MASTER IN FORENSIC ACCOUNTING

& FINANCIAL CRIMINOLOGY

MAF 721 - RISK MANAGEMENT

Individual Assignment
Money laundering Regulation and Risk Based Decision-Making

For: Dr Sharifah Khadijah Syed Agil

Prepared by:
Ameer Shafiq Kamalullail

A countrys regime to counter money laundering and the financing terrorism has three primary
objectives. The first is to deter money launderers and terrorist financiers from using the countrys
financial system for illicit purposes. The second is to detect ML and TF as and when they occur,
and the third is to prosecute and punish those involved in such illegal activities.
Money laundering is a serious crime that affects the economy as a while, impeding social,
economic, political and cultural development of societies worldwide. The adverse consequences
for institutions are generally described as;

Reputational Clients that provide a stable deposit base and make reliable borrowings
may lose confidence towards an institution which is connected with money laundering

and would result to take their business elsewhere.

Transactional Impaired internal processes or relations with other banks impede the

institution, or raises its cost of operating and funding

Legal There is a risk of lawsuits, adverse judgements, unenforceable contracts, fines,
and penalties, which may include license withdrawal and management dismissal.

An effective AML/CFT regime requires significant collaboration and cooperation from the
countrys stakeholders in the public sector.
A Risk Based Approach
The purpose of Risk-Based Approach is life insurance companies and intermediaries are able to
ensure that measures to prevent or mitigate money laundering (ML) and terrorist financing (TF)
are commensurate to the risks identified. This will allow resources to be allocated in the most
efficient ways. The principle is that resources should be directed in accordance with priorities so
that the greatest risks receive the highest attention. The alternative approaches are that
resources are either applied evenly, so that all life insurance companies and intermediaries,
customers, products could receive equal attention, or that resources are targeted, but on the
basis of factors other than the risk assessed.
The risk-based approach places the responsibility on management to identify and assess the
money laundering and terrorist financing risks and to take appropriate measures to identify,
manage and monitor those risks. Risk-based approach to money laundering as covering:

Risk identification and assessment identifying the money laundering risks

facing a firm (including related legal, regulatory and reputational risks) given its
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customers, product and services profile and having regard to available

information including published typologies and assessing the potential scale and
impact of the risks if they were to crystallise.

Risk mitigation identifying and applying measures effectively to mitigate the

material risks emerging from the assessment.

Risk monitoring putting in place management information systems and keeping

up to date with changes to the risk profile through changes to the business or to
the threats.

Documentation having policies and procedures that cover the above and
deliver effective accountability from the board and senior management down.
Documenting the risk assessments undertaken to provide the rationale for
decisions made.

Financial institutions that rely on the proceeds of crime have additional challenges in adequately
managing their assets, liabilities and operations. The adverse consequences of money
laundering are generally described as reputational, operational, legal and concentration risks.
They are interrelated, and each has financial consequences, such as:
1. Loss of profitable business
2. Liquidity problems through withdrawal of funds
3. Termination of correspondent banking facilities
4. Investigation costs and fines
5. Asset seizures
6. Loan losses
7. Reduced stock value of financial institutions
Reputational risk is described as the potential that adverse publicity regarding an organizations
business practices and associations, whether accurate or not, will cause a loss of public
confidence in the integrity of the organization. As an example, for a bank, reputational risk
represents the potential that borrowers, depositors and investors might stop doing business with
the bank because of a money laundering scandal involving the bank. The loss of high-quality
borrowers reduces profitable loans and increases the risk of the overall loan portfolio.

Depositors may withdraw their funds. Moreover, funds placed on deposit with a bank may not
be able to be relied upon as a source of funding once depositors learn that a bank may not be
stable. Depositors may be more willing to incur large penalties rather than leaving their funds in
a questionable bank, resulting in unanticipated withdrawals, causing potential liquidity problems.
Operational risk is described as the potential for loss resulting from inadequate internal
processes, personnel or systems or from external events. Such losses occur when institutions
incur reduced or terminated inter-bank or correspondent banking services or an increased cost
for these services. Increased borrowing or funding costs are also a component of operational
risk.
Legal risk is the potential for lawsuits, adverse judgments, unenforceable contracts, fines and
penalties generating losses, increased expenses for an organization, or even the closure of
the organization. For instance, legitimate customers may become victims of a financial crime,
lose money and sue the organization for reimbursement. There may be investigations
conducted by regulators and/or law enforcement authorities, resulting in increased costs, as
well as fines and other penalties. Also, certain contracts may be unenforceable due to fraud on
the part of the criminal customer.
Concentration risk is the potential for loss resulting from too much credit or loan exposure to
one borrower or group of borrowers. Regulations usually restrict a banks exposure to a single
borrower or group of related borrowers. Lack of knowledge about a particular customer or who
is behind the customer, or what the customers relationship is to other borrowers, can place a
bank at risk in this regard. This is particularly a concern where there are related counter-parties,
connected borrowers, and a common source of income or assets for repayment. Loan losses
can also result, of course, from unenforceable contracts and contracts made with fictitious
persons.

Most significant laundering and terrorist financing risks in the insurance industry are found in life
insurance and annuities products. While many life insurance policies are generally structured to
pay a certain sum upon the death of the insured, others have an investment value which can
create a cash value if the policyholder wishes to cancel the policy. Life insurance policies that
have an investment feature, which can increase the death benefit as well as the cash value of
the policy, are often referred to as whole life or permanent life. Vulnerabilities in the insurance
sector include:
Lack of oversight/controls over intermediaries

Insurance brokers have a great deal of control and freedom regarding policies.
Decentralized oversight over aspects of the sales force
Insurance companies may have employees (captive agents) who are subject to the full control
of the insurance company. Non-captive agents, those who offer an insurance companys
products, but are not employed by an insurance company (i.e., the noncaptive agent will often
work with several insurance companies to find the best mix of products for their clients) may fall
between the cracks of multiple insurance companies or may work to find the company with the
weakest AML oversight if they are complicit with the money launderer.
Sales-driven objectives
The focus of brokers is on selling the insurance products and, thus, they often overlook signs of
money laundering, such as a lack of explanation for wealth or unusual methods for paying
insurance premiums.

Impact of Non-Compliance
1. Economic Distortions
Due to money laundering, the development is distorted as products are supplied at a price lower
than production cost, making it difficult for others to stay alive in the competition. The overall
productivity of the economy of a country can be decreased.

The demand for money in our

country will unpredictably fluctuate and the international exchange rates and cash flow will also
become unstable. Studies from The BASEL AML Index, Country Risk Ranking shows that Malaysia AML
Risk is moderate where Malaysia was ranked 102 out 162 countries and our risk score is 5.41 which is
classified as moderate. Assessment from BASEL and APG is very important in order to have the
confidence level of foreign investor to invest in Malaysia which would however affect our economy as a
whole. Weak law enforcement to anti-corruption and bribery, heighten the risk of money laundering in the
country. It was mentioned that the amount of worldwide money laundering is problematic, the International
Monetary Fund has estimated that between 2% and 5% of global GDP per year is generated annually as
the proceeds of crime (in US funds that is an amount in the trillions of dollars), the largest sources of
which are illicit drug manufacturing and trafficking, arms and people smuggling, corruption, fraud,
extortion, kidnapping and theft.

2. Erosion of Financial Sector

The cash flow of laundered money that runs into and out of our financial system will
weaken our financial markets.

Financial institutions will lose their reputation and

subsequently the stakeholders will lose trust and goodwill in these institutions. Severe
cases of money laundering might cause bank failures and financial collapse.
3.

Reduction in Government Revenue

The tax income is reduced due to money laundering and the government finds it is
difficult to meet up the expected revenue target (loss of government income) that can be
collected from the illegal transactions of money laundering.
4. Socioeconomic Costs
Dirty money coming from criminal acts are laundered to be a cleaned. Current criminal
operations are expanding and new criminals are being funded using the laundered
money. Money laundering also can affect the economic power of the government and
citizens to the criminals initiating more corruption and crimes.
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