When Basic AML Training Just Isn’t Enough

Deutsche Bank is reportedly leading an internal investigation into an alleged USD6bn laundry, using ‘relatively FCAbasictrainingsimple transactions’ to clean cash. Simple transactions used to launder money should be easy to identify – if the software does not pick it up, then the employees handling the transactions should be able to spot a suspicion. Basic anti-money laundering training would guide someone to tell their AML team if something in a transaction does not look right. What if it did, and the message is still not getting through?


Regulated financial institutions spend money on ineffective training programmes; employees spend time attending training sessions that offer no new information on the subject or on how to approach the issue at hand. There are a myriad reasons why training programmes do not have the desired effect, but why do firms still use them?

They do so because they have little choice. A robust regulatory environment, a requirement to train all employees on the risks associated with financial crime and the spectre of a large financial penalty for not doing so have backed banks and other regulated firms into a corner. Gone are the days of leaving all knowledge of money laundering, terrorist financing, sanctions busting and bribery to the compliance department. In the present environment, we have to train all employees, management, directors and the C-suite on financial crime risks. And this, as compliance officers know, comes at a great cost to a bank.

Compliance generates no revenue – the compliance department is a straight-up cost centre. Although the argument that having an effective compliance programme in place could save you a few million dollars in regulatory fines is quickly gaining ground, compliance officers – it appears – are still bound by tight budgets. This is sometimes to the detriment of quality training, forcing compliance officers to compromise on the standard of training they want to deliver to employees.

Compliance budgets are larger than they were a few years ago. The coffers are deep enough to attract and retain talented individuals to maintain good compliance procedures in banks, and to ensure that every employee has at least a basic grasp of anti-money laundering, sanctions and anti-bribery and corruption requirements – how it works and who the ‘bad guys’ are. But compliance training where employees sit through another session on placement, layering and integration and learn nothing more relevant to their role, do not encourage anyone to think in terms of risks posed to their business line.

Beyond the money laundering cycle

Basic training has done a great job; meet bank staff from any division in a corporate, retail or investment firm and they will be able to trot out the three stages, and this was not the case five years ago. Except now, the information comes by rote – it is learned, absorbed, recalled when asked but is it really embedded into how bank employees do their jobs?

FCAadvancedtrainingAdvanced or more specific AML/CTF training courses on the market should address the particular risks posed by different areas of banking. Looking into trade based money laundering operations using examples and knowledge from people who have worked in trade financing first hand, not simply adding a few slides to a power point describing false invoicing would be a good start; but this is rarely the case.

It’s about the people, stupid

Global AML efforts are now hinged upon a risk based approach – the basic principle of applying most resources where the greatest risks lie. To do this, employees need to understand the risks – what they look like, where and when they can occur. The emphasis must be on engaging the learners.

“To combat financial crime and terrorist financing, the people who work with clients must be aware of the risks. Not just compliance and the firm’s financial intelligence unit, but front line business people in an institution.” Kim Manchester, a compliance veteran and CEO of ManchesterCF told Financial Crime Asia.

This rings true. The customer facing employees – whether private banking relationship managers or traders creating OTC derivatives – know their client well enough to offer them precisely the right product at the right time. They also should be able to know with the same precision when a deal does not add up. Compliance officers can erroneously believe that ML/TF is not an issue for some of the more sophisticated financial products. Let’s take derivatives as an example. Some compliance officers do not consider AML/CTF something that derivatives traders need to be concerned with and so they did not need training on this area.

This is a huge oversight which could end up costing a financial institution. Mis-priced derivatives contracts can be used as an instrument to launder money and to channel funds to bribe takers. If the traders who engineer these products are able to recognise and report unusual activity – such as a price that does not chime with the market – compliance training is hitting the mark. But if these traders are sitting through a course which spends only a fraction of the time looking at how financial criminals try to manipulate sophisticated products, they might never spot a suspicious transaction. AML/CTF training must reach far beyond the basic stages and into the specific business lines run by banks on the markets. Because this is where the real financial crime takes place.


Sino-Spanish laundry brought down in Operation Snake

The combined efforts of Europol and the Spanish Guardia Civil dismantled a six year old money laundering operation earlier this week. Investigators estimate the group sluiced more than EUR300m in the proceeds of crime since 2009. snakesmurfChinese citizens living in Spain operated the laundry, collecting and cleaning the proceeds of crimes from across Southern Europe. The majority of the cleaned money was sent across European borders, Europol said in a statement.

Members of the criminal organisation using the laundry generated funds from importing counterfeit goods into the EU, using false documents. The sales generated an estimated EUR14m in untaxed profits which was cleaned using ‘low-level’ associates who ‘smurfed’ the money back to China. Smurfing is the process of breaking down a large sum of money into smaller and less remarkable amounts, using many different people to transfer funds through personal bank accounts – which are also generally thought to be low risk and off the radar.

As they developed a robust system for moving their own dirty cash out of Europe, via smurfs, establishing complex corporate structures and relying on front men and third parties for transactions, the Chinese group offered their services out to other organised crime groups. In exchange for a percentage of the laundered funds the Spanish network cleaned filthy lucre for contacts in Belgium, Italy, the Netherlands, Portugal and the UK. The going rate for laundering someone else’s money used to be a flat ten per cent, but stories from the past few years claim this has decreased to five per cent.

Proving that criminal networks will lend a hand to anything that turns them a profit, no matter how reprehensible, the group also ran clothing factories in Madrid which exploited Chinese workers.

Police officers arrested 32 people in Operation Snake, searching 65 private residences and company premises in Madrid, Barcelona and Valencia and seizing of 20 high-value vehicles and more than EUR1m in cash.

‘The Operation is still on-going and new arrests and seizures are expected to take place over the next hours and days,’ read the Europol statement.

A good result for the Guardia Civil, which has never shied away from getting its hands dirty in organised crime Eurosinvestigations. Although the EUR1m haul represents a fraction of the total figure estimated. It will be interesting to know how much this operation cost Europol and the Guardia Civil. While there is no doubt that criminal enterprises that make fortunes from exploiting people must be stopped, and cost should not deter law enforcement agencies from doing their jobs, it is worth considering where the rest of the money has gone, via which financial channels, and whether it will ever be recovered.

Philippines: Regulator’s warning highlights gaps in AML

Anti-money laundering (AML) professionals in the Philippines are warning firms against a few tactical errors which could result in legal or regulatory failures. A speech given by a senior compliance officer at the Financial Executives Institute of Cebu meeting last week highlights a few areas, which banks in the country could be struggling with. FCA - Cebu

  • Due diligence: carrying out due diligence on all clients, accounts, transactions and products should shed light on the risks they pose to the institution. There are no excuses for claiming you letting money laundering or terrorist financing occur.
  • Advice: offering a client advise on how to commit money laundering is considered an offence.
  • Reporting: an employee who fails to report on suspicious activity is liable.
  • Legal knowledge: the government expanded the definition of money laundering, to require include more institutions to report suspicions. Jewellers, dealers in precious stones, real estate brokers and similar agencies are now required to report.
  • Account freezing: account managers may not automatically lift freeze orders without getting clearance from compliance. bank managers to approach their compliance officers once periods lapse so the clearance can be secured.



Pakistan identifies 26 tax crimes as ML predicate offences

FCA - Pakistan flagThe government of Pakistan is preparing a list of serious tax crimes to be declared as predicate offences under the Anti-Money Laundering Act 2010. A total of 26 offences have been outlined so far, connected to sales tax, income tax and federal excise duty. Making tax crimes predicate offences to money laundering is one of the Financial Action Task Force‘s 40 Recommendations as of 2012.

As of July 1 2013, tax crimes are predicate offences to money laundering in Singapore. The Monetary Authority of Singapore guided financial institutions to  ‘develop, implement and enforce internal policies, controls and procedures that effectively detect, and deter the laundering of proceeds from wilful or fraudulent tax evasion through the financial system.’

The new guidance placed enhanced due diligence requirements on all ‘clients assessed to present high risk of wilful or fraudulent tax evasion.’

In March 2013, the Private Banking Industry Group’s issued the Industry Sound Practices (see Addendum 1, p 29), to ‘safeguard the industry from being used as a platform to harbour proceeds from serious tax crimes, or as a conduit to disguise the flow of such funds.’

Among the firm’s responsibilities is to communicate that clients are responsible for their own tax obligations and assess the bona fides of clients, carefully evaluating the tax-related risks both when taking on a client and via continuous monitoring

Red flags for when to apply EDD to a client and account include:

  • Client requests for holdmail services without satisfactory reasons. Clients can ask a bank to receive correspondence relating to their account. The mail is held for them until they return to the jurisdiction. The service allows a level of privacy or secrecy which the Singapore governmnet n
  • Use of complex structures
  • Non-face-to-face business relationships
  • Negative tax-related reports from media or other credible information sources on the client or on client’s jurisdiction of domicile or tax residence
  • Any additional parameters that a Covered Entity considers pertinent for conducting its risk assessments and due diligence checks.

The Industry Sound Practices also includes a ‘non-exhaustive’ five step process for EDD, including screening adverse or negative news, questioning the source of funds, using information from other financial institutions where legally possible, identifying the beneficial owners.

This guidance was targeted to the private banking sector, some of whose clients have been used to evading taxes and may be less inclined to reveal more details about the source of their wealth as private banking is notoriously discreet and protective of its wealthy benefactors. There was some concern that clients who had traditionally banking in Singapore may begin to move funds to jurisdictions with less rigorous counter-tax crime regimes.

If any readers have seen changes within Singapore, or heard of a client exodus, do please drop me a line.



Enhanced by Zemanta

Does Anti-Money-Laundering Work? Rick McDonell of FATF Answers Critics

Sadly, this is hidden behind a subscription to the brilliant WSJ Risk and Compliance Journal…

Have any Financial Crime Asia readers read the interview and would you care to share the details?

Many thanks.

FCA - How ML works cartoon


The World Federation of Diamond Bourses (WFDB) held a two-day Executive ‎Committee Meeting and Asian Summit in Singapore on February 27 and 28. ‎FCA - Monroe

The Asian Summit, organized by the Diamond Exchange of Singapore, focused on ‎the activities of regional bourses and discussed a range of issues facing the industry ‎in Asia, and their impact on the global diamond trade. ‎

WFDB President Ernest Blom addressed the fight against money laundering and ‎international terrorism. “The WFDB will be introducing stringent compliance regarding ‎KYS/KYC (Know your Supplier/Client)”, said Blom. “The introduction of this policy in ‎all WFDB affiliated bourses will clearly identify the rogue elements attempting to ‎tarnish the high standards of our trade”.

Addressing the synthetics issue, the WFDB is demanding that all affiliated bourse ‎members be required to incorporate a statement on their invoices and memos that ‎clearly define the natural origin of diamonds. The measure requires the buyer to share ‎the responsibly with the seller for this compliance.‎

Enhanced by Zemanta

Indian Bitcoin exchange produces KYC/AML guidance

A bitcoin exchange in India has published a compliance policy for dealing with clients in terms of bitcoin transfers. BTCXIndia FCA - Bitcoinhas reproduced the standard Know Your Customer and Anti-Money Laundering (KYC/AML) policy used by financial institutions and tailored the requirements to fit a typical bitcoin customer and transaction.

The KYC/AML guidelines focus on a customer acceptance policy, identification procedures, transaction monitoring and risk management. In brief, anyone who wants to open an exchange account with BTCXIndia will undergo the same due diligence as a client opening a regular bank account. Identification processes will include scrutiny of beneficial owners, monitoring will look for  complex, unusually large transactions and BTCXIndia has hinted that it will set thresholds for transaction limits if required. Remittances worth more than INR50,000 (USD798, XBT0.836) will be effected by debit to the customer’s account or against cheques and there will be no cash transactions through the firm at all, which would reduce some of its risks.

The exchange has committed itself to creating risk profiles for all customers, based on low, medium and high categories and using information derived from their identity, social/ financial status, nature of business activity, information about his clients’ business and their location. Salaried employees, government owned companies, regulators will fall into the low risk group, along with any client whose financial/business information is easy to acquire, barring high net worth individuals who will not automatically receive low risk status.

High risk examples

Customers who will require a higher level of due diligence checks, according to the policy, include:

(a) non-resident customers;

(b) high net worth individuals;

(c) trusts, charities, NGOs and organizations receiving donations;

(d) companies having close family shareholding or beneficial ownership;

(e) firms with ‘sleeping partners’;

(f) politically exposed persons (PEPs) of foreign origin;

(g) non-face-to-face customers and

(h) those with dubious reputation as per public information available.

The policy sets out clearly what the company expects from its customers and staff in terms of AML compliance and it is worth reading the policy to see just how BTCXIndia is managing this.

Legal position

The Reserve Bank of India, the regulatory body for banks and Bitcoin exchanges has vaguely mentioned that it is “watching” the crypto-currency but has not yet clarified what that means. BTCXIndia has published a useful guide on the latest legal commentary from different jurisdictions on status of bitcoin use.

AML Asia Pacific Conference – Kuala Lumpur, April 2014

The Association of Chartered Anti-Money Laundering Specialists (ACAMS) is holding its annual Asia Pacific focused AML conference in Kuala Lumpur this year.

Supported by the Malaysian Anti-Corruption Commission, the conference agenda will open the floor to discussions on tackling evolving financial crime threats, with some focus on alternative remittance systems – including hawala and hundi, virtual currencies – – Bitcoin et al, and electronic payment systems.

Click here for more information on the conference.

ACAMs ASIA PAC banner 2014

ACAMs ASIA PAC banner 2014