Money launderig is a threat not just to stability of Global Financial Institutions, but also national secuity

1. MONEY LAUNDERING
A Threat to Stability of Global Financial Institutions
Siddharth Chakravarty

2. The world is awash with dirty money.
How Much?
IMF ESTIMATE = 2-5% Global GDP
~ US 1-2 T
Most of it comes from illicit drugs.
Who's laundering it?
How Dirty Is The Laundry ?

3. TALKING POINTS
Money laundering
Regulatory and Policy bodies
Ethical analysis
Cost of compliance
Frontiers in Money laundering
Fight against money laundering - challenges
Case studies
Issues and recommendations

4. Money laundering
o The attempt to make ill-gotten gains appear legitimate by the movement of funds to
conceal the true source, ownership and/or use of the funds.
o Money laundering cycle - giant shadow banking system
INCOME PLACEMENT LAYERING INTEGRATION
Russian Laundromat- $20.8
billion exchanged hands through
112 bank accounts

5. Partial Universe of Money laundering
Money
Transmitters
Check
Cashers
Money
Services
Currency
Exchangers
Money
Orders
Stored
Value
Cards
Online
Payment
Systems
Informal
Value
Transfer
Bulk Cash
Smuggling
Trade-
Based
Money
Laundering
Insurance
Companies
Shell
Companies
and Trusts
Many more to evolve

6. 1970 1986 1988 1992 1994 1998 2001 2004
AML- Laws and Regulations
Bank Secrecy Act
Money
Laundering Act
Anti Drug Abuse
ActEstablished
requirements for
recordkeeping and
reporting
AW Anti Money
Laundering Act
Money laundering
suppression Act
Money Laundering &
Financial Crimes
Strategy Act
Patriot Act
Intelligence Reform
& Terrorism
Prevention Act
Established
money laundering
as a federal crime
• Expanded the
definition of
financial
institution
• Financial Action
Task Force (FATF)
is founded by G7
countries
Required
Suspicious Activity
Reports &
Established the
Bank Secrecy Act
Advisory Group
Required MSB to
review and enhance
training, and develop
anti-money laundering
examination
procedures
Anti-money
laundering training
and involved
Department of the
Treasury and other
federal agencies
• Criminalized the financing of terrorism
• FATF role expanded to CTF ->NCCT
• Mandated
 Know your customer KYC
 Enhanced due diligence (EDD)
Required certain
financial institutions
to report cross-
border electronic
transmittals of funds

7. Framework of KYC/CDD/EDD
Fundamental KYC requirements, regulators’ views on the use of the risk based
approach, dealing with Politically Exposed Persons (“PEPs”) and guidance on
prohibitions relating to shell banks
Who your customer’s customer are?
Ensure that only legitimate and bona fide customers are accepted.
Sources of funds
Nature of customers’ business
What constitutes reasonable account activity?
o Monitor customers accounts and transactions to prevent or detect illegal
activities.
o Reporting SARS

8. Regulatory bodies (US)
National Money Laundering Risk
Assessment (NMLRA) identifies the money
laundering risks that are of priority
concern to the United States.
Department of the
Treasury
IRS
Criminal
Investigations
Small Business/Self-
employed
Terrorism and
Financing
Intelligence
Financial Crimes
Enforcement
Network
Office of Foreign
Assets Control
Office of
Intelligence and
Analysis
Treasury Executive
Office of Asset
Forfeiture
Department of
Justice
Executive Office for
United States
Attorneys
Asset Forfeiture
and Money
Laundering Section
Drug Enforcement
Administration
Federal Bureau of
Investigation
Department of
Homeland Security
Immigration and
Customs
Enforcement
United States
Secret Service
Homeland and
Security
Investigations
Department of
Health and Human
Services
United States Postal
Service
Staff of the Federal
functional
regulators
Private sector
NMLRA
(Multi agency
report)
Financial Crimes Enforcement
Network (BSA) – SARS + CTR
Source: US Treasury

9. Policy-making bodies
Source: FATF
35 member and 2 organizations 9 members and 17 observers
Caribbean Financial Action Task Force
41 members and 2 observers.
MONEYVAL 47 member
states
Eastern and Southern Africa Anti-Money
Laundering Group
Financial Action Task Force of Latin America

10. Measuring Risks
Basel Anti-Money Laundering (AML) Index -ranking countries according
to their risk of money laundering and terrorist financing
High Risk – Non cooperative jurisdictions
Source: FATF, Basel 2016 report

11. Ethical dilemma
“Too Big to Fail” does not mean “Too Big to Jail”
HSBC illegally conducted
transactions on behalf of
customers in Cuba, Iran,
Libya, Sudan and Burma
 Financial institutions have made it difficult to prosecute them, because such
prosecutions could have a “negative impact on the national and world economies”
 Ripple effect - institutions or other companies that had nothing to do with this are
affected badly.

12. Is It Worth The Cost ?

13. Compliance framework
 AML legislation costs $4.8 - $8 billion, annually
 Since Dodd-Frank took effect (2010) there have been 700 convictions
 Each conviction cost ~ $7 million; the average amount laundered was far less
Source: CAIB Inc.

14. Compliance In Numbers
0% 10% 20% 30% 40% 50% 60% 70%
Enhancing Transaction monitoring systems
Reviewing, updating, and maintaining KYC prodecures
Recruitment
Provision of training
Implementing of Foreign Account Tax Compliance Act
Maintaning sanction lists
Procedural updates
Increasing internal reporting requirements
Anti-bribery and corruption activities
Transaction look back-reviews
Others

15. SAR
 "Suspicious Activity Report"
 One of the tools under the Bank Secrecy Act of 1970 (BSA)
 Cover any activity that is out of the ordinary, if that activity gives suspicion that
the account holder is trying to hide something or avoid reporting under the BSA
 Banks are required to report suspicious activities above $5,000
 The customer does not know this is being filed
 Disclosure to the customer, or failure to file a SAR, can result in very severe
fines to individuals and institutions

16. Cost-Benefit Don’t Add-up
Money Laundering Investigations
FY 2016 FY 2015 FY 2014
Investigations Initiated 1201 1436 1312
Prosecution Recommendations 1010 1301 1071
Indictments/Informations 979 1221 934
Sentenced 668 691 785
Incarceration Rate* 84.1% 84.1% 82.2%
Average Months to Serve
62 65 66
Source: IRS
• Suspicious Activity Report (SAR) filing and overregulation are impacting the bottom line of
several banks.
• SAR regulations are burdensome- monitoring for suspicious transactions above a $5,000
threshold requires a lot of manpower
• SAR also requires banks and other financial institutions to go against their clients, potentially
creating a conflict of interest

17. Cost Of Compliance To Banks
The AML regime places a financial burden on banks - especially on smaller, regional
banks
Compliance costs can lower returns by 20 basis points
These costs are then passed on to customers - higher interest rates and fees
Non-account holders citing lack of
documentation as barrier (%)
Non-account holders cost as a
barrier (%)

18. Cost Of Failure To Banks
What are the risks to banks?
i. Reputational risk
ii. Legal risk
iii. Operational risk
iv. Concentration risk (either side of
balance sheet)
All risks are inter-related and together
have the potential of causing
serious threat to the survival of the
bank
 Given these risks, banks and other
financial institutions spend on
compliance as a form of "insurance"
Biggest money laundering settlements with
US authorities

19. Constitutional Issues
 AML/KYC legislation also raises constitutional issues
 The Fourth, Fifth, and Ninth Amendments protect individuals’ right to privacy
(under which personal finance would be included)
 Current legislation is inconsistent with individual rights, privacy, and the
presumption of innocence
 Individuals from moderate or high risk countries are immediately subject to higher
scrutiny
 That can be considered a form of discrimination
 AML/KYC legislation opens the door to government abuse
 Individuals and countries can be subject to higher scrutiny, sanctions, and fees for
political reasons

20. Economic And Political Impacts
 Macroeconomic Consequences of Money Laundering
The Risk to the Financial System- financial stability, asymmetrical
information
 Money launderers and terrorist financiers exploit both the complexity
inherent in the global financial system as well as differences between
national laws and system.
 They are especially attracted to jurisdictions with weak or ineffective
controls where they can more easily move their funds without detection.
 Problems in one country can quickly spread to other countries in the
region or in other parts of the world

21. New Frontiers – Are We
Ready ?
Come in and Join Us

22. Case in picture virtual currency
SILK ROAD CASE（2013):
A hidden website designed to
enable users to trade unlawful
goods and services and
launder money. The Justice
Department also seized the
website and approximately
174,000 bitcoins, worth more
than US $33.6 million at the
time of the seizure

23. New frontiers in money laundering
VIRTUAL CURRENCY
The Financial Crimes Enforcement Network (FinCEN):“a medium of exchange
that operates like a currency in some environments, but does not have all the
attributes of real currency. In particular, VC does not have legal tender status in
any jurisdiction.”
Bitcoin ecosystem-anonymity
Source: https://www.atmmarketplace.com

24. Potential AML/CFT risks
 VCs allow greater anonymity than traditional noncash payment
methods
 VC's Global reach increase AML risks
 Components of a virtual currency system may be located in
jurisdictions that do not have adequate AML/CFT controls

25. Steps taken to counteract
 An alternative AML strategy is required
 Treat the currency converters as Money Service Business(MSB)
 Financial institutions develop program and training to better
understand VC transactions

26. �Case studies
�BSA/AML
�Expectations

27. Specific Issues and Cases
CASE 1: MEGABANK
o August 2016 – DFS $180 million fine
o BSA/AML Officer and CCO both lack of familiarity of U.S regulatory
requirements
o CCO and other key senior officers have conflicts interest of roles
o Failed to periodically review surveillance monitoring review of filtering
criteria to detect SARs
o Numerous documents relied in monitoring were not translated in
English
o No guidance concerning SAR reporting, inconsistency of compliance
policies
o Internal Audit team fail

28. CASE 2: AGRICULTURE BANK OF CHINA
o November 2016 – DFS US $250 million fine
o Unusually large round dollar transactions between Chinese and Russian
companies
o Unusually large round dollar payment from Yemen to China
o Certain invoices between China and Russia appear to be counterfeit or
falsified/ other documents suggests trading with Iranian counterparties
o Dollar transaction associated with narcotics traffickers and illicit cash flow
o Unable to retain a qualified, permanent CCO
o Limited contact with Head Office from BSA officer
o CCO also perform as BSA Officer
Specific Issues and Cases

29. BSA/AML Actions and Environment
Recent Actions Imposing personal liabilities
o SEC order instituting administrative and cease-and-desist proceedings
o January 2017, SEC filed against New York-headquartered broker-dealer and
its CCO and AML officer for violation of BSA and failure of filling SARs
o The failure of filing SARs make US $24.8 million in suspicious penny stock
sale transactions which led to US $493,000 in commissions
o AML officer was personal liable of failing to file required SARs

30. FDIC case
In December 2016, Federal Deposit Insurance Corporation (FDIC)
brought and enforcement action against the President and CEO of an
Arkansas state-chartered non-member bank with US $37 million in
assets for alleged violations of BSA. The individual failed to file timely
SARs, the individual consent to civil money penalty (CMP) in amount of
US $35,000. Prohibited from seeking or accepting indemnification from
the bank
Cease and Desist Order and Civil Money Penalty

31. Future Environment & Expectations
◦From a policy perspective, there are numerous indications that AML will remain a
top priority
◦The Financial Crimes Enforcement Network's final Customer Due Diligence Rule
(CDD Rule) seeks to address one of those identified deficiencies: beneficial
ownership.
◦New York Department of Financial Services' (DFS) new risk-based anti-terrorism
and anti-money laundering rule (DFS Rule) became effective on January 1,
2017, requiring New York-regulated institutions to bolster their AML programs
and, most significantly, to provide a personal certification to the DFS that those
enhanced programs meet the DFS' expectations

32. Conclusion
o Worldwide issue with different format: disguise, layering, money smuggling
o More and more complex BSA/AML especially related to KYC/CDD/EDD
legislations places an undue burden on banks
o Stricter KYC rules regarding beneficiary ownership, purpose of transactions
raises constitutional issues questions
o More and more SARs reporting required by enhancing Compliance monitoring
and enlarged blacklist
o Bitcoin and new tech raises more money laundering risk and challenges for
banks and government
o Criminals can find ways around BSA/AML legislation – Global effort
o Balance Point Of Compliance – Penalties Or Investment?

33. “After foreign exchange and the oil industry, the laundering of dirty money is the world’s
third-largest business.”
Jeffrey Robinson, The Laundrymen