed of trust drawn up by the
person who establishes the trust. Trusts are more
complex to use than corporations, but they are less
regulated.
 The private nature of trusts makes them attractive to
money launderers. Secrecy and anonymity rules help
conceal the identity of the true owner or beneficiary of
trust assets. Also, the presence of a corporate trustee
provides an appearance of legitimacy.
 In addition, offshore trusts may contain a 'flee clause’.
This clause allows the trustee to shift the controlling
jurisdiction of the trust if it is in danger because of war,
civil unrest or, more likely, the activities of law
enforcement officers or litigious investors and
consumers.

48. Walking accounts
 Using walking accounts is a common layering
technique.
◦ Using shell corporations, Onyancha sets up three
accounts with three different banks. He provides
instructions to transfer all funds immediately on
receipt to one or more of the other accounts.
◦ Smurfs deposit cash into the first account. Without the
need for further action, the funds are 'layered' by
being transferred to the third account.
 A walking account is an account for which the account
holder has provided standing instructions that all funds
be transferred immediately on receipt to one or more
other accounts. By setting up a series of walking
accounts, criminals can automatically create several
layers as soon as any funds transfer occurs.

49. Intermediaries
 The use of intermediaries is a common layering technique.
◦ Onyancha transfers funds to a special account for client funds
maintained by the law firm called Shady Deals & Co. Advocates.
◦ Shady Deals & Co. Advocates establishes a shell corporation,
Mwenyeji Trading Co. , which opens various bank accounts.
Shady Deals & Co. Advocates now transfers Onyancha's funds
into these accounts.
 Lawyers, accountants and other professionals may be used as
intermediaries between the illegal funds and the criminal.
Professionals engage in transactions on behalf of a criminal
client who remains anonymous. These transactions may include
the use of shell corporations, fictitious records and complex
paper trails.
 Many countries have realised that criminals are increasingly
using non-financial professionals as intermediaries. To counter
these activities, many countries have included non-financial
professionals in new anti-money laundering legislation.

50.  Laundered funds are made available for
activities such as investment in legitimate or
illegitimate businesses, or spent to promote
the criminal's lifestyle. At this stage, the
illegal money has achieved the appearance of
legitimacy.
 It should be noted that not all money
laundering transactions go through this
three-stage process. Transactions designed
to launder funds can also be effected in one
or two stages, depending on the money
laundering technique being used.

51. Integration is the third stage of the money laundering
process, in which the illegal funds or assets are
successfully cleansed and appear legitimate in the
financial system, making them available for investment,
saving or expenditure.
Integration techniques include:
◦ credit and debit cards
◦ consultants
◦ corporate financing
◦ asset sales and purchases
◦ business recycling
◦ import/export transactions.

52. Credit and debit cards
 Credit and debit cards are efficient ways for money
launderers to integrate illegal money into the
financial system. By maintaining an account in an
offshore jurisdiction through which payments are
made, the criminals limit the financial trail that
leads to their country of residence.
 In recent years, authorities have grown more
attuned to the use of offshore credit cards as a
money laundering technique. As a result, certain
offshore jurisdictions now enable regulators to
obtain from banks all records of transactions made
by their credit card clients.

53. Consultants
 Consultancy arrangements can cover a wide range of
non-quantifiable services and are often used to
integrate illegal funds into the legitimate financial
system.
• The consultant might not even exist. For example, the
criminal could actually be the consultant and the money
is declared as income from services performed and can
be used as legitimate funds.
 In many cases, the criminal will employ an actual
consultant (e.g. accountant, lawyer or investment
manager) to do some legitimate work. This could
involve purchasing assets. Often, the criminal transfers
funds to the consultant's client account from where the
consultant makes payments on behalf of the criminal.

54. Corporate financing
 Corporate financing offers a flexible way to transfer money
between companies. This technique is often used in
sophisticated money laundering schemes.
◦ Onyancha sets up a shell corporation and a related bank
account in an offshore jurisdiction. He also sets up a
legitimate business in his country of residence.
◦ Using illegal money in the offshore account, the shell
corporation makes a business loan to, or equity investment
in, the legitimate business.
 Corporate financing is typically combined with a number of
other techniques, including the use of offshore banks,
consultants, complex financial arrangements, electronic
funds transfers, shell corporations and actual businesses.
This allows money launderers to integrate very large amounts
of money into the legitimate financial system.

55. Corporate financing
 Money launderers may also take a tax deduction on
interest payments made by them in corporate
financings!
 From appearances alone, such transactions are identical
to legitimate corporate finance transactions. Financial
service professionals serving legitimate businesses need
to look closely to find peculiarities in their dealings,
such as:
◦ large loans by unknown entities
◦ financing that appears inconsistent with the
underlying business
◦ unexplained write-offs of debts.

57. Asset sales and purchases
 To integrate illegal funds into a legitimate financial system,
money launderers often resort to actual or fictitious sales and
purchases of assets.
◦ Onyancha sets up a shell corporation and a related bank
account in an offshore jurisdiction. He also owns or
controls a legitimate business or real estate asset in his
country of residence.
◦ The shell corporation purchases the business or real estate
at an inflated price. The earnings from this transaction are
treated as legitimate profits.
 This technique can be used directly by the criminal or in
combination with shell corporations, corporate financing and
other sophisticated methods. The end result is that the
criminal can treat the earnings from the transaction as
legitimate profits from the sale of the assets.

58. Business recycling
 Business recycling is a common integration technique in
which illegal funds are mixed with cash flow from a
seemingly legitimate business.
◦ Onyancha owns or controls a legitimate, cash-
intensive car wash business.
◦ Onyancha deposits illegal funds into the business.
These funds are treated as revenue from the
legitimate business.
 Legitimate businesses that also serve as conduits for
money laundering are referred to as 'front businesses’.
Cash-intensive retail businesses are some of the most
traditional methods of laundering money. This
technique combines the different stages of the money
laundering process.

59. Business recycling
 The principal requirement when using businesses
as fronts is that they have high cash sales and/or
high turnover. This way it becomes easy for
criminals to merge illegal funds and difficult for the
authorities to spot the scheme.
 An important indicator of front businesses is the
relation between the size and nature of the
business and the amount of revenue it generates.
For example, if a newspaper stand starts making
deposits into its bank account at $1 million a
month, this should alert the bank to the possibility
of illegal activity.

60. Import/export transactions
 Import/export transactions are a common integration
technique used by money launderers, especially in order to
move illegal funds between countries.
◦ Onyancha sets up an import company in a foreign country
as well as an export company in his country of residence.
◦ The export company exports goods to the foreign import
company. The import company remits illegal funds to pay
for the goods on an over-invoiced basis.
 To bring 'legal' money into the criminal's country of
residence, the domestic trading company will export goods to
the foreign trading company on an over-invoiced basis. The
illegal funds are remitted and reported as export earnings.
The transaction can work in the reverse direction as well.
 In many cases, there is no actual export of goods or only the
export of fake goods. In such cases, the trading companies
may also exist only on paper. Bankers may be able to spot
these transactions if the underlying trade documentation is
inadequate or the underlying pricing is incorrect.

62. ◦ ensuring that only legitimate and bona fide
customers are accepted
◦ ensuring that customers are properly identified
and that they understand the risks they may
pose
◦ verifying the identity of customers using reliable
and independent documentation
◦ monitoring customer accounts and transactions
to prevent or detect illegal activities
◦ implementing processes to effectively manage
the risks posed by customers trying to misuse
facilities.

63. There are five types of risks that an effective
KYC policy can help to mitigate:
 reputational
 operational
 legal
 financial
 concentration.

64. Reputational risk:
The reputation of a business is usually at the
core of its success. The ability to attract good
employees, customers, funding and business is
dependant on reputation. Even if a business is
otherwise doing all the right things, if
customers are permitted to undertake illegal
transactions through that business, its
reputation could be irreparably damaged. A
strong KYC policy helps to prevent a business
from being used as a vehicle for illegal
activities.

65. Operational risk:
This is the risk of direct or indirect loss from
faulty or failed internal processes, management
and systems. In today's competitive
environment, operational excellence is critical
for competitive advantage. If a KYC policy is
faulty or poorly implemented, then operational
resources are wasted, there is an increased
chance of being used by criminals for illegal
purposes, time and money is then spent on
legal and investigative actions and the business
will be viewed as operationally unsound.

66. Legal risk:
If a business is used as a vehicle for illegal activity by
customers, it faces the risk of fines, penalties, injunctions
and even forced discontinuance of operations.
Apart from regulatory risk, involvement in illegal activities
could lead to third-party judgments and unenforceable
contracts. In addition, professionals working within many
financial and other professional sectors may also
personally be subject to legal action or prosecution.
Due to the nature of business, these risks can never entirely
be eliminated. However, if a business does not have an
effective KYC policy, it will be inviting legal risk. By strictly
implementing and following a KYC policy, a business can
mitigate legal risk to itself and its staff.

67. Financial risk:
If a business does not adequately identify and
verify customers, it may run the risk of
unwittingly allowing a customer to pose as
someone they are not. The consequences of
this may be far reaching. If a business does
not know the true identity of its customers,
it will also be difficult to retrieve any money
that the customer owes.

68. Concentration risk:
This type of risk occurs on the assets side of
a business if there is too much exposure to
one customer or a group of related
customers. It also occurs on the liabilities
side if the business holds large
concentrations of funds from one customer
or group (in which case it faces liquidity risk
if these funds are suddenly withdrawn).

69. KYC policy has five major elements:
 Customer acceptance: The point at which a new
customer is accepted or rejected is the easiest point
at which the risk of dealing with illegal money can be
avoided. By following good customer acceptance
policies, dealing with entities and individuals who
might engage in illegal transactions can be avoided.
 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.

70.  Customer verification: Verifying that customers
are who they say they are is vital to any customer
identification procedure. Merely collecting customer
information is not enough for an effective KYC policy.
Reliable and independent documentation should be
used to support and confirm the identification details
a customer provides. For example, citing an original
primary photographic identification document such
as a passport or drivers licence.
 Accounts and transactions monitoring: In an
effective KYC policy, customer accounts and
transactions are properly classified in terms of risk
and are regularly monitored. Through checks and
thresholds, unusual activities, activities by high-risk
customers, or suspicious behaviour can be detected
and reviewed.

71.  Risk management: To ensure that the risks
posed by money laundering and other criminal
activities are identified, mitigated and managed
good risk management practices are essential.
 Another objective of the KYC policy is to look
past the appearance of the customer and obtain
visibility into the sources of the customer's
money. The basic objective is to obtain an
understanding of the risk the customer poses to
business. Could the customer use the business to
facilitate money laundering?

73.  Reporting entities must monitor their
customers to identify, mitigate and manage
any Money Laundering risk that may be
posed by providing a designated service.
OCDD obligations apply to all customers,
including pre-commencement customers
and also those who were identified by
another reporting entity. There are three
mandatory components of OCDD:
◦ KYC information
◦ a transaction monitoring program
◦ an enhanced customer due diligence program.

74.  Reporting entities need to determine when and
in what circumstances additional KYC
information should be collected, updated or
verified.
 A transaction monitoring program that sets out
how customer transactions will be monitored,
how the reporting entity will identify
transactions that are unusual or suspicious and
how such transactions will be managed once
they are identified as unusual or suspicious is a
requirement of an effective AML program.

76.  Under the AML Act, a reporting entity must
make and retain a record of its applicable
customer identification procedures.
 The records must be retained for seven years
after the end of the reporting entity's
relationship with the relevant customers.

79. Compliance Risk management
Compliance is about meeting obligations, Risk management involves:
which in this case are mandated by the AML • the identification of different types of risk
Act. • assessing the impact of these risks
• determining the risk appetite of the
organisation
• putting in place risk management
procedures and controls.
Compliance is about meeting obligations Risk management does not have a
that may have a mandatory component. mandatory component as the organisation
determines how to deal with the various
risks it faces.
However, risk management may have to deal
with both mandatory and non-mandatory
elements.
All compliance risks must be dealt with. Risk management is used to prioritise the
compliance risks.
Compliance identifies all the obligations an Risk management techniques are used to
organisation has. prioritise the response to the obligations in
terms of control procedures and processes,
levels of monitoring and reporting
requirements.