Guide Combating Money Laundering and the Financing of Terrorism: A Comprehensive Training Guide

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This latter definition constitutes a form of negligent money Vienna Convention, article 3 b i. Also, certain money-laundering offenses could require proving the specific intent of an individual to assist another, for example, in evading the legal consequences of his or her actions. In terms of culpability, this state of mind standard falls between the negligence and specific knowledge standard of intent. The OAS Model Regulations further provide that these three culpable states of mind can be inferred from objective and factual circumstances.

OAS Model Regulations. Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism Finally, it may be very difficult to prove the state of mind of a person engaging in an activity that otherwise appears to be ordinary on its face. Thus, the Vienna Convention, the Palermo Convention, the Forty Recommendations and many of the other legal instruments provide that the law should permit the inference of the required state of mind from objective factual circumstances. Corporate Liability Money laundering often takes place through corporate entities. The concept of corporate criminal liability, however, varies greatly among different countries.

Some countries, mainly those with a common law tradition, subject corporations to criminal liability laws. In countries with a tradition of civil law, corporations may not be covered by criminal laws. The UN Model Legislation does not provide for criminal liability for corporations. The sanctions envisioned by the UN Model Legislation include fines, bans on carrying out certain business activities, closure or winding up, and the publication of rulings. UN Model Legislation, Article 4. Predicate Offense Perpetrator Liability for Laundering An important question is whether money laundering liability extends to the person who committed the predicate offense, as well as to the person who has laundered the ill-gotten proceeds.

Some countries do not hold the perpetrator of the predicate offense liable for laundering the proceeds of his or her criminal actions, if he or she is not involved in the laundering activity. The basic rationale for this approach is that punishing the perpetrator for evading the legal consequences of his or her criminal activity could amount to double jeopardy, i.

Other countries hold the perpetrator of the predicate offense liable for laundering the ill-gotten proceeds on the basis that the conduct and the harm of evasion are distinct from the predicate offense. There are also practical reasons for this approach. Exempting perpetrators of predicate offenses from money-laundering liability could severely penalize third parties for their conduct in handling criminal proceeds, while perpetrators remain immune from liability. This could occur when the predicate offense has been committed extraterritorially, placing it beyond the jurisdiction of the state prosecuting third parties for their laundering activities.

Section 2 l. Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism Overall, the general international standard in this area provides for a broad laundering offense that permits the perpetrator to be liable for laundering the proceeds of his or her own criminal activities regardless of active participation in laundering activities. Predicate offenses for money laundering can be defined in legislation so broadly that, in their totality, they include any transaction involving the use of the proceeds derived from a criminal activity.

Given such a broad interpretive construction, these laws could have the effect of criminalizing the mere receipt of a fee by a lawyer for the purpose of providing criminal defense. This poses unique problems of due process. Considering that the right of the accused to adequate defense in criminal trials is now established as one aspect of the right to a fair trial, countries should be careful in drafting the scope of the money laundering offenses. Countries may also wish to consider an effective provision excluding lawyers from such potential criminal liability for merely rendering their services, provided that the services were limited to, or were rendered only in connection with, defending the accused at trial.

If a lawyer has knowledge that his or her fees were derived from a criminal activity, the attorney should observe these integrity standards and The model laws and regulations in this area are silent on this point. Criminalization of Terrorism and the Financing of Terrorism Those who finance terrorism, like other criminals, may use the national and international financial systems to hide the funds they need to support their activities, even if these funds have legitimate sources.

Criminalizing all aspects of terrorism and terrorist financing is a practical way to undermine the capacity of terrorist organizations by preventing their funds from entering the financial system. In addition, a country needs legislation to help detect when terrorist funds are within its borders so that the funds can be confiscated and forfeited.

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This further helps thwart terrorist efforts. In its nine Special Recommendations on Terrorist Financing Special Recommendations , FATF urges countries to criminalize the financing of terrorism, terrorist acts and terrorist organizations and to designate these as predicate offenses of money laundering. FATF provides that one of the designated categories of offenses is terrorism, including terrorist financing. Seizure, Confiscation, and Forfeiture The current approaches to international crime and terrorist financing are designed to make criminal activities unprofitable and keep terrorists from accessing funds.

These goals cannot be achieved without effective confiscation Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism laws, whereby authorities may permanently deprive criminals and terrorists of their ill-gotten proceeds. Confiscation of Direct and Indirect Proceeds of Crime FATF encourages countries to adopt laws permitting a broad interpretation of the confiscation of proceeds of crime, in accordance with the Vienna and Palermo Conventions.

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FATF encourages countries to adopt laws that permit the confiscation of the laundered property, the proceeds of laundering and predicate offenses, the instrumentalities used, or intended for use in, laundering, and property of corresponding value. Criminals are also likely to transfer the property beyond the reach of authorities or to commingle it with property legitimately derived. Vienna Convention, article 1 p ; Palermo Convention, article 2 e. Enforcement of Confiscated Property The effective enforcement of confiscation orders requires that the relevant authorities possess the powers necessary to identify, trace and evaluate property that could be subject to confiscation.

Thus, authorities should also be granted the power to take preventive measures. For example, they should be able to freeze and seize assets that might be subject to confiscation. This power is a necessary condition for an effective law enforcement framework for preventing the laundering of money. That discussion is equally applicable to AML-related assets. Third Party Liability While international law on confiscation does not preclude the confiscation of assets in the hands of third parties, FATF and various international agreements qualify the permissibility of such action by requiring countries to take Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism measures to protect the rights of bona fide third parties.

According to the model regulations, the court or other competent authority should return the property to the claimant, if it is satisfied that the claimant: 1 has proper legal title to the property; 2 did not participate in, collude with, or was not in any other way involved in the predicate offense; 3 did not have knowledge of the use of property for illegal purposes and did not consent freely to this use; 4 did not acquire rights that were specifically designed to evade the confiscation proceedings; and 5 did whatever could reasonably be expected to prevent the illegal use of the property.

In addressing the question of bona fide third parties, the UN Model Crime Bill provides that the court can deny the third-party claim to the property in cases where the court finds that the person 1 was involved in the commission of the predicate offense; 2 acquired the property for insufficient consideration; or 3 acquired the property knowing its illicit origin. International Aspects of Confiscation Establishing an effective confiscation regime for domestic purposes is only the first step toward eliminating the profitability at the heart of so many interna This is a model law designed for common law jurisdictions.

The second necessary step, and one vital to the overall success of this effort, is creating cooperative mechanisms for enforcing cross-border confiscation orders. Countries may enable the relevant authorities to implement confiscation requests from other countries, employing such measures as tracing, identification, freezing, and seizure.

As an incentive for international cooperation, countries may consider establishing asset-sharing arrangements. The general principle in the disposal of confiscated assets is that such disposal be subject to the domestic laws and regulations of the country that executed the confiscation order.


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Types of Covered Entities and Persons FATF recommendations impose numerous requirements upon financial institutions and non-financial businesses and professions to prevent money laundering and terrorist financing. Thus, a crucial decision for a country is to determine which entities and persons should be covered by which requirements. The Forty Recommendations, see generally Recs. Financial Institutions It is axiomatic that money launderers and those who finance terrorism must have access to financial institutions. These institutions provide the means for such individuals to transfer funds among other financial institutions, both domestically and internationally.

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These institutions also provide the means to convert currencies and pay for the assets used in the money laundering and terrorist financing process. The types of financial institutions and their capabilities vary greatly among different countries. Lending including consumer credit; mortgage credit; factoring, with or without recourse; and finance of commercial transactions including forfeiting ;. See also interpretive note to The Special Recommendations, Spec. VI and VII. The test is whether an entity or individual carries out any of the above functions or activities for customers, not what the business is called or how the business is designated.

There are two qualifications to this requirement. First, if a financial activity, described above, is carried out occasionally or on a very limited basis, such that there is little money laundering risk, a country may decide not to apply all, or indeed any, money laundering requirements. However, countries are encouraged to adopt a risk-based approach, which may lead to increased measures Financial activity should only be excluded or subject to limited controls generally after a proper study has established that the money laundering risk is low.

The starting presumption should be that all of the above financial activities should be subject to all of the AML requirements. Designated Non-Financial Business and Professions The FATF recommendations were revised in to include certain designated non-financial businesses and professions within coverage of The Forty Recommendations for the first time.


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The requirements applicable to these entities and professionals are more limited and apply in more limited circumstances than financial institutions. Acting as a formation agent of legal persons; b. Acting as or arranging for another person to act as a director or secretary of a company, a partner of a partnership, or a similar position in relation to other legal persons; c. Providing a registered office; business address or accommodation, correspondence or administrative address for a company, a partnership or any other legal person or arrangement; d.

Acting as or arranging for another person to act as a trustee of an express trust; or e. Acting as or arranging for another person to act as a nominee shareholder for another person. Other Potential Covered Entities and Persons Finally, in a separate, and all-embracing recommendation, FATF states that countries should consider applying the recommendations to businesses and professions, other than those listed above, that pose a money laundering or terrorist financing risk.

Examples could include dealers in high value and luxury goods antiques, automobiles, boats, etc. There is no requirement to cover any or all of this list of any other but there is a requirement to consider the risks and appropriate response to such risks. When criminals control financial institutions or hold senior management positions in financial institutions, countries find it exceedingly difficult to prevent and Similarly, when certain persons are involved with money laundering actions, countries find prevention and detection more difficult.

Integrity and licensing requirements help prevent such entities and individuals from participation in money laundering and terrorist financing efforts. Financial Institutions a. Core Principles Institutions These institutions, i. Other Financial Institutions These institutions are not normally subject to the same stringent requirements as Core Principles Institutions largely because the same prudential issues do not arise. For example, directors and senior management are not evaluated See Chapter IV.


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In some cases, the oversight could be limited to law enforcement action against institutions that do not comply with applicable regulations, but no proactive inspection or oversight of compliance. Designated Non-Financial Businesses and Professions Non-financial businesses and professions fall into two categories: casinos and all other non-financial businesses and professions other NFBPs. Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism For all other NFBPs, the requirement is that effective systems for monitoring and ensuring compliance on a risk-sensitive basis are in place.

The monitoring may be carried out either by a government agency or a self-regulatory organization. Unlike other financial institutions see above , there is no licensing or registration system. Laws Consistent with Implementation of FATF Recommendations A crucial aspect of any legal system is to have laws and regulations that are internally consistent and work in coordination with each other.

Thus, it is important that one law not conflict with another law, unless there is a basis in policy for making an exception, and that the two laws can be read as working together without contradiction. One area where there is potential for conflict is with secrecy laws. Often, countries have general laws protecting the privacy of financial information from disclosure. Such laws may conflict with the specific requirement, for example, that financial institutions report suspicious transactions. Cooperation Among Competent Authorities Each country needs to provide that there are effective mechanisms in place to enable its policy makers, FIU, law enforcement authorities including customs where appropriate , financial institution supervisors and other relevant authorities to cooperate with each other.

Investigations Each country should assure that designated law enforcement authorities are responsible for money laundering and terrorist financing investigations. Thus, each country should maintain statistics on the effectiveness and efficiency of its investigations and other aspects of its regime. Customer Identification and Due Diligence 1. Scope of Customer Identification and Due Diligence 2. Who Is a Customer? Customer Acceptance and Identification Procedures 4.

Low and High Risk Accounts and Transactions 5. Circumstances Requiring Increased Due Diligence 6. Extending Due Diligence to Vendors and Others 7. Insurance Sector Measures 8. Security Sector Measures 9. Suspicious Transaction Reporting 1. Suspicious Transactions: What is involved 2. Provisions for Reporting 3. Scope of Reporting Obligation 4. Fiscal Crimes 5. Insurance Sector 6. Securities Sector 7. Cash Transaction Reporting 1. Multiple Cash Transactions 2. Cross-Border Movements 3. Modern Money Management Techniques.

Record Keeping Requirements 1. Insurance Sector 3. Securities Sector 4. Internal Controls G. Regulation and Supervision. In fact, access to such entities and persons is crucial if criminals are to succeed because financial institutions, and other, provide the means to transfer funds to other financial institutions, both domestically and internationally; to exchange currencies, and to convert proceeds of crime into different financial instruments and other assets.

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These preventative 1. These mandates for action are also flexible, however, to permit a country to adopt requirements that are consistent with its own economic circumstances, legal system and constitution. Countries may also wish to examine the Methodology for Assessing Compliance with The Forty and Special Recommendations for further explanation of the requirements. Customer Identification and Due Diligence In accordance with international standards set by the Basel Committee on Banking Supervision Basel Committee 4 and by FATF,5 countries must assure that their financial institutions have appropriate customer identification and due diligence procedures in place.

Help maintain the integrity of the financial system and enable development efforts in emerging markets;. Protect the reputation of the financial organization against the detrimental effect of association with criminals. Scope of Customer Identification and Due Diligence The customer identification and due diligence procedures employed by a financial institution must also apply to its branches and majority-owned subsidiaries—both domestically and internationally—provided local law is not in conflict.

Host country supervisors should make efforts to change such laws and regulations in the local jurisdiction. Adequate due diligence on new and existing customers is a key part of these controls. Basel Customer Due Diligence for Banks provision 9. A person or entity who maintains an account with a financial institution or on whose behalf an account is maintained i. A person or entity connected with a financial transaction who can pose a significant risk to the bank.

A crucial aspect of customer identification is establishing whether the customer is acting on his, her or its own behalf, or whether there is a beneficial owner of the account that may not be identified in the documents maintained by the financial institution. If there is any reason to suspect that the customer is acting on behalf of another person or entity, appropriate due diligence measures should be instituted. Beneficial ownership is also difficult in the case of legal entities or corporations where there is tiered ownership involved.

Tiered ownership involves one corporation owning or controlling one or more other corporate entities. In some cases, there can be numerous corporations each, in turn, owned by another corporation and, ultimately, owned or controlled by a parent corporation. When corporations or legal entities are involved, appropriate due diligence measures should be employed to determine the identity of the actual parent or controlling entity. Customer Acceptance and Identification Procedures Financial institutions should develop and enforce clear customer acceptance and identification procedures for clients and those acting on behalf of clients.

Such profiles would include standard risk indicators such as personal background, country of origin, possession of a public or highprofile position, linked accounts, and type and nature of business activity. As a general rule, the rigidity of the acceptance standards should be commensurate with the risk profile of a potential customer.

It is strongly recommended that only senior management should render decisions on customers whose profiles suggest they pose a high risk of money-laundering activities. Under these guidelines, The best documents for verifying the identity of potential or actual customers are those that are the most difficult to reproduce. In those instances where an agent is representing a beneficiary e. In cases of fund transfers, such as money remittances, financial institutions should include accurate and meaningful originator information name, address, and account number and pass this information along the payment chain with the fund transfer.

Basel Customer Due Diligence for Banks provision Customer identification is an ongoing process that requires, as a general rule, financial institutions to keep up-to-date records on all relevant client information. Low and High Risk Accounts and Transactions The customer due diligence measures described above should be applied in accordance with the risk attached to the type of customer and transaction.

For higher risk categories, enhanced measures should be taken and some particular cases are discussed below. For lower risk categories, a country may allow its financial institutions to apply reduced or simplified measures. Examples of such lower risk customers are financial institutions, public companies and government enterprises. Neither the Basel Committee Basel Customer Due Diligence for Bank provision Circumstances Requiring Increased Due Diligence In certain cases, The Forty Recommendations provide that certain enhanced due diligence measures should be taken in addition to those performed in the normal course by financial institutions.

The following discusses those cases requiring additional due diligence procedures. Politically Exposed Persons FATF defines Politically Exposed Persons PEPs as: Individuals who are or have been entrusted with prominent public functions in a foreign country, for example Heads of State or of government, senior politicians, senior government, judicial or military officials, senior executives of State owned corporations, important political party officials.

Business relationships with family members or close associates of PEPs involve reputational risks similar to those with PEPs themselves. The definition is not intended to cover middle ranking or more junior officials in the forgoing categories. Identifying PEPs; Approval at senior management level to account opening; Establishing the source of wealth and funds; Enhanced ongoing monitoring. Actually finding out whether a customer is a PEP is often the biggest challenge for a financial institution given the definition of the term. No official organization issues a list of such individuals, but various commercial entities maintain and regularly update such lists.

Cross-Border Correspondent Banking Relationships Cross-border correspondent banking relationships are another source of potentially high risk accounts for financial institutions. Such relationships could be a way for entities or persons from countries with lax arrangements to gain access to the global financial system without undergoing proper due diligence procedures.

There is no intention on the part of the international standard setters to obstruct such developments, which give customers greater choice and services as well as benefit the economy. In such circumstances, financial institutions should do three things. Second, the Preventive Measures institution should make certain that the introducer has collected sufficient information about identity and other relevant due diligence documentation about the customer. Third, the institutions should make sure that the introducer can make that information available on request without delay.

The introducer can be domestic or international. Where it is an international party that is the introducer, the financial institution needs to be especially vigilant that the above requirements are met. Several countries, which permit introduced business, require that the introducer should be an individual or an institution that is subject to AML controls, is supervised by a regulatory body with responsibility for compliance with AML controls, and is located in a country that complies with FATF standards.

First, there are complex, unusual large transactions and unusual patterns of transactions which have no apparent economic or visible lawful purpose. Second, there are countries that have been identified as non-compliant with FATF recommendations that merit special attention. While transactions with such countries are not prohibited, financial institutions should pay special attention to them and, when there is doubt about their purpose, investigate further and record the outcome.

Extending Due Diligence to Vendors and Others The supply-chain structure of many businesses has become increasingly complex and interconnected with the advance in global commerce. Consequently, many financial institutions have found it necessary to exercise greater diligence over the vendors, suppliers, and agents of organizations as well as with employees and correspondent banks of financial institutions. Insurance Sector Measures The International Association of Insurance Supervisors IAIS maintains its own guidelines for customer identification and due diligence; the insurance industry must adhere to these in addition to the relevant requirements of The Forty Recommendations discussed above.

For large numbers of subjects e. Verify all underlying principals as well as their relationship with the policyholders—the principals and not the policyholders should be questioned regarding the nature of the relationship;. Verify claims, commissions, and other money administered to no policyholders e. Monitor reinsurance or retrocession on a regular basis as a way to ensure payments to bona fide reinsurance entities at rates justified by the risk level. Security Sector Measures The International Organization of Securities Commissions IOSCO has not established separate customer identification or due diligence requirements for securities firms, brokers, or collective investment entities.

Although IOSCO has not established such specific requirements, the customer identification requirements of The Forty Recommendations as described more fully in the Methodology40 do apply to the securities sector. Measures for Designated Non-Financial Businesses and Professions These requirements for customer due diligence, as well as those relating to record keeping, apply to designated non-financial businesses and professions in a more limited manner than to financial institutions.

The following discussion outlines the applicable circumstances where due diligence procedures apply to these entities and persons. Examples of such transactions include buying or cashing-in casino chips, opening accounts, wire transfers, and currency exchange. This does not mean that every gambling transaction has to be monitored or recorded for 5 years. The applicable recommendations are Recs. Real Estate Agents Transactions for a client concerning the buying and selling of real estate require due diligence procedures.

However, identification and other customer due diligence need only be conducted when a transaction takes place and only with respect to the party who is the client of the estate agent. Creation, operation or management of legal persons or arrangements, buying and selling of business entities. Identification and customer due diligence and record keeping are required after the professional becomes involved in carrying out the transaction, which includes the preliminary work on drawing up the transaction as Preventive Measures well as its execution.

Acting as a formation agent of legal persons; Acting as or arranging for anchor person to act as a director or secretary of a company, a partner of a partnership of a similar position in relation to other legal persons; Providing a registered office; business address or accommodation, correspondence or administrative address for a company, a partnership or any other legal person or arrangement; Acting as or arranging for another person to act as a trustee or an express trust; or Acting as or arranging for another person to act as a nominee shareholder for another person.

In some countries the above-described transactions are performed by lawyers. Financial Institutions Financial institutions should keep customer identity and transaction records for a minimum of five years following the termination of an account. Contents of the records should be made readily available to authorities upon request and, further, be of sufficient detail to permit the prosecution for criminal behavior.

If a potential customer knows that records are being maintained, the customer may not be as likely to try to use the institution for these illegal purposes. Record maintenance also helps detect those involved and provides a financial trail to help competent authorities pursue those involved. Insurance Sector The IAIS maintains its own set of record keeping requirements; the insurance entities must adhere to these, in addition to the relevant guidelines of The Forty Recommendations.

Financial institution supervisors must verify that all representatives for insurance companies are licensed under appropriate insurance law and jurisdiction. Securities Sector The IOSCO has established its own set of record keeping requirements, which securities firms should follow in addition to adhering to the applicable general requirements of The Forty Recommendations discussed above.

IOSCO requires that the national centralized authority on financial crime or other competent authority ensure that intermediaries maintain records as needed demonstrating their adherence to the regulatory rules. Designated Non-Financial Businesses and Professions Record keeping requirements for designated non-financial businesses and professions apply in the same circumstances as are applicable to customer identification and customer due diligence requirements. Suspicious Transactions Reporting If a financial institution suspects or has reasonable grounds to suspect that funds are the proceeds of a criminal activity, or are related to terrorist financing, it should report its suspicions to the applicable financial intelligence unit.

Suspicious Transactions: What Is Involved Suspicious transactions have certain broad characteristics, including, most obviously, transactions that depart from normal patterns of account activity. Any complex or unusually large transactions—in addition to any unusual patterns of transactions absent an apparent economic, commercial, or lawful purpose—are suspect and, therefore, merit further investigation by the finan-. Basel Core Principle 15, Description Preventive Measures cial institution and, if necessary, by the appropriate authorities.

Specific examples of suspicious activity e. Assets withdrawn immediately after they are credited to an account. A dormant account suddenly becomes active without any plausible reason. The high asset value of a client is not compatible with either the information concerning the client or the relevant business. A client provides false or doctored information or refuses to communicate required information to the bank. The arrangement of a transaction either insinuates an unlawful purpose, is economically illogical or unidentifiable. Frequent deposit of cash incompatible with either the information concerning the client or his business.

Deposit of cash immediately followed by the issuance of checks or transfers towards accounts opened in other banks located in the same country or abroad. Frequent exchange of notes of high denomination for smaller denominations or against another currency.

Frequent cash transactions for amounts just below the level where identification or reporting by the financial institution is required. Purchase of stocks and shares with funds that have been transferred from abroad or just after cash deposit on the account. Illogical structures numerous accounts, frequent transfers between accounts, etc. Granting of guarantees pledge, bonds without any obvious reason. Transfers in favor of other banks without any indication of the beneficiary. Unexpected repayment, without a convincing explanation, of a delinquent loan. Deposit of checks of large amounts incompatible with either the information concerning the client or the relevant business.

Such laws protect financial institutions and employees from criminal and civil liability when reporting suspicious transactions to competent authorities in good faith. These legal provisions should provide financial institutions, and their employees or representatives, protection against lawsuits for any alleged violation of confidentiality or secrecy laws provided that the suspicious report was filed in good faith i.

Preventive Measures 3. Scope of Reporting Obligation An STR is a way of alerting authorities to the possibility that a particular transaction could involve money laundering or terrorist financing and should, therefore, be investigated. In most cases, the reporting financial institution will not have evidence that the transaction represents the proceeds of crime, and is less likely to know of what specific crime might be involved. The financial institution will simply be aware that the transaction is unusual and not consistent with the normal type of transaction on the account.

Most likely, it will not be aware of the source of the funds or the reason for the transaction and cannot inquire of the customer without the risk of tipping-off the customer. In such situations, the institution should submit a suspicious transaction report and leave it to the authorities to further investigate.

It is not necessary to require the reporting institution to investigate the transaction or have actual evidence that the funds relate to criminal activity. Fiscal Crimes Some countries do not classify fiscal crimes, such as tax evasion, as a money laundering predicate offense. Thus, laundering the proceeds of tax evasion is not necessarily a money laundering offense.

However, financial institutions should still report transactions that they find suspicious and leave it to the authorities to determine whether money laundering is involved. Otherwise, there is a risk that customers would attempt to explain away transactions related to money laundering predicates as the proceeds of tax evasion and pressure institutions not to file STRs. Insurance companies should report suspicious activity to the financial intelligence unit or other national centralized authority. Unusual or disadvantageous early redemption of an insurance policy; Unusual employment of an intermediary in the course of some usual transaction or financial activity e.

Securities Sector The IOSCO has not established separate suspicious activity reporting requirements for securities firms, brokers, or collective investment entities. Although IOSCO has not established separate or additional requirements in this area, the suspicious activity reporting requirements of The Forty Recommendations do apply to the securities sector.

Designated Non-Financial Businesses and Professions Under the revision of The Forty Recommendations, designated nonfinancial businesses and professionals are now required to file suspicious transactions reports, but on a more limited basis than their obligation to identify customers and carry out due diligence. Preventive Measures For lawyers, notaries, other independent legal professionals and accountants, there is only an obligation to file an STR only when they engage in a financial transaction for, or on behalf of, a client.

There is no obligation to report in legally privileged circumstances. Established money laundering as a federal crime Prohibited structuring transactions to evade CTR filings Introduced civil and criminal forfeiture for BSA violations Directed banks to establish and maintain procedures to ensure and monitor compliance with the reporting and recordkeeping requirements of the BSA.

Anti-Drug Abuse Act of Money Laundering Suppression Act Required banking agencies to review and enhance training, and develop anti-money laundering examination procedures Required banking agencies to review and enhance procedures for referring cases to appropriate law enforcement agencies Streamlined CTR exemption process Required each Money Services Business MSB to be registered by an owner or controlling person of the MSB Required every MSB to maintain a list of businesses authorized to act as agents in connection with the financial services offered by the MSB Made operating an unregistered MSB a federal crime Recommended that states adopt uniform laws applicable to MSBs.

Required banking agencies to develop anti-money laundering training for examiners Required the Department of the Treasury and other agencies to develop a National Money Laundering Strategy Created the High Intensity Money Laundering and Related Financial Crime Area HIFCA Task Forces to concentrate law enforcement efforts at the federal, state and local levels in zones where money laundering is prevalent. HIFCAs may be defined geographically or they can also be created to address money laundering in an industry sector, a financial institution, or group of financial institutions.

Anonymity, or the lack of transparency, is disfavored by criminal enforcement authorities. However, there may be legitimate reasons to keep confidential the beneficial ownership of an entity from the public because of business competitive reasons. For example, a developer may desire to acquire multiple tracts of land. By keeping the identity of its beneficial owners out of the public record, the developer may be able to acquire the tracts at fair market value without paying a premium. Non-business reasons for confidentiality may apply as well. For instance, a wealthy investor may desire anonymity to enhance personal safety e.

Lawyers should be mindful, though, that law enforcement authorities may have a legitimate need to know the identity of the true beneficial owner in appropriate circumstances, such as bona fide criminal investigations. Services requested by the client for which the client knows the lawyer does not have expertise excepting where the lawyer is referring the request to an appropriately trained professional for advice. A lawyer regularly represents a client in commercial real estate transactions.

The client asks the lawyer to handle the creation of various off-shore trusts.

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The client is aware that the lawyer has no training in creating these types of trusts. Transfer of real estate between parties in a time period that is unusually short for similar transactions with no apparent legal, tax, business, economic or other legitimate reason. But real property transfers made in an unusually short time frame in comparison to similar deals and with no apparent legal, tax, business, economic or other legitimate reason represent a higher risk to the lawyer.

For example, a client asks the lawyer to handle the transfer of a residence from the client to a new entity controlled by the client. The client then directs the lawyer to convey the property immediately from the new entity to yet another new entity controlled by the client. The lawyer needs to understand the legal, tax, business, economic, or other legitimate reason for the serial transactions within a compressed time period.

In a report, FinCEN noted that a bank reported a series of transactions occurring within a one-month period in which the same property was bought and sold among related individuals. The bank indicated in the suspicious activity report narrative that it was not able to definitively determine the motive for these transactions, but surmised that they may have been conducted to promote money laundering or tax evasion. Payments received from unassociated or unknown third parties and payments for fees in cash where this would not be a typical method of payment.

If a client offers to pay in cash, the lawyer is dealing with a higher risk situation. For payments from third parties, the lawyer should always understand the reason for that arrangement. Transactions where it is readily apparent to the lawyer that there is inadequate consideration, such as when the client does not identify legitimate reasons for the amount of the consideration. In assessing the adequacy of consideration, a lawyer is not required to undertake a rigorous analysis of the economics of the transaction. Rather, the lawyer simply needs to understand whether the stated consideration is reasonably related to the value of the transaction after factoring in the known relevant criteria.

On its face, the disparity between the value of the land and the stated consideration should prompt the lawyer to inquire into the justification for the disparity in consideration. Administrative arrangements concerning estates where the decedent was known to the lawyer to be a person who had been convicted of proceeds generating crimes. If the decedent was involved or even reputed to have been involved in criminal activity, then the lawyer is dealing with a higher risk situation.

Although these businesses are not necessarily illegal, they involve sufficient indicia of criminal elements being associated with such businesses that the assumption of higher risk is warranted. Clients who offer to pay extraordinary fees for services which would not ordinarily warrant such a premium. Bona fide and appropriate contingency fee arrangements, where a lawyer may receive a significant premium for a successful representation, should not be considered a risk factor.

If the client offers to pay the lawyer a percent of the proceeds for a sale where the client wants the closing to be quick and anonymous, a lawyer should view this as a higher risk situation. The source of funds and the source of wealth. The source of funds is the activity that generates the funds for a client, while the source of wealth describes the activities that have generated the total net worth of a client. Most clients can quickly inform a lawyer of how they made or acquired their wealth. A higher risk situation may arise if the client is unable or unwilling to identify the source of wealth.

Unusually high levels of assets or unusually large transactions compared to what might reasonably be expected of clients with a similar profile may indicate that a client not otherwise seen as higher risk should be treated as such. Conversely, low levels of assets or low value transactions involving a client that would otherwise appear to be higher risk might allow the lawyer to treat the client as lower risk.

This risk factor focuses on transactions that appear out of character for a particular client because of the size of the transactions or assets. Shell companies, companies with ownership through nominee shareholding and control through nominee and corporate directors. These are the kinds of structures typically used to conceal beneficial ownership.

The risk is higher when such entities are being utilized. Situations where it is difficult to identify the beneficiaries of trusts; this might include a discretionary trust that gives the trustee discretionary power to name the beneficiary within a class of beneficiaries and distribute accordingly the assets held in trust, and when a trust is set up for the purpose of managing shares in a company that can make it more difficult to determine the ownership of the company managed by the trust.

Typically trust beneficiaries are obvious. In any situation where they are not, the risk is higher. Sometimes trusts are used to conceal beneficial ownership, but there is no reason that the beneficial owners should not be disclosed to the lawyer so the lawyer can make an assessment of the risk based on that knowledge. Services that deliberately have provided or purposely depend upon more anonymity in the client identity or participants than is normal under the circumstances and in the experience of the lawyer. As described in a previous Practice Pointer, a developer assembling multiple parcels may have a legitimate need to anonymity and, in that case, anonymity is not by itself a higher risk factor.

In the usual case a trust lawyer will know immediately if the trust arrangement has odd or unusual characteristics. Even then, some of these features may be easily explained by the client, but such factors may be a sign of a higher risk situation. Risk Variables that May Affect Risk. All lawyers and law firms are not the same. For that reason, when creating a reasonable risk-based approach and evaluating the resources that can be reasonably allocated to implement and manage it, due consideration must be given to these factors. A lawyer needs to consider whether the client and the proposed work would be unusual, risky, or suspicious.

The risk-based approach and its concept of proportionality dictates that the presence or absence of one or more of these variables may require a lawyer to perform enhanced due diligence or lead the lawyer to conclude that standard CDD can be reduced. This approach is best viewed as a sliding scale where one or more of the following variable factors may increase or decrease the perceived risk posed by a particular client or type of work.

In this situation, it would be disproportionate to perform standard CDD; rather, reduced CDD would be warranted and the focus should be on the transaction involved. Reduced CDD may simply entail confirming the on-going accuracy of the client information. The type of client influences the scope, level, and intensity of the CDD.

Lawyers should thus determine the type of entity involved, such as whether the client is a natural person or a legal entity.

If the client is a legal entity, is the client privately held or publicly traded? If the client is a legal entity, who is acting on behalf of the client in directing the performance of the Specified Activities? The level of regulation or other oversight or governance regime to which a client is subject. The reputation and publicly available information about a client. Clients that are transparent and well known in the public domain and have operated for a number of years without being convicted of proceeds generating crimes may have low susceptibility to money laundering. A client has been operating a family owned business in the same location for several generations.

The client has an excellent reputation in the community and is active in various community organizations. In this example, the client can be viewed as having a low susceptibility to money laundering. The client is publicity shy and there appears to be no publicly available information about the client. The lawyer does not know the criminal background of the client. In that situation, the lawyer should perform standard CDD unless other risk factors suggest that enhanced CDD should be performed. The regularity or duration of the relationship.

The regularity and duration of the attorney-client relationship influences the level of CDD. A lawyer who has been regularly representing a client for several decades would have no need to perform standard or enhanced CDD. Reduced CDD would be warranted in that situation.

By contrast, a lawyer who has represented a client for several decades but only deals with the client once or twice every five years should perform standard CDD given the lack of regular, on-going interaction with the client. This likely is only going to be an issue for lawyers who practice cross-border work. Even then this requested service may not be a higher risk situation.

Subject to other factors including the nature of the services and the source and nature of the client relationship , providing limited legal services in the capacity of a local or special counsel may be considered a low risk factor. If the referring counsel is well known and has a good reputation for ethics and professionalism, the risk is lower than if the referring counsel is not known or does not enjoy a good reputation. Significant and unexplained geographic distance between the lawyer and the location of the client where there is no nexus to the type of work being undertaken.

Where a prospective client has instructed the lawyer to undertake a single transaction-based service as opposed to an ongoing advisory relationship and one or more other risk factors are present. If the entire scope of representation of a new client is to form a limited liability company for the client to receive the proceeds of a sale, the narrowness of the representation may pose a higher risk factor.

Risks that may arise from the use of new or developing technologies that permit non-face to face relationships and could favour or promote anonymity. However, due to the prevalence of electronic communication between lawyers and clients in the delivery of legal services, non-face to face interaction between lawyers and clients should not, standing alone, be considered a high risk factor. For example, non-face to face, cross-border work for an existing client is not necessarily high risk work for certain organisations such as regional, national or international law firms or other firms, regardless of size, that specialize in that type of work.

It is not unusual for lawyers and clients, who have never met in person, to deal and interact with each other via e-mail and voicemail messages. This should not, standing alone, constitute a high risk factor. The nature of the referral or origination of the client relationship. A prospective client may contact a legal professional in an unsolicited manner or without common or customary methods of introduction or referrals, which may increase risk. The structure of a client or transaction.

Structures with no apparent legal, tax, business, economic or other legitimate reason may increase risk. Legal professionals often design structures even if complex for legitimate legal, tax, business, economic or other legitimate reasons. In those cases, the structure used is not a high risk factor. Trusts that are pensions may be considered lower risk. Controls for Higher Risk Clients. An assessment of the applicable risk factors may lead to the conclusion that the client may be higher risk. Lawyers and appropriate staff need to be trained to identify and detect changes in client activity by reference to risk-based criteria.

The measures and controls for higher risk clients may include the following:. It is paramount that general training be made available to lawyers and appropriate staff on money laundering methods and risks relevant to lawyers. Targeted training for increased awareness by the lawyers providing Specified Activities to higher risk clients or to lawyers undertaking higher risk work. The key is to ensure that those lawyers who will be exposed to the higher risk work be specifically trained so that they are attuned to the applicable risks.

Enhanced levels of CDD for higher risk situations see section 6.

Money laundering - Wikipedia

Peer or managerial review and oversight are important measures to take when dealing with higher risk clients. Additional review may detect other risk factors or may reveal factors that mitigate the risk. In larger firms, various management levels or committees may review these types of engagements with close scrutiny. At smaller firms, these types of formal controls may not be feasible or practical, but the lawyer should nonetheless seek additional review when exploring an engagement with a higher risk client. Services offered by a lawyer may, over time, become more susceptible to money laundering and terrorist financing.

Lawyers should periodically review their services to see if the risks of money laundering and terrorist financing occurring have increased.