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Is too much compliance a bad thing
This document contains a presentation on anti-money laundering (AML) compliance. The presentation covers the necessity of AML regulation, money laundering trends, interplay with other compliance risks like FATCA and sanctions, and concludes by emphasizing the importance of cooperation between regulators and financial institutions to ensure effective AML compliance. It discusses key AML principles in Aruba including senior management responsibility, a risk-based approach, know-your-customer procedures, reporting, screening, and compliance monitoring. The presentation also outlines the money laundering process, AML business workflows, effects of non-compliance, and strategic considerations for AML compliance officer reports.
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Is too much compliance a bad thing
- 1. 1 Giana Quandt, Senior Consultant SimonConsulting VBA Presentation BBA Bank N.V. August 1, 2013 IS TOO MUCH COMPLIANCE A BAD THING? STRENGTHENING THE INTER-RELATIONSHIP BETWEEN THE REGULATORS AND THE FINANCIAL INSTITUTION TO MITIGATE CHANCE OF DISCREPANCIES
- 2. FACILITATORS 2 Pierre Simon Managing Director SimonConsulting Group Giana Quandt, LLM CAMS Senior Consultant Simon Consulting VBA
- 3. 11:00-11:05 Welcome andIntroduction 11:05-12:00 The importance of the integration of Regulation for the Onshore Banking Entity 12:05-12:45 Trends in AML 12:45-13:00 Wrap-up 13:00 End of Presentation AGENDA 3
- 4. Financial stabilityis crucial to the well-being of a modern economy Investors may need protection from the risks posed by complex financial products The introduction of unusual or suspicious transaction reporting by the regulated sector NECESSITY FOR REGULATION 4
- 5. THE MONEY LAUNDERINGPROCESS 5
- 6. 6 6 AML/CFT BUSINESS PROCESSOVERVIEW
- 7. REGULATOR’S VS FINANCIALSECTOR MAIN GOALS The main Regulator’s aim is to create successful circumstances for the financial sector: efficient profitable /good services more valuable money extended access to affordable services √ Regulated Firms have similar goals √ This creates a strong shared interest, despite inevitable tensions. 7
- 8. INTERCONNECTEDNESS OF REGULATION StateOrdinance AML/ CFT AB 2011 no 28 Internal Codes and practice GuidanceMaterial AML Handbook FATF RECOMMENDATION 5 Customer due diligence CDD measures, including Identifying and verifying the identity of their customers. CDD on a risk sensitive basis FATF Recommendation 6 (politically exposed persons) FATF Recommendation 7 (correspondent banking) FATF Recommendation 8 (non-face-to-face customers) FATF Recommendation 9 (intermediaries) FATF Recommendation 10 (Record Keeping) 8
- 9. KEY AML/CFT PRINCIPLESIN ARUBA The 6 key AML/CFT principles cover the following areas: Principle 1 – senior management responsibility; Principle 2 – risk-based approach; Principle 3 – know your customer; Principle 4 – effective reporting; Principle 5 – high standard screening and appropriate training; and Principle 6 – evidence of compliance. 9
- 10. BUILDING AN EFFECTIVERELATIONSHIP “Main elements: Active management (on both sides) Practical arrangements, e.g. interconnection Provision of full information Arrangements to ensure compliance Straightforward approach to enforcement 10
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- 13. OVERVIEW EFFECTS OFNON COMPLIANCE 13
- 14. MLCO REPORTING What arethe requirements? Monthly reporting by MLRO to senior management ( Board of Trustees) Assess the adequacy and effectiveness of the firms AML/CFT policies, procedures, systems and controls in preventing ML/TF as shown in slide 11 Timely reporting to allow senior management to deal with the report 14
- 15. STRATEGIC CONSIDERATION OFTHE MLCO REPORT Consider and scrutinize each report made by the MLCO Promote Raising knowledge and awareness in the organization Stress the importance of detecting unusual transactions If deficiencies are identified – approve an action plan to remedy gaps 15
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- 17. MONEY LAUNDERING TRENDS Traditionalmethods - cash based businesses Real estate, loans and trade based money laundering Credit cards issued by offshore banks has increased Electronic money and internet-based trading and gambling 17
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- 22. ‘TRADE BASED MONEY LAUNDERING’ Over- and under-invoicing Multiple Billing Fictitious transactions 22
- 23. INTERPLAY WITH OTHERWHITE COLLAR COMPLIANCE RISKS FATCA US legislation designed to force foreign financial institutions (FFIs) to disclose their US account holders • Operates by imposing 30% withholding on payments • In AuA, will most likely apply via an Inter Governmental Agreement (IGA) • IGA will align FATCA more with FATF concepts but will apply to FFIs even if no US assets • Requires additional KYC/CDD over AML/CFT requirements • Will require inter-agency cooperation and information sharing 23
- 24. INTERPLAY WITH OTHERWHITE COLLAR COMPLIANCE RISKS - REQUIREMENTS Sanctions Complex sanctions obligations: UN, domestic legislation, consider foreign restrictions (eg. US) Regulatory and commercial considerations KYC/CDD Terrorist financing risk tie-ins entity lists activities (risk flags for further KYC/CDD) If serious enforcement contemplated, requires inter- agency cooperation 24
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- 26. SUMMARY Board of Directors(BOD) & Senior Management (SM) overall responsibility Appointment of Board BOD and SM responsibility for promoting awareness & culture building Monitor plan till transition into Building Up mode Set up appropriate control structure Ensure appropriate segregation of duties Ensure adequate and comprehensive data Establish effective channels of communication Ensure appropriate Technological Support in place Continually monitor internal controls Effective and comprehensive internal audit of internal control system Report on identified internal control deficiencies Develop time bound implementation Plan EXEMPLARY GOVERNANCE INTEGRATED COMPLIANCE MANAGEMENT CONTROL STRUCTURE INFORMATION & COMMUNICATION MONITORING 26
- 27. CONCLUSIONS AML/CFT isthe “latest” in a long line of criminalisation of corporate misconduct Even if your agency is not directly involved, it plays an important role through Integrity of data Inter-play of white collar criminal detection and enforcement Your contribution in ensuring AML/CFT compliance will contribute to a healthy financial sector 27
- 28. THANK YOU FORYOUR ATTENTION
Editor's Notes
- #5 Financial Markets are large and important
- #6 Money laundering is a serious threat to the legal economy and affects the integrity of financial institutions. It also changes the economic power in certain sectors. If left unchecked, it will corrupt society as a whole. Fighting money laundering serves several Purposes
- #7 What are the threats that the organization faces when dealing with depicted challenges? Investigation done by OECD in 2012 reveals that: The offshore entity can be used as a vehicle for for Integration: Justification The goal in this stage is to create an apparent legal origin for the criminal proceeds. This can be done by: • Doing business with oneself (falsifying sources of income, capital gains and/or loans); • Disguising the ownership of assets, and using criminal proceeds in transactions with third parties. The money launderer creates an apparent legal origin of the money by fabricating transactions (invoices, bookkeeping and agreements), with the use of false and fabricated documents such as invoices, reports, contracts, agreements, deeds as well as written or spoken statements. Other methods revealed by the OECD are: • Fabricating a loan: loan-back or back to back; • Fabricating a rise in net worth: buying and selling real estate and other items, fabricating casino winnings, lottery prizes, inheritance, etc.; • Disguising the ownership of assets and interest in businesses (constructions with foreign legal entities, e.g. offshore companies or relatives as legal owner); • Price-manipulating (over- and under-invoicing); • Manipulating turnover/sales by commingling illicit and legal sources of income. Integration: Investment The goal in this final stage is to use criminal proceeds for personal benefit. Cash or electronic money can be used for: • Safekeeping: cash on hand; • Investing: bank accounts, real estate, stocks, securities, receivables, funding of legal and illegal business activities.
- #8 To deal with the noted concerns the regulator aims to protect the financial sector. The regulator understand that the sector has to offer…
- #9 In Aruba, the regulator dealt with an audit by the FATF. This audit led to the incorporation of State Ordinance 2011 no 28. In this state ordinance the above noted recommendations are incorporated. The state ordinance was later translated into a manual. This manual serves as guidance to institutions in their aim to combat money laundering.
- #10 Safeguarding the integrity of the financial sector and other sectors vulnerable to money laundering and terrorist financing the policies and procedures consist of the following principles
- #11 In presenting these elements the regulator also understand they have an active part in combating Money laundering. To ensure that compliance is integrated in the business case, the regulator places the burdens of compliance of the regulated entity on the shoulders of the Board of trustees. Operational wise the burden of compliance to the compliance processes are placed n the shoulders of the MLCO who in some cases is assisted by the MLRO
- #13 In this slide we present the legal paths that AML/CFT represent – This graph represent how the regulation in regards to information sharing is depicted. Information is send directly to the FIU in case of detection of unusual transactions by the MLCO. However all other reporting requirements are governed by the firm.
- #16 Raising knowledge and awareness
- #18 These trends are reported by CAMS; OECD and FATF Trends are of importance for the Aruban economy as the government is promoting global trade, opening business opportunities for free zone endeavors thus raising the risks for entities doing offshore business in Aruba. Subsequently will present 6 case studies each with a different type of risk.
- #19 In this case the illegal proceeds are deposited into a domestic bank account which has not been declared to the tax authorities. These funds are then transferred to an offshore bank account where the money can be withdrawn and used to fund a further offshore bank account which is linked to a credit or debit card. The credit card can be used anywhere to make use of the criminal proceeds.
- #20 In this case, the criminal wants to launder $200 000 of illicit income. These funds are deposited in an offshore bank account controlled by offshore company “A” which is owned by the criminal. The criminal wants to have these funds available to them in their home country. The funds are subsequently wired to a domestic bank account by company “A” for the purchase of shares in company “B” which is also owned by the criminal. An inflated value of $200 000 is placed on the shares of company “B”. Company “B” now has $200 000 in its account available to the criminal. These funds are now laundered and can be integrated as seen above. Purchase or sale of the companies’ shares at a price far above or below estimated value Criminals also invest their money in legitimate corporations. They may be interested in a legitimate corporation to earn a return on their criminal proceeds, or because they want to decrease their exposure to risk from their other activities. A legitimate corporation can also be used for criminal activities and criminals do attempt to launder money in the buying, financing and running of legitimate companies. An indicator is the buying of shares at a price way below estimated value, or net worth of the company. The balance of the true price may be paid “under the table”. Another indicator is a relatively high capital gain compared to the length of time the company was owned. This may indicate the use of criminal proceeds at the time of purchase. In this situation a simulated capital gain is being bought by asking the buyer to pay an inflated price while refunding the inflated portion of the price to the buyer with the proceeds of crime.
- #21 In this scheme the proceeds of crime are recorded as sales. Because the proceeds of crime are mostly cash, in many cases cash sales are fabricated so that clients and the origin of the money cannot be identified. In the example illustrated above, a superficial examination of the information and records available may appear very straightforward and may not raise suspicion that money is being laundered. What is actually happening is that the criminal is depositing the illicit funds into the business bank account along with funds from genuine sales. The illicit funds are recorded in the books and records as if the money came from genuine turnover and the overstated income is reported in their tax returns. The company may not have to pay tax on this increased income if the company has trading losses available or where false deductions are also created
- #22 Property flipping means that two or more transactions relating to the same property take place within a relatively short period of time. Property flipping can be used to launder criminal proceeds. The buyer pays more than the price which is documented in the purchase agreement and the notary deed. When the buyer subsequently resells the property for the same price that they actually paid, it appears that they have made a profit. As a result of this transaction, the criminal proceeds have been converted to a seemingly legitimate amount of deposit money. In this example the criminal seeks to launder $200 000 with the apparent legitimate purchase and subsequent sale of a property. The property seller receives full market value (e.g. $700 000) for the property, but agrees to receive an “under-the-table” cash payment of $200 000 and a formal payment of $500 000 along with notary documents listing the sale as $500 000. When the buyer subsequently resells the property for the same price that they actually paid ($700 000), it appears that they have made a profit.
- #23 It is seen by various organizations, such as the FATF and the World Customs Organization as a key method to move and/or launder large amounts of money derived from crime. The movement of money can be visible through the payment of expenses and visible or not, by moving money via air transportation, road transportation or by smuggling with goods. Criminal proceeds often need to be transferred to another country, a criminal transaction must be settled or funds must at some time come back to the criminal. These are reasons for criminals to move capital with the capabilities and constructed legitimacy of international trade. The techniques are discussed hereafter. Over- and under-invoicing By making over- or under-valuations of imports or exports, capital can be moved and laundered in the form of goods or money flows. Over- and under valuation may take the form of adjustments to price, quantity, quality or a combination thereof. False descriptions The goods identified on the invoice may not be the goods actually imported or exported. The documents can contain a price that corresponds to the specified goods but the actual market value of the goods imported or exported may be many times higher or lower. Physical observation is necessary in order to confirm that the goods shipped are the same as the goods invoiced. Goods shipped may actually be strategic goods, goods with restrictions (quotas), goods with a higher import duty or prohibited goods such as raw materials for drugs, weapons and fictitious goods. Multiple Billing Multiple billing (or multiple invoicing) is a technique where multiple invoices are created for the same goods. This technique is used to evade import duties or to launder the proceeds of crime. Fictitious transactions Finally, transactions can be fictitious. The goods are never delivered or the services are never performed. Yet, with an invoice on hand, funds can be transferred or received. This serves to move money safely through corporate accounts, to falsify profits, to cover up or settle possible illegal activities. With current technology, it is easy to modify existing invoices or produce fictitious invoices. Information on corporations that is needed to create an invoice is readily available. It is also easy to set up a foreign corporation to deliver or receive goods or services when, in fact, they are neither delivered nor received.