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Basics of Anti Money Laundering & Combating Terrorist Financing

By:  


  



  

 


AML Anti money Laundering

AMLO Anti-Money Laundering ordinance

APG Asia Pacific Group

ARS Alternative Remittance System

ATA Anti Terrorism Act

CDD Customer Due Diligence

CTC Counter Terrorism Committee

FATF Financial Action Task Force

FIU Financial Intelligence Unit

FSRBs FATF-Style Regional Bodies

GPML Global Program against Money Laundering

IOSCO International Organization of Securities Commissioners

KYC Know Your Customer

NCCTs Non-Cooperative Countries and Territories

NPO Non Profit Organization

PEP Political Exposed Person

RBA Risk Based Approach

TBML Trade Based Money Laundering

UNDCP United Nations Drug Control Program

 
Disclaimer:

The information shared in this Book does not suggest any legal, professional or commercial advice. Anyone going to
rely on the information shared in this publication should consult to independent or appropriate professional advice
prior to doing so. The writer does not guarantee, and accepts no legal liability or responsibility in this publication
to any loss or damage suffered arising from, or in connection with, the accuracy, completeness or usefulness of the
information in this document.


All rights reserved.

No reproduction or translation of this publication may be made without prior written permission. Applications for
such permission, for all or part of this publication, should be made to;

 

 





Title 
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CHAPTER I

MONEY LAUNDERING AND TERRORIST FINANCING: UNDERSTANDING THE

TRENDS & TYPOLOGIES

Background

O ver the last three decades phenomenal growth of financial services has been observed due to
advancement in technology and globalization. This growth has led to increased cross-border
activities to boost up global financial intermediation. But on other side, this development has
promoted transnational organized crimes including Money Laundering and Terrorist Financing
(ML/ TF) enacted by underground economies.

Money laundering (ML) is defined as the process whereby criminals attempt to obscure the
illegal origin and/or illegitimate ownership of property and assets that are the results or proceeds
of their criminal activities. In Financing of Terrorism (FT) both legitimate and illegitimate
money characterized by concealment of the origin or intended criminal use of the funds. The
term Terrorist refers to any natural person who commits, or attempts to commit, participates as
an accomplice, organizes or directs others or contributes to terrorist acts.

Money laundering and terrorist financing are making global threats to international peace and
security which could destabilize world’s development and progress.

The United Nations 2000 Convention Against Transnational Organized Crime, also known as the
“Palermo Convention,” defines money laundering as The conversion, transfer, concealing,
disguising, acquisition or possession of property associated with illegal origins or intents/acts of
criminals.

Criminal Offences and Money laundering

Financial Action Task Force (FATF) has designated following categories of offences which
heavily contribute to Money Laundering & Terrorist Financing.

 Participation in an organized criminal group and racketeering

 Terrorism, including terrorist financing
 Trafficking in human beings and migrant smuggling
 Sexual exploitation, including sexual exploitation of children


  Illicit trafficking in narcotic drugs and psychotropic substances
 Illicit arms trafficking
 Illicit trafficking in stolen and other goods
 Corruption and bribery
 Fraud
 Counterfeiting currency
 Counterfeiting and piracy of products
 Environmental crime
 Murder, grievous bodily injury
 Kidnapping, illegal restraint and hostage-taking
 Robbery or theft
 Smuggling
 Extortion
 Forgery
 Piracy
 Insider trading and market manipulation

Difference between Money laundering and terrorist financing

The fundamental difference between terrorist financing and money laundering involves the
origin of the funds. In Terrorist financing the miscreant use funds for illegal religious, political or
specified purposes, but the trail of money is not necessarily may come from donations,
governmental covert funds or aid from agencies. Terrorist financing may be supported both by
legitimate and illegitimate proceeds. But money laundering always involves the proceeds of
illegal activity. The rationale of laundering the money is to enable the money to be used with
lawful rights. From a technical perception, the frequent laundering processes used by terrorists
and other criminal organizations are similar. Although it would seem commonsensical that
funding from legitimate sources does not need to be laundered, there is a need for the terrorist
group to obscure the link between it and its genuine funding sources.

Terrorists and money launderers use the similar methodologies to rout their money through
various channels to avoid detection, such as placement, structuring/layering and integration the
payments to avoid reporting and underground banking, such as the ancient system of Hawala or
Hundi.

Stages in Money Laundering & Terrorist Financing Process

Money laundering & terrorist financing often involves a multifaceted series of transactions that
are usually complicated to trail. Generally following three phases of money laundering are
involved:

1- Placement
2- Layering
3- Integration


 The Processes of Moneyy Laundering and Financing of Terrorism




  

   
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Placement: The physical placem ment or disposal of cash or other assets deriveed from criminal
activity. While using placementt mode, the money launderer instill the illegal proceeds
p into the
financial channels or financiall system. The illegal proceeds may be placced in Financial
institutions, casinos, shops and other designated non financial businesses, bo oth national and
internationally. In this stage the ttransactions may be processed such as:

 Breaking up large amouunts of cash into unidentified able sums and depositing them
directly into various bankk accounts.

 Channelizing cash acrosss borders to deposit in foreign financial instittutions or to buy

high-value goods— suchh as artwork, antiques, and precious metals and stones—
s that can
then be resold for paymennt by other instruments e.g., check or bank transsfer.

Layering: The severance or ppartitioning the illicit proceeds from their orig gin by layers of
financial transactions with motivves to conceal the source of the proceeds. This particular
p stage is
intended to reshape the proceedss of the crime into another form and creating complex layers of
unds.
financial transactions to avoid thee audit trail, supply channel and ownership of fu

This stage can involve processes such as:

  
  Frequently sending wire transfers of funds from one account to another, sometimes to or
from other institutions or jurisdictions.

 Converting deposited cash into monetary instruments (e.g. traveler’s checks).

 Reselling high-value goods and prepaid access/stored value products.

 Investing in real estate and legitimate businesses.

 Injecting money in investments such as stocks, bonds or life Insurance

 Maneuvering shell companies or other structures whose primary motive is to obscure the
ownership of assets.

Integration: Production of apparent legitimacy to illicit proceeds through the re-entry of the
funds into the economy by showing to be normal business activities or personal transactions.
This stage entails using laundered proceeds in seemingly normal transactions to create the
perception of legitimacy. The parties involved in laundering may choose to input the funds in
real estate, financial ventures or luxury assets. A successful integration transaction make it
difficult to distinguish between legal and illegal wealth. This stage provides a launderer the
opportunity to increase his wealth with the proceeds of crime.

Typologies in Money Laundering &Terrorist Financing

Basically, Typologies involve the study of methodologies, techniques and trends of money
laundering and terrorist financing. As a series of ML or TF arrangements are conducted
repetitively in a similar manner or using the same methods, we notify them as a “typology”. The
FATF & APG undertake comprehensive typologies research to better understand the money
laundering and terrorist financing environment. The following examples taken from APG
research provide a few key money laundering and terrorist financing methods, techniques,
schemes and instruments.

Money exchanges / Converting Cash: This typology is being used to aid the process of
smuggling to another jurisdiction or to exploit low reporting requirements on currency exchange
houses to minimize risk of detection.
Use of couriers for currency smuggling: illegal movement of currency to avoid transaction /
cash reporting measures.
Smurfing: using a novel technique involving frequent transactions (deposits, withdrawals,
transfers), to avoid detection threshold reporting compulsions.
Use of Financial instruments: Use of credit cards, cheques, promisory notes etc. to have funds
held in a financial institution, often in another jurisdiction.
Purchase of high value commodities: A method to purchase intensive high value products like
gems, precious metals etc. to mask the ownership or move value without detection and avoid
financial sector AML/CFT measures – e.g., movement of diamonds to another jurisdiction (a
detailed presentation in Hollywood Movie “The Blood Diamond”.

  
Investment in real estate, race horses and vehicles: Illicit proceeds are invested in high value
negotiable goods to take advantage of reduced reporting requirements to make the source of
proceeds of crime incomprehensible.
Mutual Commodity exchanges: Motive of this methodology is avoiding the use of money or
financial instruments in value transactions to evade financial sector AML/CFT measures – e.g., a
direct exchange of heroin for gold bullion.
Wire transfers: This typology is assisted by electronically transfers. The funds are routed
between financial institutions and often to another jurisdiction to avoid exposure and
confiscation.
Alternative Remittance Channels: Underground banking systems are being used to remit
money. Various case studies revealed the features that most of money launderers and terrorist
financiers use this mode of money remittance because it is most confidential method to move
value without detection and to obscure the identity of those controlling funds. These channels are
eye-catching to terrorist financiers. Al Qaeda successfully instigated its operations because of
effective transfers of money by hawala/hundi/alternative remittances before September 11, 2001.
Trade-based manipulations: To assist the agenda of money laundering and terrorist financing,
the malpractices used by malefactors are invoice manipulation, over/under invoicing and
alterations in trade finance routes and commodities to avoid financial transparency laws and
regulations.
Gambling & Gaming activities: These activities involve buying tickets from legitimate
players; using casino chips as currency for illicit transactions, using online gambling to obscure
the source of funds. Most of activities are performed in casinos, horse racing, internet gambling
etc.
Exploitation of (NPOs) non-profit organizations: Terrorist funds and other illegal proceeds
may be legitimized by using the shield of (NPOs) non-profit organizations.
Investment in Stock Exchanges or Capital markets: There are motives to avoid exposure of
proceeds of crime by purchasing negotiable instruments available in Capital markets.
Intermingling of Legal business with illegal activities: To obscure the source of funds this a
Instrumental step by money launderers to combine the proceeds of crime with legitimate
business monies.
Use of Front/shell companies: Presently, launderer and terrorists are using these bodies to avoid
the identity of persons controlling funds and take advantage of relatively low reporting
requirements.
Trust company service providers: These are persons and entities that professionally create,
administrate or manage the corporate vehicles. These vehicles are used to obstruct the access to
persons controlling funds.
Use of trusts: The term trust expresses the legal relationship that is accorded by a person (the
“settlor”) where assets are handed over to control of another person (the “trustee”) for the benefit
of one or more beneficiaries. This mode of involvement evades the identity of persons
controlling illicit funds.
Use of “gatekeepers” or professional services: The involvement of lawyers, accountants,
brokers etc. with intentions to hide and guard the beneficiaries and the source of illegitimate
funds.
Alternative Delivery Channels: Exploiting the new payment technologies for money
laundering and terrorist financing is another typology with impending threats. Examples include
computer, ATM cards and cell phone-based remittance and payment systems.

  
Money Laundering and Terrorist Financing are emerging abruptly with potential negative
consequences on the economic, political and social progresses. There is dire need for countries
to have more strong anti-money laundering policies, regulations and independent authorities to
cope with this concern. Internationally, effectual efforts e.g., contributions from FATF, IMF,
WB, and UNO, have been launched to fight against ML/TF and most of the countries have
shown exceptional cooperation in connection to devise monitoring and surveillance systems for
financial institutions, cross border money & drug smuggling, regulatory measures and
international cooperation to prevent, detect and respond money laundering and terrorist
financing.

A s financial institutions have more diverse products like; customer accounts, wire transfers,
correspondent banking and foreign exchange services etc. and there are more concerns of
exploitations of these entities. Therefore, more dynamic efforts like strengthening the AML/CFT
policies, reporting officer designation based on experience and qualification, co-operation with
the supervisory authority, effective tools for customer due diligence, rapid monitoring and
responding to suspicious transactions and AML/CFT employee training program can play their
considerable role in combating money laundering and terrorist finance

Cyber Laundering and New Payment Methods & ML/TF

Introduction

Information and communication technologies (ICT) have revolutionized every sector of life.
Internet’s role in linking up computers globally put forward exceptional opportunities to societies
worldwide. The Internet facilitates the people and organisations in all affairs e.g., to converse,
exchange information, to offer and make use of services, to perform their transactions, to manage
their accounts/businesses and to exercise their privileges. But the other side of coin depicts dark
shadows of this virtue, the exploitation of ICT and the Internet makes the world susceptible to
terrorization of misuse such as cybercrime. The abuse of the Internet facilities by money
launderers is potentially a considerable threat (Solicitor General Canada, 1998 Veng Mei Leong,
2007).

(Rob McCusker, 2005) defined the money laundering as the process of concealing the source of
money that has been derived from illicit means. Money laundering is increasingly becoming a
cybercrime. (Stephen Jeffrey Weaver, 2005) defined “The process of “utilizing Internet-based
electronic wire transfer methods, such as Internet banking or online gambling, in furtherance of
disguising the source of illegally obtained money”. Cyber-laundering is channelized by using
various methodologies, operations and procedures on account of financial services providers,
bank transfers, cash withdrawals/deposits and manipulation of digital/ electronic currencies
(“Cyber Laundering”, 2002). Anonymity, no face to face contacts, speed of the transactions are
few features of the cyber world which attract criminals /launderers (Skalski, 2004 GIFI, 2008).

  
Methods & Techniques of Cyber Laundering

Cyber launderers use various methods/techniques to fulfill their shadowy motives. Followings
are few key ways;

Malwares

Primary tools for committing cybercrime are malicious software. According to Sophos Security
Threat Report 2010, Malware evolved itself with a complex economic infrastructure and well-
organised and well-funded criminal gangs. Some malware e.g., viruses, worms and Trojans
having features to remove security applications, download additional malware or infect files,
steal login, account credentials and other data are considered the pinnacle malicious code
samples.

Botnets
Botnets are considered the primary threat with regard to cybercrime and information security.
(Commtouch report, 2010) explained that they target the groups of individual computers that are
infected with a piece of malware which turns these infected computers into “robots” (bots) or
“zombies” that are controlled remotely and without the knowledge of the owners of the
computers by the originators or masters of the botnet (“bot herders”) from command and control
servers. The malware may moreover be exploitable to propagate itself to further systems.

Money mules

“Money mules” are generally agents that act as money couriers and constitute an integral part in
the clandestine movement of black money. Chances are there that mules may be or be not having
knowledge of hidden motives of offenders or their motivators. Some time they have not access to
actual circumstances that they are part of criminal operations
(www.banksafeonline.org.uk/moneymule). They may be contacted and recruited through various
ways e.g., via spam, recruitment websites, emails and SMSs tagged with texts “financial
manager”, “work at home” or other relevant vacancies in a shell company.

Social networking platforms

Both the social networking sites and the number of users expanded significantly in last decade
(http://www.facebook.com/press/info.php?statistics). Cyber launderers seek their benefits and
motives by spreading malware, track their prey, mules and missions of cybercrimes and
ultimately evolve security risks. According to (Sophos’s Report, 2010), social networks have
become a viable and lucrative market for malware distribution with Web, stealing data,
displaying fake anti-virus alerts and generating income for criminals.

Cloud computing

With the passage of time, the technological developments tried to offer more options and
conveniences to humanity but in addition to facilities, this phenomenon also explored more
  
vulnerability to cybercrime. Similar trend is “cloud computing”, that is defined as the migration
of data and services from specific computers to servers “somewhere” in the clouds. No doubt this
development has significantly impacted the data storage options. But on other side, this raises the
concerns of security implications, security breaches and rapid data stolen.

Online banking attacks, misuse and account take-over by Identity theft

The Internet and other information and communication technologies accomplice the fraud acts
related to identity theft.(Koops, Bert-Jaap/Leenes, Ronald ; 2006) defined identity theft as “fraud
or another unlawful activity where the identity of an existing person is used as a target or
principal tool without that person’s consent”. By abusing personally identifiable information
(PII), the launderers make use of their dirty money and channelize it to some other safe
jurisdictions.

Phishing is considered as key social engineering techniques which are primarily used by
launderers on the Internet to steal identity-related information for their own intentions.
According to (Avira, 2011) Financial institutions/banks, online payment systems and auction
websites are more vulnerable to phishing and its allied forms of phishing like “smishing” ( using
cell/mobile phone text messages to acquire the personal identity information), “spear phishing”
(personalized communication via message targeting single individual), “pharming” (routing
website traffic from a legitimate website to a bogus website to capture identity codes) and
“spoofing” (an individual or program is camouflaged to gain confidence with intention to enter
prey’s details into a counterfeit website).

Banking Trojans

Banking Trojans are malwares that are used to captures the exchange of codes or information
between a customer and its online bank. The cyber launderers exploit the captured account
details for movement of funds.

Internet payment services

The term ‘internet payment services’ (IPS) is generally used to illustrate Internet based
movement of money from remitter to beneficiary. IPS accounts and transactions can be misused
for fraud and money laundering purposes in a similar manner as the bank accounts.

Digital/electronic currency

The term Digital or electronic currency expresses a value exchange system that operates
electronically. Electronic currency is featured as encrypted code in lieu of the value attached to
the certain “account”. According to (FATF Report, 2014), it is digital representation of value that
can be digitally traded and functions as (1) a medium of exchange; and/or (2) a unit of account;
and/or (3) a store of value, but does not have legal tender status (i.e., when tendered to a creditor,

  
is a valid and legal offer of payment) in any jurisdiction. Virtual currency’s global reach e.g.,
access via internet, quick fund transfer, cross border payments make it more vulnerable to
AML/CFT risks. There are various forms of virtual currencies like Bitcoin; e-Gold (defunct);
Liberty Reserve (defunct); Second Life Linden Dollars; WebMoney, Project Entropia Dollars; Q
Coins; and World of Warcraft Gold.

Prepaid cards

Prepaid cards are gaining their familiarity with steps of time. These cards are used as tool for
consumer electronic payments and can be used by launderers to channelize their ill gotten funds
from a jurisdiction to another (layering stage) or to buy products and/or services for the their
benefit (integration stage).

On-line Gambling

For purpose of money laundering and tax evasion, the criminals use Internet gambling as this is
perfect way to legitimize ill-gotten gains with the help of online medium. Money launderers
idealize online gambling because of; off-shore financial centers, lack of regulatory practices and
tracing ownership is difficult task.

The Way Forward

No doubt, advancement in information technology and telecommunication is facilitating the

customers, users, businesses, organizations and governments with its effective, efficient and
swift paces. Further features like speed of transactions, access to customers or counterparts and
capacity to extend beyond national border elaborate its vital significance (Cyber Laundering,
2002). But in meantime, cyber savvy launderers exploiting this technology to place, channelize
and integrate their illicit funds.
There is utmost need for more organized and methodical future approaches and strategies e.g.,
fraud reporting mechanisms, public awareness, mutual cooperation, information sharing on
national and international basis, establishing specialized units, trainings, formulation of
regulations and resourced based supports for prevention of cyber based money laundering and
the financing of terrorism.

THE HAWALA SYSTEM: A CATALYST FOR MONEY LAUNDERING &

TERRORIST FINANCING

The word “Hawala” comes originally from the Arabic language and being recognized by various
terms like Hundi (a Hindi word meaning “collect”), Chiti banking (referring to the way the
system operates), Chop Shop banking (China), and Poey Kuan or flying money (Thailand). The
Hawala system has been used since 8th century in a number of jurisdictions and is associated
with a money transfer mechanism (money transfer without actual money involvement, or any
wire transfer”) that operated extensively in South Asia many centuries ago, and which still exists
there, as well in the Middle East, and in Africa.
  
The Hawala System is an alternative remittance system or informal value transfer system or
underground banking based on trust which subsists and channelizes its activities outside of, or
parallel to conventional banking or financial institutions. Apart from risk free remittance of
money from expatriates the ancient system of Hawala is being used both by terrorists and money
launderers to move their money in ways to avoid detection and reporting.

Processes in Hawala Systems

There is usually no physical movement of currency and a lack of formality with regard to
verification and recordkeeping as described in figure below. The money transfer takes place by
coded information that is passed through chits, couriers, letters or faxes, followed by telephone
confirmations.

Figure: Hawala Process

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Note: Suppose Mr. (A) received that particular amount as legitimate earnings by physical labor or illicit proceeds
of drugs, donations, terrorist aids, agencies aid, corruption gratifications, tax evasion etc.

Features of Hawala System

  
According to a recent IMF report the Hawala has several characteristics that guarantee its
widespread use. They include speed, convenience, versatility, and potential for anonymity. As
per conclusion from FATF‘s questionnaire (study conducted in various jurisdictions) cheaper
money transmission, faster money transmission, cultural preference, lack of banking access in
remittance receiving and sending country, many higher confidence in Hawala and other similar
service providers than in the banking system, evade currency controls and international
sanctions, evade taxes, transfer or conceal criminal proceeds are features of Hawala that make it
more convivial and thriving.

Types of Hawala System Based on Legitimate and Illicit Use

Pure traditional (legitimate) Hawala;

This may be termed as white Hawala which is referred to legitimate transactions. It is being used
to remit low-value remittances generally from expatriates. This mode of Hawala is welcomed
and mostly used by legitimate customers/migrants because of fast and cost-effective method,
geography, culture, illiteracy, economic factors, kinship, ethnic ties, convenient and easy to use,
personal relations and lack of banking access or outside the reach of the traditional financial
sector.

Mostly Pakistanis working abroad prefer Hawala system because of illiteracy, low wages, and
financial exclusion, unawareness to rules & regulations and ethnic factors.

Hybrid traditional (sometimes unwitting) Hawala;

hese channels are not principally set up to move legitimate money but may be engaged in
illegal processes such as funneling of money generated from tax evasion, corruption, to evade
currency controls and to avoid jurisdictional sanctions, etc.

Criminal
   Hawala;

In some Jurisdictions Hawala systems are infatuated by illegitimate money flows and are often
controlled by criminals or criminal groups. They therefore pose for a high criminal money
laundering and terrorist financing risk. This system supports other offences including tax fraud,
currency offences, drugs proceeds, ransom acts and corruption etc. Sometimes these Criminal
Hawala systems are part of well-developed criminal groups that have been formulated
intentionally to enable illegitimate activities.

This system may be termed as black Hawala due to involvement of illegitimate transactions e.g.,
money laundering, narcotics trafficking and fraud etc. Some users, however, exploit the system
to launder money obtained or intended for terrorist financing/ illegal activity. Al Qaeda and other
terrorist organizations make good use of the ancient Hawala (ARS) underground banking
system. This is also used by individuals and entities seeking to evade currency trail, tax
obligations, and sentences/sanctions.

  
The Hawala System; a Vehicle for Money Laundering & Terrorist Financing

Money launderers use three phases to accomplish their motives: placement, layering and
integration. As Hawala system is a remittance system, it can be used at any phase. There are
various reasons why Hawala systems may pose a money laundering and terrorist financing
threats for nations. These include a lack of supervisory intents and preferences; ease of
settlement across jurisdictions through already agreed value or cash outside of the banking
system; the exploitation of businesses unregulated by financial regulators; the consented
settlement and the jumbling of licit and illicit proceeds, lack of commitment and non compliance
to effective regulation.

It is worth noting that Al Qaeda moved much of its money by Hawala before September 11,
2001. Al Qaeda used about a dozen trusted hawaladers, who almost certainly knew of the source
and purpose of the money. Al Qaeda also used both unwitting hawalas who probably strongly
suspected that they were dealing with al Qaeda, but were nevertheless willing to engage in the
transactions.

Pakistan is facing hostile insurgency from terrorist/extremist and ultimate lineage of monetary
support is through alternative remittance systems. This funding may be channelized through
money laundering processes and Hawala systems. U.S. Treasury Department study identified
Hawala as a means of money laundering for drug trafficking and other crimes in Pakistan. The
report said Pakistan, India, and Dubai on the Persian Gulf form the ‘Hawala triangle’ to move
money secretly worldwide. Worldwide, approximately US $500 billion are remitted using this
particular system and Pakistanis are involved in transacting estimated $7 billion through this
system each year.

Attributes of Hawala Operators

Hawala service provider may be spotted by some attributes like;

 Generally they deal with Cash-in and cash-out businesses.

 They perform their services in vicinities of expatriates.
 Mostly offer legitimate financial services to migrants.
 Sometimes they offer services for illegal/illicit transportation of money across borders.
 They are visible and available to their customers
 They run front businesses.
 They are linked to similar operators in other countries.
 They share only partial information or have limited communication with their customers.
 Their bank accounts show heavy deposit activities.
 They are engaged in other business like Car Rentals (usually non-chain or franchise)
 Telephones/Pagers Import/Export, Travel and Related Services, Jewelry (gold, precious
stones) Foreign Exchange, Rugs/Carpets and Used Cars.

  
Hawala System in Pakistan

Presently, Pakistan is combating against two malicious menaces e.g., money laundering and
terrorist perils which are supposed to be escorted by alternative remittance system called hundi
or Hawala. This system is being assessed as concealed dagger for security aspects of Pakistan.
Although controls have been significantly tightened since 2002. As per FATF recommendation
the Hawala system should be regulated by requiring hawaladars to obtain licenses, In June 2004,
the State Bank of Pakistan notified all hawaladars to register as authorized foreign exchange
dealers and to convene minimum capital requirements. Government of Pakistan is making all
possible efforts to control and regulate that particular system. Consequently, legitimate
remittances from the roughly five million Pakistani expatriates residing abroad, sent via the
Hawala system prior to 2001, now flow mostly through the formal banking sector. Despite the
State Bank of Pakistan’s exertions, unlicensed Hawala operators still conducting their illegal
dealings in parts of the country predominantly in high profile cities like Peshawar and Karachi.

How to Combat Hawala System

The gravity of exploitation of Hawala System may be lessened by pursuing the Financial Action
Task Force (FATF)’s Recommendation which deals with alternative remittance and contains
three major elements; (a) inclusion of persons or legal entities providing money/value
transmission services in mainstream line by licensing or registration processes, (b) formulation &
implementation of regulations on national and international level (c) imposition of sanctions on
money/value transmission services, including informal systems or networks in connection to
failure of registration and non compliance. One suggestion for Taxation of Hawala network may
prove a handy tool to make it transparent and regulate the system. Governments may collect
significant amount of revenue on account of taxation especially countries like Pakistan where
estimated $7 billion is channeled through this system each year.

In nutshell, effective regulations and supervision, awareness raising, compliance, monitoring and
sanctions against malefactors of Hawala systems may trim down the magnitude of money
laundering and terrorist financing.

Non Profit Organizations: Concepts and Inherent Risks

Non-profit organisations (NPOs) are a vibrant and integral part of the contemporary global
environment and play a significant role in combating terrorism. The wide range, geographic
reach, and operational endurance of their activities arguably make NPOs unique among
international actors. FATF define a non-profit organisation as a legal person or arrangement or
organisation that primarily engages in raising or disbursing funds for purposes such as charitable,
religious, cultural, educational, social or fraternal purposes, or for the carrying out of other types
of “good works”. Good works may be included the help of famine, flood, earth quick etc.
effected people on earth.

  
Exploitation of Non-profit organisations (NPOs)

The State Department’s Coordinator for Counterterrorism Report in 2002 noted that “terrorist
organizations can bore into any legitimate enterprise to try to divert money for illegitimate
purposes.” The next targets were charities abusing humanitarian causes and other untrustworthy
non-governmental organizations. These outfits are using the money donated to them, for
humanitarian purposes, to actually fund death and destruction.

Methods and Risks of Abusing NPOs

According to FATF’s Best practices paper on combating the abuse of non-profit organisations,
followings are methods to exploit the NPOs. Very same methodologies may be used to abuse
Islamic NPOs.

Diversion of Funds: An NPO, or an individual acting on behalf of an NPO, diverts funds to a

known or suspected terrorist entity. Maktab alKhidamat has been alleged to have been
transformed by Osama bin Laden into Al Qaeda.

Affiliation with a Terrorist Entity: An NPO, or an individual acting on behalf of NPO,

maintains an operational affiliation with a terrorist organisation or supporter of terrorism.
Internationale Humanitäre Hilfsorganisation has financially supported Hamas, while presenting
activities to donors as humanitarian help.

Abuse of Programming: NPO-funded programs meant to support legitimate humanitarian

purposes are manipulated at the point of delivery to support terrorism. Tamil Coordinating
Committee has been accused to support terrorism.

Support for Recruitment: NPO-funded programs or facilities are used to create an environment
which supports and/or promotes terrorism recruitment-related activities. Afghan Support
Committee has been alleged to have funneled support to fighters in Afghanistan.
False Representation and Sham NPOs: Under the guise of charitable activity, an organisation
or individual raises funds and/or carries out other activities in support of terrorism. The Sanabal
Charitable Committee is considered a fund raising front for the Libyan Islamic Fighting Group.

Red Flags indicating abuse of NPOs:

Here are list of red flags which highlight the possible exploitation of NPOs, excerpted from FATF’s
report “Risk of terrorist abuse in non-profit organisations” and “Best practices paper on combating
the abuse of non-profit organisations”.
 Use of cash couriers to transfer NPO  Requests to transfer NPO funds are
funds into areas with known terrorist accompanied by vague justifications.
activity. NPO transactions are structured NPO uses a shell organisation as a
to avoid transaction reporting. funding conduit.


 
 NPO representatives fail to declare large
currency amounts at international
borders. NPO bank accounts are used by
entities whose own accounts are under
restrictions.
 NPO funds are transferred to other
entities believed to be engaged in, or
supporting, terrorist activities.
 NPO receives funds from entities
believed to support terrorist activities.
 NPO funds are comingled with personal
or private business funds.
 Bank accounts related to some programs
or activities are concealed.
 NPO funds are transferred to entities not
associated with declared programs or
activities.
 NPO facilities are frequented by
individuals believed to support terrorist
activities.
 NPO procures dual-use equipment.
 Resources of an NPO are transferred to
an entity known to be engaged in, or
supporting, terrorist activity.
 NPO receives resources from an entity
believed to support or be engaged in
terrorist activities.
 NPO shares property with another
organisation believed to support terrorist
activity.
 NPO activities are found to support
individuals or organisations whose
identities correspond to those of listed
entities.
 Existence of reliable information
indicating an NPO or its representatives
are engaged in supporting terrorist
activity.
 Existence of reliable information
indicating an NPO or its representatives
are linked to third parties that support or
are engaged in terrorist activity.
 The identities of proscribed terrorist
entities are found to match the identities
of NPO directing officials or employees.
 Entities operating in areas with known
terrorist activity transfer funds into the
bank accounts of an NPO, directing
officials, or employees.
 NPO transfers resources or conducts
activities in an area where terrorist
entities are known to have a substantial
presence.
 NPO records are maintained in an area
where terrorist entities are known to
have a substantial presence.
 NPO representatives travel frequently
into areas where terrorist entities are
known to have a substantial presence.
 NPO has unreported activities,
programs, or partners.
 NPO uses an unusually complex
financial network for its operations.
 NPO avoids mandatory reporting
requirements.
 NPO programs and activities are
vaguely explained to oversight or
regulatory bodies.
 Third parties are used to open NPO bank
accounts or carry out some transactions.
 NPO expenditures are not consistent
with its programs and activities.
 NPO is unable to account for the final
use of all of its resources.
 NPO is unable to account for the origin
of its
 A lead from the public alleges that an
NPO is engaged in activities related to
terrorism.
 NPO merges with another organisation
believed to support terrorist activities.
 NPO humanitarian assistance is targeted
towards supporting individuals directly
linked to terrorist entities.
 Directing officials of an NPO are, or
have been, directing officials of other
organisations believed to support
terrorist activity.
 NPO suffers from an internal conflict,
where one faction is known to be
sympathetic or actively supportive
towards terrorist entities.
 NPO has inconsistencies in its
accounting and/or mandatory reporting.
 NPO has opaque leadership or decision-
making structures.
 NPO or NPO representatives use
falsified or conflicting documentation.
  Individuals involved in terrorist activities
are linked to an NPO.  Criminal activities consistent with terrorist
 NPO publications or speakers support operations are concealed in NPO facilities.
terrorism or terrorist entities.  NPO directing officials or employees are
 Advertised NPO is fictitious. engaged in other criminal activities
 NPO facilities conceal criminal activities. consistent with terrorist operations.
 NPO directing officials or employees are
engaged criminal activities.
 Directing officials or employees of an
NPO engage in activities that support
recruitment to violence.
How to prevent NPO’s exploitation

There is utmost needs to develop principles and strategies to ensure that NPOs are not misused
by terrorist organisations: (i) to pose as legitimate entities; (ii) to exploit legitimate entities as
conduits for terrorist financing, including for the purpose of escaping asset freezing measures; or
(iii) to conceal or obscure the clandestine diversion of funds intended for legitimate purposes, but
diverted for terrorist purposes.

As per Interpretive Note to Recommendation 8 (FATF, 2012), an effective approach to

protecting the NPO sector involves the following four elements:

1) Ongoing outreach to the sector

2) Proportionate, risk-based supervision or monitoring
3) Effective investigation and information gathering
4) Effective mechanisms for international cooperation

FATF’s 8th Recommendation

The 8th Recommendation of FATF emphasized that countries should adopt measures to identify
and take effective action against NPOs that either are exploited by, or actively support, terrorists
or terrorist organisations should aim to prevent and prosecute, as appropriate, terrorist financing
and other forms of terrorist support. Where NPOs suspected of, or implicated in, terrorist
financing or other forms of terrorist support are identified, the first priority of countries must be
to investigate and halt such terrorist financing or support. The FATF’s 8th Recommendation
suggest following general principles to combat the abuse of NPOs.

a) Past and ongoing abuse of the NPO sector by terrorists and terrorist organisations requires
countries to adopt measures both: (i) to protect the sector against such abuse, and (ii) to identify
and take effective action against those NPOs that either are exploited by, or actively support,
terrorists or terrorist organisations.

b) Measures adopted by countries to protect the NPO sector from terrorist abuse should not
disrupt or discourage legitimate charitable activities. Rather, such measures should promote


transparency and engender greater confidence in the sector, across the donor community and
with the general public, that
Charitable funds and services reach intended legitimate beneficiaries. Systems that promote
achieving a high degree of transparency, integrity and public confidence in the management and
functioning of all NPOs are integral to ensuring the sector cannot be misused for terrorist
financing.

c) Measures adopted by countries to identify and take effective action against NPOs that either
are exploited by, or actively support, terrorists or terrorist organisations should aim to prevent
and
Prosecute, as appropriate, terrorist financing and other forms of terrorist support. Where NPOs
suspected of, or implicated in, terrorist financing or other forms of terrorist support are
identified, the first priority of countries must be to investigate and halt such terrorist financing or
support. Actions taken for this purpose should, to the extent reasonably possible, avoid negative
impact on innocent and legitimate beneficiaries of charitable activity. However, this interest
cannot excuse the need to undertake immediate and effective actions to advance the immediate
interest of halting terrorist financing or other forms of terrorist support provided by NPOs.
d) Developing cooperative relationships among the public, private and NPO sector is critical to
raising awareness and fostering capabilities to combat terrorist abuse within the sector.
Countries should encourage the development of academic research on, and information sharing
in, the NPO sector to address terrorist financing related issues.
e) A targeted approach in dealing with the terrorist threat to the NPO sector is essential given
the diversity within individual national sectors, the differing degrees to which parts of each
sector may be vulnerable to misuse by terrorists, the need for legitimate charitable activity to
continue to flourish, and the limited resources and authorities available to combat terrorist
financing in each country.
f) Flexibility in developing a national response to terrorist financing in the NPO sector is also
essential, in order to allow it to evolve over time as it faces the changing nature of the terrorist
financing threat.

Apart from all measures, there is a need to develop a system of effective CFT measures at
national and international level which respond the possible terrorist threats. Secondly,
Operational efficacy of the NPO sector is mandatory to maintain the effectiveness and efficiency
in the delivery of programs and activities. Thirdly, all stakeholders of NPO sector should ensure
that funds or material entrusted to the sector by donors are used for the purposes they were
intended and meet services provided to beneficiaries meet international humanitarian standards.
Fourthly, the State should enact independent actions to ensure transparency and compliance of
rules and standards set by international bodies (such as the FATF 40 Recommendations, UNO
resolutions etc.).


Political Exposed Persons: Inherent Risk to Financial Systems

Introduction

According to FATF’s revised 40 Recommendations of 2012, a PEP is an individual who has

been entrusted with prominent public functions in a foreign country, such as a head of state,
senior politician, senior government official, judicial or military official, senior executive of a
state-owned corporation or important political party official, as well as their families and close
associates. The term PEP does not extend to middle ranking individuals in the specified
categories. Various country regulations will define the term PEP, which may include domestic as
well as foreign persons.

The Third Money Laundering Directive of European Union on the Prevention of the Use of the
Financial System for the Purpose of Money Laundering and Terrorist Financing includes the
following definition of a politically exposed person: “Politically exposed persons” means natural
persons who are or have been entrusted with prominent public functions and the immediate
family members, or individuals known to be close associates, of such persons. A person should
not be considered PEPs after at least one year of not being in a prominent position.

Foreign PEPs: individuals who are or have been entrusted with prominent public functions by 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.

Domestic PEPs: individuals who are or have been entrusted domestically with prominent public
functions, 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.
International organisation PEPs: persons who are or have been entrusted with a prominent
function by an international organisation, refers to members of senior management or individuals
who have been entrusted with equivalent functions, i.e. directors, deputy directors and members
of the board or equivalent functions.

Family members are individuals who are related to a PEP either directly (consanguinity) or
through marriage or similar (civil) forms of partnership.

Close associates are individuals who are closely connected to a PEP, either socially or
professionally.

PEPs: High Risk Customers

Generally, all risk categories can be broken down into the four levels of risk: Prohibited, High
Risk, Medium Risk and Standard or medium Risk.


The risks in high risk category are significant, but are not necessarily prohibited. To mitigate the
heightened risk presented, the firm should apply more stringent controls to reduce the risk, such
as conducting enhanced due diligence and more rigorous transaction monitoring. Countries that
are noted for corruption or drug trafficking are generally deemed high risk. High risk customers
may include PEPs; high-risk products and services may include correspondent banking and
private banking.

Political Exposed Persons: Red flags

PEPs are aware that their status as a PEP may facilitate the detection of their illicit behaviour.
This means that PEPs may attempt to shield their identity, to prevent detection. Examples of
ways in which this is done are:

 Use of corporate vehicles (legal entities and
legal arrangements) to obscure the beneficial
owner.
 Use of corporate vehicles without valid
business reason.
 Use of intermediaries when this does not
match with normal business practices or
when this seems to be used to shield identity
of PEP.
 Use of family members or close associates
as legal owner.

Specific behaviour and individual characteristics of PEPs may raise red flags / risk levels or
cause a suspicion;

 Use of corporate vehicles (legal entities and
legal arrangements) to obscure i) ownership,
ii) involved industries or iii) countries.
 The PEP makes inquiries about the
institution’s AML policy or PEP policy.
 The PEP seems generally uncomfortable to
provide information about source of wealth
or source of funds.
 The information that is provided by the PEP
is inconsistent with other (publicly
available) information, such as asset
declarations and published official salaries
 The PEP is unable or reluctant to explain the
reason for doing business in the country of
the financial institution or DNFBP.
 The PEP provides inaccurate or incomplete
information.
 The PEPs seeks to make use of the services
of a financial institution or DNFBP that
would normally not cater to foreign or high
value clients.
 Funds are repeatedly moved to and from
countries to which the PEPs does not seem
to have ties with.
 The PEP is or has been denied entry to the
country (visa denial).
 The PEP is from a country that prohibits or
restricts its/certain citizens to hold accounts
or own certain property in a foreign country.

The position that PEP holds and the manner in which the PEP presents his/her position are
important factors to be taken into account. Possible red flags are:

 The PEP has a substantial authority over or
access to state assets and funds, policies and
operations.
 The PEP has control over regulatory
approvals, including awarding licenses and
concessions.
 The PEP has the formal or informal ability
to control mechanisms established to
prevent and detected ML/TF. The PEP
(actively) downplays importance of his/her
public function, or the public function s/he is
relates to associated with.
 The PEP does not reveal all positions
(including those that are ex officio).
 The PEP has access to, control or influence
over, government or corporate accounts.
 The PEP (partially) owns or controls
financial institutions or DNFBPs, either
privately, or ex officio.


  The PEP (partially) owns or controls the  The PEP is a director or beneficial owner of
financial institution or DNFBP (either a legal entity that is a client of a financial
privately or ex officio) that is a counter part institution or a DNFBP.
or a correspondent in a transaction.

The FATF Recommendations (Interpretative Note to Recommendation 10) contain examples of

higher risk country or geographic risk factors, irrespective of the type of customer. Additionally,
the following red flags and indicators relating to countries can be taken into account when doing
business with a PEP:

The foreign or domestic PEP is from a higher risk country (as defined by the FATF in
recommendation 19 or the Interpretative Note to Recommendation 10). Additional risks occur if
a foreign or domestic PEP from a higher risk country would in his/her position have control or
influence over decisions that would effectively address identified shortcomings in the AML/CFT
system.
• Foreign or domestic PEPs from countries • Foreign or domestic PEPs from countries
identified by credible sources as having a that are dependent on the export of illicit
high risk of corruption. goods, such as drugs.
• Foreign or domestic PEPs from countries • Foreign or domestic PEPs from countries
that have not signed or ratified or have not (including political subdivisions) with
or insufficiently implemented relevant anti- political systems that are based on personal
corruption conventions, such as the rule, autocratic regimes, or countries where
UNCAC, and the OECD Anti-Bribery a major objective is to enrich those in
Convention. power, and countries with high level of
• Foreign or domestic PEPs from countries patronage appointments.
with a mono economies (economic • Foreign or domestic PEPs from countries
dependency on one or a few export with poor and/or opaque governance and
products), especially if export control or accountability.
licensing measures have been put in place. • Foreign or domestic PEPs from countries
identified by credible sources as having high
levels of (organized) crime.

A connection with a high risk industry may raise the risk of doing business with a PEP. Under
Recommendation 1, competent authorities, financial institutions and DNFBPs are required for
determining which types of clients may be higher risk. For this, financial institutions and
DNFBPs will also be guided by national guidance or risk assessments. Which industries may be
at risk depends on the risk assessments and varies from country to country, and on other industry
safeguards that may be in place. Examples of higher risk industries are:

• Arms trade and defence industry. • Development and other types of assistance.
• Banking and finance. • Human health activities.
• Businesses active in government • Mining and extraction.
procurement, i.e., those whose business is • Privatisation.
selling to government or state agencies. • Provision of public goods, utilities.
• Construction and (large) infrastructure.


Red flag and indicators can also relate to the specific business relationship or transaction:

• Multiple STRs have been submitted on a financial institutions without a business

PEP.
• (Consistent) use of rounded amounts, where
this cannot be explained by the expected
business.
• Deposit or withdrawal of large amounts of
cash from an account, use of bank cheques
or other bearer instruments to make large
payments.
• Use of large amounts of cash in the business
relationship.
• Other financial institutions and DNFBPs
have terminated the business relationship
with the PEP.
• Other financial institutions and DNFBPs
have been subject to regulatory actions over
doing business with the PEP.
• Personal and business related money flows
are difficult to distinguish from each other.
• Financial activity is inconsistent with
legitimate or expected activity, funds are
moved to or from an account or between
rationale.
• The account shows substantial activity after
a dormant period; or over a relatively short
time; or shortly after commencing the
business relationship.
• The account shows substantial flow of cash
or wire transfers into or out of the account.
• Transactions between non-client corporate
vehicles and the PEP’s accounts.
• A PEP is unable or reluctant to provide
details or credible explanations for
establishing a business relationship, opening
an account or conducting transactions.
• A PEP receives large international funds
transfers to a gaming account.
• The PEP withdraws a small amount for
gaming purposes and withdraws the balance
by way of cheque.
• A PEP uses third parties to exchange
gaming chips for cash and vice versa with
little or minimal gaming activity.

The FATF Recommendations (Interpretative Note to Recommendation 10) contain examples of

products, industries, service, transaction or delivery channels, which are of a higher risk,
irrespective of the type of customer. These examples are:

• Private banking.
• Anonymous transactions (including cash).
•
If these industries, products, service, transaction or delivery channels are used by PEPs, then this
adds an additional risk factor (depending on the nature of the PEP). In addition to the examples
already listed in the FATF Recommendations, there are other products, industries, service,
transaction or delivery channels that can become additionally vulnerable when used by PEPs.
Examples of these are:

• Businesses that cater mainly to (high value)
foreign clients.
• Trust and company service providers.
• Wire transfers, to and from a PEP account
that cannot be economically explained, or
that lack relevant originator or beneficiary
information.
• Correspondent and concentration accounts.
• Dealers in precious metals and precious
stones, or other luxurious goods.
• Dealers in luxurious transport vehicles (such
as cars, sports cars, ships, helicopters and
planes).
• High end real estate dealers.


Measures to Manage the Inherent Risks of PEPs

To find 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.

The followings additional due diligence measures must be conducted:

• Identifying PEPs;
• Approval at senior management level to account opening;
• Establishing the source of wealth and funds;
• Enhanced ongoing monitoring.

Assessment of risk conducted by competent authorities (which include supervisors) should

identify and evaluate their National Risk Assessment (FATF’s Recommendation 1). Pursuant to
FATF’s Recommendation 12, financial institutions and DNFBPs should be required to obtain
senior management approval for establishing (or continuing, for existing customers) business
relationships with foreign PEPs Financial institutions and DNFBPs should be required to take
reasonable measures to establish the source of wealth and the source of funds of foreign PEP.
Foreign PEPs are always considered high risk, which means that enhanced ongoing monitoring
of the business relationship is always required, as is the case for higher risk
domestic/international organisation PEPs. Supervisors should also pay attention to PEPs, where
appropriate, as a high-risk category in their role of taking necessary legal or regulatory measures
to prevent criminals or their associates from holding, or being the beneficial owner of, a
significant or controlling interest, or holding a management function in, a financial institution or
DNFBP. Supervision of the general customer due diligence requirements, supervisors should
also pay attention to internal controls of financial institutions and DNFBPs. Their supervisory
methodology as it relates to PEPs should include: i) internal policies, procedures and controls,
including appropriate compliance management arrangements, ii) a relevant ongoing employee
training program; and iii) an independent audit function to test the system.


Trade Based Money Laundering: An Overview

Introduction

There are three main methods by which criminal organisations and terrorist financiers move
money for the purpose of disguising its origins and integrating it into the formal economy. The
first is through the use of the financial system; the second involves the physical movement of
money (e.g. through the use of cash couriers); and the third is through the physical movement of
goods through the trade system.

FATF defined trade-based money laundering (TBML) as the process of disguising the proceeds
of crime and moving value through the use of trade transactions in an attempt to legitimize their
illicit origins. Trade-based money laundering (TBML) may be performed through the
misrepresentation of the price, quantity or quality of imports or exports. Moreover, trade-based
money laundering techniques vary in complexity and are frequently used in combination with
other money laundering techniques to further obscure the money trail. To give the transactions
an air of legitimacy, the partners may use a financial institution for trade financing, which often
entails letters of credit and other documentation.

The 2006 FATF study concluded that trade-based money laundering represents an important
channel of criminal activity and, given the growth of world trade, an increasingly important
money laundering and terrorist financing vulnerability. Moreover, as the standards applied to
other money laundering techniques become increasingly effective, the use of trade-based money
laundering can be expected to become increasingly attractive. The international trade system is
clearly subject to a wide range of risks and vulnerabilities that can be exploited by criminal
organisations and terrorist financiers. In part, these arise from the enormous volume of trade
flows, which obscures individual transactions; the complexities associated with the use of
multiple foreign exchange transactions and diverse trade financing arrangements; the
commingling of legitimate and illicit funds; and the limited resources that most customs agencies
have available to detect suspicious trade transactions.

The International Trade System

The international trade system is subject to a wide range of risks and vulnerabilities, which
provide criminal organisations with the opportunity to launder the proceeds of crime and provide
funding to terrorist organisations, with a relatively low risk of detection. The vulnerability of
international trade system increases due to enormous volume of trade flows, limited resources for
custom agencies, complexity associated with foreign exchange transactions, diverse financing
arrangements and limited recourse to verification procedures between countries make more.

Followings are common methods or techniques used in trade based money laundering.

 Black Market Peso Exchange


  Alternative Remittance System
 Price, Invoice & quantity Manipulations

Black Market Peso Exchange

Money launderers can move money out of one country by simply using their illicit funds to
purchase high-valued products, and then exporting them at very low prices to a colluding foreign
partner, who then sells them in the open market at their true value.

The Black Market Peso Exchange (BMPE) is a process by which money in the U.S. (could also
be in another country, for example, countries in Europe) derived from illegal activity is
purchased by Colombian (and other countries’) “peso brokers” and deposited in U.S. bank
accounts that the brokers have established. The brokers sell checks and wire transfers drawn on
those accounts to legitimate businesses, which use them to purchase goods and services in the
U.S. Colombian importers created the BMPE in the 1950s as a mechanism for buying U.S.
dollars on the black market to avoid domestic taxes and duties on the official purchase of U.S.
dollars and on imported goods purchased with dollars.

The Hawala System

The hawala system is an alternative remittance system (ARS) or informal value transfer system
or underground banking is based on trust which subsists and channelizes its activities outside of,
or parallel to conventional banking or financial institutions. Apart from the risk-free remittance
of money from expatriates, the ancient system of hawala is being used both by terrorists and
money launderers to move their money in ways to avoid detection and reporting.

Basic Trade-Based Money Laundering Techniques

Generally misrepresentations of the price, quantity or quality of imports or exports are basic
techniques used for trade based laundering. In many cases, this can also involve abuse of the
financial system through fraudulent transactions involving a range of money transmission
instruments, such as wire transfers. The basic techniques of trade-based money laundering
include:
 Over- and under-invoicing of goods and services
 Multiple invoicing of goods and services
 Over- and under-shipments of goods and services
 Falsely described goods and services

Over- and Under-Invoicing of Goods and Services

Money laundering through the over- and under-invoicing of goods and services, which is one of
the oldest methods of fraudulently transferring value across borders, remains a common practice
today. The key element of this technique is the misrepresentation of the price of the good or
service in order to transfer additional value between the importer and exporter.


Multiple Invoicing of Goods and Services

Technique used to launder funds involves issuing more than one invoice for the same
international trade transaction. By invoicing the same good or service more than once, a money
launderer or terrorist financier is able to justify multiple payments for the same shipment of
goods or delivery of services. Employing a number of different financial institutions to make
these additional payments can further increase the level of complexity surrounding such
transactions

Over- and Under-Shipments of Goods and Services

Money launderers can overstate or understate the quantity of goods being shipped or services
being provided. In the extreme, an exporter may not ship any goods at all, but simply collude
with an importer to ensure that all shipping and customs documents associated with this so called
“phantom shipment” are routinely processed. Banks and other financial institutions may
unknowingly be involved in the provision of trade financing for these phantom shipments.

TBML Red flags 



 
 


!



a) Use of letters of credit to move money between those countries, where such trade would not
normally occur and / or is not consistent with the customer’s usual business activity. A Letter of
credit is generally resorted to so as to accord more legitimacy to the transaction in order to
conceal the real facts.

b) The method of payment requested by the client appears inconsistent with the risk
characteristics of the transaction. For example receipt of an advance payment, for a shipment,
from a new seller in a high-risk jurisdiction.

c) The transaction involves the receipt of cash (or by other payment methods) from third
party entities that have no apparent connection with the transaction or which involve front or
shell companies or wire instructions / payment from parties which were not identified in the
original letter of credit or other documentation. The transactions that involve payments for goods
through cheques, bank drafts, or money orders not drawn on the account of the entity that
purchased the items also need further verification.

d) The transaction involves the use of repeatedly amended or frequently extended letters of credit
without reasonable justification or that includes changes in regard to the beneficiary or location
of payment without any apparent reason.
e) Unusual deposits i.e. use of cash or negotiable instruments (such as traveller’s cheques,
Cashier’s cheques and money orders) in round denominations (to keep below reporting threshold
limit) to fund bank accounts and to pay for goods and services. The negotiable instruments may
be sequentially numbered or purchased at multiple locations and may frequently lack payee
information. Further, cash payments for high-value orders are also indication of TBML activity.


f) Inward remittances in multiple accounts and payments made from multiple accounts for trade
transaction of same business entity are indicators for TBML. In this regard the study of foreign
exchange remittances may help detect the offence.

g) In the case of merchanting trade, the trade finance mechanism should be in place for both
export leg as well as import leg of transaction. If the Trade Finance mechanism, for example,
Letters of Credit, have been provided for only the import leg of the transaction and not for export
leg, it also indicates the possibility of TBML.

Bankers and Trade Based Money Laundering

In most countries, banking officials have limited involvement in trade-based money laundering
activities. However, they frequently receive information related to suspicious trade based
activities from their financial alerts. To avoid exploitation of banking sector, banking officials
should share trade-related information with customs agencies, law enforcement agencies,
financial intelligence units and tax authorities. Further training programs should be arranged for
bankers to detect, monitor and report suspicious trade based activities.

Virtual Currencies: Concepts, Features & Inherent AML/CFT Risks

Virtual currency is a digital representation of value that can be digitally traded and functions as
(1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value, but does not
have legal tender status (i.e., when tendered to a creditor, is a valid and legal offer of payment) in
any jurisdiction. It is not issued nor guaranteed by any jurisdiction, and fulfils the above
functions only by agreement within the community of users of the virtual currency. Virtual
currency is distinguished from fiat currency (a.k.a. “real currency,” “real money,” or
“national currency”), which is the coin and paper money of a country that is designated as its
legal tender; circulates; and is customarily used and accepted as a medium of exchange in the
issuing country. It is distinct from e-money, which is a digital representation of fiat currency
used to electronically transfer value denominated in fiat currency. E-money is a digital transfer
mechanism for fiat currency—i.e., it electronically transfers value that has legal tender status.

Digital currency can mean a digital representation of either virtual currency (non-fiat) or e-
money (fiat) and thus is often used interchangeably with the term “virtual currency”. In this
paper to avoid confusion, only the terms “virtual currency” or “e-money” are used.

Types of Virtual currency

Convertible (or open) virtual currency has an equivalent value in real currency and can be
exchanged back-and-forth for real currency. Examples include: Bitcoin; e-Gold (defunct);
Liberty Reserve (defunct); Second Life Linden Dollars; and WebMoney.


Non-convertible (or closed) virtual currency is intended to be specific to a particular virtual
domain or world, such as a Massively Multiplayer Online Role-Playing Game (MMORPG) or
Amazon.com, and under the rules governing its use, cannot be exchanged for fiat currency.
Examples include: Project Entropia Dollars; Q Coins; and World of Warcraft Gold.

Centralised Virtual Currencies have a single administrating authority (administrator)—i.e., a

third party12 that controls the system. An administrator issues the currency; establishes the rules
for its use; maintains a central payment ledger; and has authority to redeem the currency
(withdraw it from circulation). The exchange rate for a convertible virtual currency may be either
floating—i.e., determined by market supply and demand for the virtual currency--or pegged—
i.e., fixed by the administrator at a set value measured in fiat currency or another real-world store
of value, such as gold or a basket of currencies. Currently, the vast majority of virtual currency
payments transactions involve centralised virtual currencies. Examples: E-gold (defunct); Liberty
Reserve dollars/euros (defunct); Second Life “Linden dollars”; PerfectMoney; WebMoney “WM
units”; and World of Warcraft gold.

Decentralized Virtual Currencies (a.k.a. crypto-currencies) are distributed13, open-source,

math-based peer-to-peer virtual currencies that have no central administrating authority, and no
central monitoring or oversight. Examples: Bitcoin; LiteCoin; and Ripple.14

Cryptocurrency refers to a math-based, decentralised convertible virtual currency that is

protected by cryptography.—i.e., it incorporates principles of cryptography to implement a
distributed, decentralised, secure information economy. Cryptocurrency relies on public and
private keys to transfer value from one person (individual or entity) to another, and must be
cryptographically signed each time it is transferred. The safety, integrity and balance of
cryptocurrency ledgers is ensured by a network of mutually distrustful parties (in Bitcoin,
referred to as miners) who protect the network in exchange for the opportunity to obtain a
randomly distributed fee (in Bitcoin, a small number of newly created bitcoins, called the “block
reward” and in some cases, also transaction fees paid by users as a incentive for miners to
include their transactions in the next block). Hundreds of cryptocurrency specifications have
been defined, mostly derived from Bitcoin, which uses a proof-of-work system to validate
transactions and maintain the block chain. While Bitcoin provided the first fully implemented
cryptocurrency protocol, there is growing interest in developing alternative, potentially more
efficient proof methods, such as systems based on proof-of-stake.

Bitcoin, launched in 2009, was the first decentralised convertible virtual currency, and the first
cryptocurrency. Bitcoins are units of account composed of unique strings of numbers and letters
that constitute units of the currency and have value only because individual users are willing to
pay for them. Bitcoins are digitally traded between users with a high degree of anonymity and
can be exchanged (purchased or cashed out) into US dollars, Euros, and other fiat or virtual
currencies. Anyone can download the free, open-source software from a website to send, receive,
and store bitcoins and monitor Bitcoin transactions. Users can also obtain Bitcoin addresses,


which function like accounts, at a Bitcoin exchanger or online wallet service. Transactions (fund
flows) are publicly available in a shared transaction register and identified by the Bitcoin
address, a string of letters and numbers that is not systematically linked to an individual..
Therefore, Bitcoin is said to be “pseudo-anonymous”.

Altcoin refers to math-based decentralised convertible virtual currency other than bitcoins, the
original such currency. Current examples include Ripple; PeerCoin, Lite-coin; zerocoin;
anoncoin and dogecoin.

Anonymiser (anonymising tool) refers to tools and services, such as darknets and mixers,
designed to obscure the source of a Bitcoin transaction and facilitate anonymity. (Examples: Tor
(darknet); Dark Wallet (darknet); Bitcoin Laundry (mixer)).

Mixer (laundry service, tumbler) is a type of anonymiser that obscures the chain of transactions
on the blockchain by linking all transactions in the same bitcoin address and sending them
together in a way that makes them look as if they were sent from another address. A mixer or
tumbler sends transactions through a complex, semi-random series of dummy transactions that
makes it extremely difficult to link specific virtual coins (addresses) with a particular transaction.
Mixer services operate by receiving instructions from a user to send funds to a particular bitcoin
address. The mixing service then “comingles” this transaction with other user transactions, such
that it becomes unclear to whom the user intended the funds to be directed. (Examples:
Bitmixer.io; SharedCoin; Blockchain.info; Bitcoin Laundry; Bitlaunder; Easycoin).

Tor (originally, The Onion Router) is an underground distributed network of computers on the
Internet that conceals the true IP addresses, and therefore the identities of the network’s users, by
routing communications/transactions through multiple computers around the world and wrapping
them in numerous layers of encryption. Tor makes it very difficult to physically locate computers
hosting or accessing websites on the network. This difficulty can be exacerbated by use of
additional tumblers or anonymisers on the Tor network. Tor is one of several underground
distributed computer networks, often referred to as darknets, cypherspace, the Deep web, or
anonymous networks, which individuals use to access content in a manner designed to obscure
their identity and associated Internet activity.

Dark Wallet is a browser-based extension wallet, currently available on Chrome (and

potentially on Firefox), that seeks to ensure the anonymity of Bitcoin transactions by
incorporating the following features: auto-anonymiser (mixer); decentralised trading;
uncensorable crowd funding platforms; stock platforms and information black markets; and
decentralised market places similar to Silk Road.

Cold Storage refers to an offline Bitcoin wallet—i.e., a Bitcoin wallet that is not connected to
the Internet. Cold storage is intended to help protect the stored virtual currency against hacking
and theft.


Hot Storage refers to an online bitcoin wallet. Because it is connected to the Internet, hot storage
is more vulnerable to hacking/theft than cold storage.

Local Exchange Trading System (LETS) is a locally organised economic organisation that
allows members to exchange goods and services with others in the group. LETS use a locally
created currency to denominate units of value that can be traded or bartered in exchange for
goods or services. Theoretically, bitcoins could be adopted as the local currency used within a
LETS. (Examples: Ithica Dollars; Mazacoin).

Participants of Virtual Currency System

An exchanger (also sometimes called a virtual currency exchange) is a person or entity

engaged as a business in the exchange of virtual currency for real currency, funds, or other forms
of virtual currency and also precious metals, and vice versa, for a fee (commission). Exchangers
generally accept a wide range of payments, including cash, wires, credit cards, and other virtual
currencies, and can be administrator-affiliated, non-affiliated, or a third party provider.
Exchangers can act as a bourse or as an exchange desk. Individuals typically use exchangers to
deposit and withdraw money from virtual currency accounts.
An administrator is a person or entity engaged as a business in issuing (putting into circulation)
a centralised virtual currency, establishing the rules for its use; maintaining a central payment
ledger; and who has the authority to redeem (withdraw from circulation) the virtual currency.
A user is a person/entity who obtains virtual currency and uses it to purchase real or virtual
goods or services or send transfers in a personal capacity to another person (for personal use), or
who holds the virtual currency as a (personal) investment. Users can obtain virtual currency in
several ways. For example, they can (1) purchase virtual currency, using real money (from an
exchanger or, for certain centralised virtual currencies, directly from the administrator/issuer);
(2) engage in specific activities that earn virtual currency payments (e.g., respond to a promotion,
complete an online survey, provide a real or virtual good or service); (3) with some decentralised
virtual currencies (e.g., Bitcoin), self-generate units of the currency by "mining" them (see
definition of miner, below),and receive them as gifts, rewards, or as part of a free initial
distribution.
A miner is an individual or entity that participates in a decentralised virtual currency network by
running special software to solve complex algorithms in a distributed proof-of-work or other
distributed proof system used to validate transactions in the virtual currency system. Miners may
be users, if they self-generate a convertible virtual currency solely for their own purposes, e.g., to
hold for investment or to use to pay an existing obligation or to purchase goods and services.
Miners may also participate in a virtual currency system as exchangers, creating the virtual
currency as a business in order to sell it for fiat currency or other virtual currency.


 Taxonomy of Virtual Currencies

Centralised Decentralized
Convertible Administrator, exchangers, users; Exchangers, users (no
third-party ledger; can be exchanged administrator); no Trusted Third-
for fiat currency. Example: Party ledger; can be exchanged for
WebMoney fiat currency. Example: Bitcoin

Non-convertible Administrator, exchangers, users; Does not exist

third-party ledger; cannot be
exchanged for fiat currency.
Example: World of Warcraft Gold

Key Features of Virtual Currencies

Like other new payment methods, virtual currency has legitimate uses, with prominent venture
capital firms investing in virtual currency start-ups.

Virtual currency has the potential to improve payment efficiency and reduce transaction costs for
payments and fund transfers. For example, Bitcoin functions as a global currency that can avoid
exchange fees, is currently processed with lower fees/charges than traditional credit and debit
cards, and may potentially provide benefit to existing online payment systems, like Paypal.

Virtual currency may also facilitate micro-payments, allowing businesses to monetize very low-
cost goods or services sold on the Internet, such as one-time game or music downloads.

Virtual currency may also facilitate international remittances and support financial inclusion in
other ways, as new virtual currency-based products and services are developed that may
potentially serve the under- and un-banked.

Virtual currency - notably, Bitcoin- may also be held for investment. These potential benefits
need to be carefully analysed, including whether claimed cost advantages will remain if virtual
currency becomes subject to regulatory requirements similar to those that apply to other
payments methods, and/or if exchange fees for cashing out into fiat currency are factored in, and
whether volatility, consumer protection and other factors limit their potential for financial
inclusion.

Virtual Currencies and Inherent AML/CFT Risks

New Payment Products and Services (NPPS) Guidance (FATF, 2013) identified following
features of virtual currencies which may cause possible risk of money laundering and terrorist
financing.

 They may allow greater anonymity than traditional non-cash payment methods. Virtual
currency systems can be traded on the Internet, are generally characterised by non-face-
to-face customer relationships, and may permit anonymous funding (cash funding or


 third-party funding through virtual exchangers that do not properly identify the funding
source). They may also permit anonymous transfers, if sender and recipient are not
adequately identified.
 Decentralised systems are particularly vulnerable to anonymity risks. For example, by
design, Bitcoin addresses, which function as accounts, have no names or other customer
identification attached, and the system has no central server or service provider. The
Bitcoin protocol does not require or provide identification and verification of participants
or generate historical records of transactions that are necessarily associated with real
world identity. There is no central oversight body, and no AML software currently
available to monitor and identify suspicious transaction patterns. Law enforcement
cannot target one central location or entity (administrator) for investigative or asset
seizure purposes (although authorities can target individual exchangers for client
information that the exchanger may collect). It thus offers a level of potential anonymity
impossible with traditional credit and debit cards or older online payment systems, such
as PayPal.
 Virtual currency’s global reach likewise increases its potential AML/CFT risks. Virtual
currency systems can be accessed via the Internet (including via mobile phones) and can
be used to make cross-border payments and funds transfers.
 Virtual currencies commonly rely on complex infrastructures that involve several entities,
often spread across several countries, to transfer funds or execute payments. This
segmentation of services means that responsibility for AML/CFT compliance and
supervision/enforcement may be unclear.
 Centralised virtual currency systems could be complicit in money laundering and could
deliberately seek out jurisdictions with weak AML/CFT regimes. Decentralised
convertible virtual currencies allowing anonymous person-to-person transactions may
seem to exist in a digital universe entirely outside the reach of any particular country.

The Way Forward

Although virtual currency has improved payment efficiency and reduce transaction costs for
payments and fund transfers and this may also play its vital role in international remittances and
support financial inclusion. But Virtual currency is still a complex subject that implicates not
only AML/CFT issues, but also require more consideration in regulatory matters, including
consumer protection, prudential safety, tax and soundness regulation, and network IT security
standards.


CHAPTER II

ANTI MONEY LAUNDERING & COMBATING TERRORIST FINANCING: THE

COMPLIANCE PROGRAM

What is money laundering & terrorist financing?

The FATF has defined “money laundering” as the processing of criminal proceeds to disguise
their illegal origin in order to legitimize the ill-gotten gains of crime. The United Nations 2000
Convention against Transnational Organized Crime, also known as the “Palermo Convention”
defines money laundering as:

“The conversion or transfer of property, knowing it is derived from a criminal offense, for the
purpose of concealing or disguising its illicit origin or of assisting any person who is involved in
the commission of the crime to evade the legal consequences of his actions. The concealment or
disguising of the true nature, source, location, disposition, movement, rights with respect to, or
Ownership of property knowing that it is derived from a criminal offense. The acquisition,
possession or use of property, knowing at the time of its receipt that it was derived from a
criminal offense or from participation in a crime”.

Financing of Terrorism (FT) involves both legitimate and illegitimate money characterized by
concealment of the origin or intended criminal use of the funds. The term Terrorist refers to any
natural person who commits, or attempts to commit, participates as an accomplice, organizes or
directs others or contributes to terrorist acts.

Compliance &Compliance Risks

Compliance is defined as the adherence to laws, regulations, rules, related self-regulatory

organization standards and codes of conduct in matters to ensure the bank is observing proper
standards of market conduct, managing conflicts of interest, specifically dealing with matters
such as prevention of money laundering and terrorist financing, and investigations of alleged
corrupt and fraudulent behaviour.

Compliance risk is the risk of legal or regulatory sanctions, material financial losses, or losses to
reputation, an organization or business may suffer as a result of its failure to comply with
compliance laws, rules and standards. Operational compliance includes the assessment of
integrity risk and reputation risk in the organization or business’s transactions, in particular
certain principles, such as Anti-Money Laundering (AML), Counter Terrorist Financing (CTF)


and Know Your Customer (KYC) as well as compliance issues in relation to the development of
new products or business practices.

The Compliance Program

An AML/CFT program is an essential component of a financial institution’s compliance regime.

The primary goal of every good program is to protect the organization against money laundering
and to ensure that the organization is in full compliance with relevant laws and regulations.

Risk-based approach for Risk assessment

A risk-based approach requires institutions to have systems and controls that are commensurate
with the specific risks of money laundering and terrorist financing facing them. Assessing this
risk is, therefore, one of the most important steps in creating a good anti-money laundering
compliance program. As money laundering risks increase, stronger controls are necessary.
However, all categories of risk — whether low, medium or high — must be identified and
mitigated by the application of controls, such as verification of customer identity, CDD policies,
suspicious activity monitoring and economic sanctions screening. Governments around the world
believe that the risk-based approach is preferable to a more prescriptive approach in the area of
anti-money laundering and counter-terrorist financing because it is more:

Flexible — as money laundering and terrorist financing risks vary across jurisdictions, customers,
products and delivery channels, and over time.

Effective — as companies are better equipped than legislators to effectively assess and mitigate
the particular money laundering and terrorist financing risks they face.

Proportionate — because a risk-based approach promotes a common sense and intelligent

approach to fighting money laundering and terrorist financing as opposed to a “check the box”
approach. It also allows firms to minimize the adverse impact of anti-money laundering
procedures on their low-risk customers.

Factors to Determine Risk

The risks your organization faces depend on many factors, including the geographical regions
involved, your customer types and the products & services offered.

Levels of Risk

Generally, all risk categories can be broken down into the following levels of risk:

Prohibited — The Company will not tolerate any dealings of any kind given the risk. Countries
subject to economic sanctions or designated as state sponsors of terrorism, such as Sudan or Iran,
are prime candidates for prohibited transactions. Prohibited customers would include shell banks.


High-Risk – The risks here are significant, but are not necessarily prohibited. To mitigate the
heightened risk presented, the firm should apply more stringent controls to reduce the risk, such
as conducting enhanced due diligence and more rigorous transaction monitoring. Countries that
are noted for corruption or drug trafficking are generally deemed high risk. High risk customers
may include PEPs; high-risk products and services may include correspondent banking and
private banking.

Medium-Risk — Medium risks are more than a low- or standard-risk of money laundering, and
merit additional scrutiny, but do not rise to the level of high-risk.

Low- or Standard-Risk — This represents the baseline risk of money laundering; normal business
rules apply. FATF member countries and domestic retail customers are frequently, but not
always, considered to be standard- or low-risk.

The Elements of an AML Compliance Program

In general, the basic elements a financial institution or business must address in an anti-money
laundering program are:

 Risk assessment
 A system of internal policies, procedures and controls
 A designated compliance officer with day-to-day oversight over the AML program
 An ongoing employee training program
 An independent audit function to test the AML program

Risk Assessment

The many different kinds of financial institutions have different risk profiles, and each institution
in a group differs from the others in the group. Nevertheless, each institution is expected to
create and maintain an effective compliance program that fits its risk profile. Therefore, the risk
assessment is the crucial first step in developing a compliance program. Institutions should
carefully identify the risks inherent in their business, looking at products and services, customers,
and geographic locations. Then, these risk categories should be evaluated for risk, with the
aggregation of the risks yielding the risk profile.

Internal Policies, Procedures and Controls

The first step in determining what policies, procedures and controls are necessary is to identify
and understand the applicable laws and regulations. This will set the absolute minimum
compliance standards for the institution. The institution should then look at its own risk
assessment and gauge its risk appetite. For example, what countries, products and customers are
prohibited because the institution has deemed them to be too risky? These should be prohibited
by policy and should be supported by appropriate controls to enforce the policy. Institutions also


need a process to stay on top of regulatory changes, which will keep the program current.
Internal anti-money laundering policies should be established or approved by higher
management or the board of directors, and should set the tone for the organization. While the
organization’s policy may be a high-level statement of principles, it serves as the basis for
procedures and controls that provides details as to how lines of business will achieve compliance
with laws and regulations, as well as with the organization’s AML policies.

Compliance Officer

A person should be designated as the anti-money laundering compliance officer. This individual
should be responsible for designing and implementing the program, making necessary changes
and disseminating information about the program’s successes and failures to key staff members,
constructing antimony laundering-related content for staff training programs and staying current
on legal and regulatory developments in the field.

Training

Regulations and laws require financial institutions to have formal, written AML compliance
programs that include “training for appropriate personnel.” A successful training program not
only should meet the standards set out in the laws and regulations that apply to an institution, but
should also satisfy internal policies and procedures and should mitigate the risk of getting caught
up in a money laundering scandal. Training is one of the most important ways to stress the
importance of anti-money laundering efforts, as well as educating employees about what to do if
they encounter potential money laundering. In this discussion of training, the term includes not
only formal training courses, but it also includes communication that serves to educate and
inform employees, such as e-mails, newsletters, periodic team meetings and anything else that
facilitates the sharing of information.

Audit

Putting your AML compliance program into motion is not enough. The program must be
monitored and evaluated. Institutions should assess their anti-money laundering programs
regularly to ensure their effectiveness and to look for new risk factors. The audit must be
independent (i.e., performed by people not involved with the organization’s AML compliance
staff), and individuals conducting the audit should report directly to the board of directors or to a
designated board committee composed primarily or completely of outside directors. Those
performing the audit must be sufficiently qualified to ensure that their findings and conclusions
are reliable.


Know Your Customer and Customer Due Diligence Policies

Introduction

KYC includes anti-money laundering policies and procedures used to determine the true identity
of a customer and the type of activity that is “normal and expected,” and to detect activity that is
“unusual” for a particular customer. Many experts believe that a sound KYC program is one of
the best tools in an effective anti money laundering program.

CDD means to implement adequate policies, practices and procedures that promote high ethical
and professional standards for dealing with customers and are designed to prevent banks from
being used, intentionally or unintentionally, by criminal elements. Customer due diligence
includes not only establishing the identity of customers, but also monitoring account activity to
identify those transactions that do not conform with the normal or expected transactions for that
customer or type of account.

Costs of CDD/KYC Deficiencies

The inadequacy or absence of KYC standards can subject banks to serious customer and
counterparty risks, especially reputational, operational, legal and concentration risks. It is worth
noting that all these risks are interrelated. However, any one of them can result in significant
financial cost to banks (e.g. through the withdrawal of funds by depositors, the termination of
inter-bank facilities, claims against the bank, investigation costs, asset seizures and freezes, and
loan losses), as well as the need to divert considerable management time and energy to resolving
problems that arise.

Reputational risk poses a major threat to banks, since the nature of their business requires
maintaining the confidence of depositors, creditors and the general marketplace. Reputational
risk is defined as the potential that adverse publicity regarding a bank’s business practices and
associations, whether accurate or not, will cause a loss of confidence in the integrity of the
institution. Banks are especially vulnerable to reputational risk because they can so easily
become a vehicle for or a victim of illegal activities perpetrated by their customers. They need to
protect themselves by means of continuous vigilance through an effective KYC program. Assets
under management, or held on a fiduciary basis, can pose particular reputational dangers.

Operational risk can be defined as the risk of direct or indirect loss resulting from inadequate or
failed internal processes, people and systems or from external events. Most operational risk in
the KYC context relates to weaknesses in the implementation of banks’ programs, ineffective
control procedures and failure to practice due diligence. A public perception that a bank is not
able to manage its operational risk effectively can disrupt or adversely affect the business of the
bank.


Legal risk is the possibility that lawsuits, adverse judgments or contracts that turn out to be
unenforceable can disrupt or adversely affect the operations or condition of a bank. Banks may
become subject to lawsuits resulting from the failure to observe mandatory KYC standards or
from the failure to practice due diligence. Consequently, banks can, for example, suffer fines,
criminal liabilities and special penalties imposed by supervisors.
Indeed, a court case involving a bank may have far greater cost implications for its business than
just the legal costs. Banks will be unable to protect themselves effectively from such legal risks
if they do not engage in due diligence in identifying their customers and understanding their
business.

Concentration risk mostly applies on the assets side of the balance sheet. As a common practice,
supervisors not only require banks to have information systems to identify credit concentrations
but most also set prudential limits to restrict banks’ exposures to single borrowers or groups of
related borrowers. Without knowing precisely who the customers are, and their relationship with
other customers, it will not be possible for a bank to measure its concentration risk. This is
particularly relevant in the context of related counterparties and connected lending.

Application of Customer Due Diligence

Apply Customer Due Diligence (CDD) measures, including identifying and verifying the identity
of the customers when:

 Establishing business relationship

 Conducting occasional transactions
 Carrying out occasional wire transfers (domestic/cross border)
 There is suspicion of money laundering/terrorist financing

Main Elements of a CDD Program

A sound CDD program should include these 7 elements:

 Full identification of customer and business entities including source of funds and wealth
when appropriate
 Development of transaction and activity profiles of each customer’s anticipated activity
 Definition and acceptance of the customer in the context of specific products and services
 Assessment and grading of risks that the customer or the accounts present
 Account and transaction monitoring based on the risks presented
 Investigation and examination of unusual customer or account activity
 Documentation of findings

Essential elements of KYC standards

The four key elements of KYC, according to this paper are: In 1988, the Basel Committee issued
a Statement of Principles called “Prevention of Criminal Use of the Banking System for the
Purpose of Money Laundering”.


  Customer identification
 Risk management
 Customer acceptance
 Monitoring

Customer acceptance

Banks should develop clear customer acceptance policies and procedures, including a description
of the types of customer that are likely to pose a higher than average risk to a bank. In preparing
such policies, factors such as customers’ background, country of origin, public or high profile
position, linked accounts, business activities or other risk indicators should be considered. Banks
should develop graduated customer acceptance policies and procedures that require more
extensive due diligence for higher risk customers. For example, the policies may require the most
basic account-opening requirements for a working individual with a small account balance. It is
important that the customer acceptance policy is not so restrictive that it results in a denial of
access by the general public to banking services, especially for people who are financially or
socially disadvantaged. On the other hand, quite extensive due diligence would be essential for
an individual with a high net worth whose source of funds is unclear.

The Banks shall not deal / accept the following types of persons/entities as customer: The
negative list shall include:

 Shell banks/companies
 Unregistered arms-related business
 Bearer share company
 Accounts where the customer is acting on behalf of another customer to open an account.
(The account shall be opened in the name of the person who is the beneficial owner of the
funds in the account and not the benami/accounts with fictitious names)/ Anonymous or
fictitious Accounts.
 Entities/persons appearing in OFAC/EU/UN lists and any other list recommended in each
jurisdiction where NBP operates.
 Entities/persons appearing in negative/sanctioned lists. Proscribed entities and persons or
those who are known for their association with such entities and persons, whether under
the proscribed name or with a different name.
 Gamblers/Bookies
 Un-registered money changers/exchange companies.

Customer identification

Customer identification is an essential element of KYC standards. A customer includes:

• The person or entity that maintains an account with the bank or those on whose behalf an
account is maintained (i.e. beneficial owners)
• The beneficiaries of transactions conducted by professional intermediaries
• Any person or entity connected with a financial transaction who can pose a significant
reputational or other risk to the bank.


Banks should establish a systematic procedure for identifying new customers and should not
establish a banking relationship until the identity of a new customer is satisfactorily verified.
Banks should “document and enforce policies for identification of customers and those acting on
their behalf”. The best documents for verifying the identity of customers are those most difficult
to obtain illicitly and to counterfeit. Special attention should be exercised in the case of non-
resident customers and in no case should a bank short-circuit identity procedures just because the
new customer is unable to present himself for interview. The bank should always ask itself why
the customer has chosen to open an account in a foreign jurisdiction. The customer identification
process applies naturally at the outset of the relationship. To ensure that records remain up-to-
date and relevant, there is a need for banks to undertake regular reviews of existing records. An
appropriate time to do so is when a transaction of significance takes place, when customer
documentation standards change substantially, or when there is a material change in the way that
the account is operated. However, if a bank becomes aware at any time that it lacks sufficient
information about an existing customer, it should take steps to ensure that all relevant
information is obtained as quickly as possible.

Banks that offer private banking services are particularly exposed to reputational risk, and should
therefore apply enhanced due diligence to such operations. Private banking accounts, which by
nature involve a large measure of confidentiality, can be opened in the name of an individual, a
commercial business, a trust, an intermediary or a personalized investment company. In each
case reputational risk may arise if the bank does not diligently follow established KYC
procedures. All new clients and new accounts should be approved by at least one person, of
appropriate seniority, other than the private banking relationship manager. If particular
safeguards are put in place internally to protect confidentiality of private banking customers and
their business, banks must still ensure that at least equivalent scrutiny and monitoring of these
customers and their business can be conducted, e.g. they must be open to review by compliance
officers and auditors.

Banks should develop “clear standards on what records must be kept on customer identification
and individual transactions and their retention period”. Such a practice is essential to permit a
bank to monitor its relationship with the customer, to understand the customer’s on-going
business and, if necessary, to provide evidence in the event of disputes, legal action, or a
financial investigation that could lead to criminal prosecution. As the starting point and natural
follow-up of the identification process, banks should obtain customer identification papers and
retain copies of them for at least five years after an account is closed. They should also retain all
financial transaction records for at least five years after the transaction has taken place.

On-going monitoring of accounts and transactions

On-going monitoring is an essential aspect of effective KYC procedures. Banks can only
effectively control and reduce their risk if they have an understanding of normal and reasonable
account activity of their customers so that they have a means of identifying transactions which
fall outside the regular pattern of an account’s activity. Without such knowledge, they are likely
to fail in their duty to report suspicious transactions to the appropriate authorities in cases where
they are required to do so. The extent of the monitoring needs to be risk-sensitive. For all


accounts, banks should have systems in place to detect unusual or suspicious patterns of activity.
This can be done by establishing limits for a particular class or category of accounts. Particular
attention should be paid to transactions that exceed these limits. Certain types of transactions
should alert banks to the possibility that the customer is conducting unusual or suspicious
activities. They may include transactions that do not appear to make economic or commercial
sense, or that involve large amounts of cash deposits that are not consistent with the normal and
expected transactions of the customer. Very high account turnover, inconsistent with the size of
the balance, may indicate that funds are being “washed” through the account. Examples of
suspicious activities can be very helpful to banks and should be included as part of a
jurisdiction’s anti-money laundering procedures and/or guidance.

There should be intensified monitoring for higher risk accounts. Every bank should set key
indicators for such accounts, taking note of the background of the customer, such as the country
of origin and source of funds, the type of transactions involved, and other risk factors. For higher
risk accounts: Banks should ensure that they have adequate management information systems to
provide managers and compliance officers with timely information needed to identify, analyze
and effectively monitor higher risk customer accounts. The types of reports that may be needed
include reports of missing account opening documentation, transactions made through a
customer account that are unusual, and aggregations of a customer’s total relationship with the
bank. Senior management in charge of private banking business should know the personal
circumstances of the bank’s high risk customers and be alert to sources of third party
information. Significant transactions by these customers should be approved by a senior
manager. Banks should develop a clear policy and internal guidelines, procedures and controls
and remain especially vigilant regarding business relationships with PEPs and high profile
individuals or with persons and companies that are clearly related to or associated with them. As
all PEPs may not be identified initially and since existing customers may subsequently acquire
PEP status.

Risk management

Effective KYC procedures embrace routines for proper management oversight, systems and
controls, segregation of duties, training and other related policies. The board of directors of the
bank should be fully committed to an effective KYC program by establishing appropriate
procedures and ensuring their effectiveness. Explicit responsibility should be allocated within the
bank for ensuring that the bank's policies and procedures are managed effectively and are, at a
minimum, in accordance with local supervisory practice. The channels for reporting suspicious
transactions should be clearly specified in writing, and communicated to all personnel. There
should also be internal procedures for assessing whether the bank’s statutory obligations under
recognized suspicious activity reporting regimes require the transaction to be reported to the
appropriate law enforcement and and/or supervisory authorities. Banks’ internal audit and
compliance functions have important responsibilities in evaluating and ensuring adherence to
KYC policies and procedures. As a general rule, the compliance function should provide an
independent evaluation of the bank’s own policies and procedures, including legal and regulatory
requirements. Its responsibilities should include ongoing monitoring of staff performance
through sample testing of compliance and review of exception reports to alert senior
management or the Board of Directors if it believes management is failing to address KYC


procedures in a responsible manner. Internal audit plays an important role in independently
evaluating the risk management and controls, discharging its responsibility to the Audit
Committee of the Board of Directors or a similar oversight body through periodic evaluations of
the effectiveness of compliance with KYC policies and procedures, including related staff
training. Management should ensure that audit functions are staffed adequately with individuals
who are well versed in such policies and procedures. In addition, internal auditors should be
proactive in following-up their findings and criticisms. All banks must have an ongoing
employee-training program so that bank staff is adequately trained in KYC procedures. The
timing and content of training for various sectors of staff will need to be adapted by the bank for
its own needs. Training requirements should have a different focus for new staff, front-line staff,
compliance staff or staff dealing with new customers. New staff should be educated in the
importance of KYC policies and the basic requirements at the bank. Front-line staff members
who deal directly with the public should be trained to verify the identity of new customers, to
exercise due diligence in handling accounts of existing customers on an ongoing basis and to
detect patterns of suspicious activity. Regular refresher training should be provided to ensure that
staff are reminded of their responsibilities and are kept informed of new developments. It is
crucial that all relevant staff fully understand the need for and implement KYC policies
consistently. A culture within banks that promotes such understanding is the key to successful
implementation.

Conclusion

Banks should devise their comprehensive AML/CFT policies which ensure that the products and
services of banks are not used to launder the proceeds of crime and that all of the Bank’s staff is
aware of their obligations and the need for vigilance in the fight against Money Laundering and
Terrorist Financing. Therefore, all financial products/services/delivery channels should be
reviewed by AML heads to counter the potential Money Laundering and Terrorist financing
Risks. Bank should focus to promote equal opportunity, and the Know-Your-Customer
requirements shall not result in refusal to provide banking services to certain ethnic groups or
delay to process their applications for banking services because of their ethnic status. Bank
should show their commitments to guard their potential customers against discrimination risk.


Risk Based Approach: A toool to combat Money Laundering & Terrorrist Financing
The Financial Action Task Foorce (FATF) is an independent inter-governm mental body with
financial system against money laundering and teerrorist financing
objectives to protect the global fi
by developing and promoting global anti-money laundering (AML) and counter-terrorist
financing (CFT) standards. Thhe FATF‘s 40 Recommendations are consiidered milestone
standards for AML & CFT m measures. The FATF‘s 1st Recommendation is captioned as
“Assessing risks and applying a risk-based approach”. The FATF quotes this recommendation
as “Countries should identify, assess, and understand the money launderin ng and terrorist
financing risks for the country, and should take action, including designating g an authority or
mechanism to coordinate actionns to assess risks, and apply resources, aimed d at ensuring the
risks are mitigated effectively”.

The terms Risk identification, Assessment, understanding, actions and risk k mitigation are
abridged forms of Risk Based A Approach. A risk based approach to anti money y laundering and
counter financing terrorism meanns that countries, competent authorities and finan
ncial institutions,
are expected to identify, assess aand understand the ML/TF risks to which they are exposed and
take AML/CFT measures commeensurate to those risks in order to mitigate them effectively.

Followings are the most commonnly identified risk categories which are weighted
d in RBA;

 Country/Geographic Riskks
 Customer Risks
 Product/Service Risk
 Channel Risks

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Country/Geographic Risk

There is no explicit criterion to mark a country or geographic area as higher risk for potential
money laundering and terrorist financing. But competent authorities or financial institutions may
prioritize following insinuations for assessment purposes;

 Countries which are facing international sanctions.

 Countries lacking appropriate AML/CFT laws regulations and other measures.

 Countries providing funding or support for terrorist activities.

 Countries having significant levels of corruption, or other criminal activity.

Customer Risk

A customer may pose for potential money laundering or terrorist financing risks if he is involved
in;

 Recurrent and inexplicable movement of accounts to different institutions.

 Frequent and unexplained movement of funds between institutions in various geographic
jurisdictions.
 Distance between the institution and the residence of the customer.
 Involvement of customer in Casinos, betting and other gambling related activities.
 Unjustified generation of cash from business of low activity.
 Involvement in Charities and other “not for profit”.
 Gatekeepers (accountants, lawyers, or other professionals).
 Politically Exposed Persons (PEPs).

Risk Profiling

Banks should assess risk involved e.g., products, services and clients by using their own
judgment and Information based on assessments procedures like CDD/KYC measures.

Quantification of Risk through Risk Matrix:

Risk Assessment Matrix is a matrix which measures the probabilities and consequences of
money laundering and terrorist financing risks (products, services and clients) by categorizing as
low, medium, high or any suitable rating scale. Based on this quantification, appropriate
measures (simplified due diligence or enhanced due diligence) are taken.


 RISK PROFILING BOX (Pakistan)
Risk Risk Variables/ Determinants Assigned
Determinants Risk
Weight
KYC exceptions of customers
PEPs (Politically Exposed Persons)
Complex/uncertain Business structures
Customer Verifications channels and their reliability
Invalid Source of Funds
End utilization of funds & customer
High value transaction/Notable net worth
customer
Products & services based on face-to-face
Product/ conduct
Services Users of private banking
Transfer of funds by using excessive
instruments
Purchasing for International products &
Services
Use of online transfers
Channels
Cash based transactions
obscurity in transactions
Based in High Risk Jurisdictions notified
Geographic by FATF
Locations Direct & Indirect relation to UN
Sanctioned Countries
Name updated in databases (World Check,
OFAC)
Connection to offshore centers or tax
heavens
Nominated by NAB, FIA, FMU
Fraudulent record/history
Others
Criminal or Police Reports
Suspicious funds or business activities
Defaulter history, notified by any
institution, ECIB
Suspicious involvement in fund raising in
TF


Phases of Risk Based Approach

To combat money laundering and terrorist financing, a risk-based approach (RBA) is a practice
that may apply following phases;

 Risk assessment

 Risk-mitigation

 Residual Risk identification

 Ongoing monitoring

Risk Assessment
A risk assessment phase involves in assessing the forthcoming threats and susceptibility factors
that may crop up the menaces of money laundering and terrorist financing. The parameters of
assessment depend on the size and risk factors of a business.
Following factors are significant in risk assessment:
 Products and services and the delivery channels
 The geographic locations
 clients

Risk Mitigation
Risk mitigation is practiced by taking measures and t implementing controls to curb the latent
money laundering and terrorist financing risks. There is paramount need to devise written risk-
mitigation strategies and policies on country/global level to mitigate high risks) and apply them
for high risks situations.

Risk Identification & Ongoing Monitoring

All financial and other concerned Institutions spot the residual risks emerged from higher risk
customers, products, services, delivery channels and geographic territories. RBA approach is not
static assessments approach. It is based on ongoing monitoring.

Still there is need of more actions to convert RBA from a ‘tick box’ approach to be an effective
tool against money laundering or terrorist financing. By setting priorities and allocation of
targeted resources, risk-based approach may play a vital role in prevention or mitigation of
money laundering and terrorist financing.


Financial Intelligence Unit: Curtailing the Perils of Money Laundering & Terrorist
Financing

Money Laundering and Terrorist Financing are two menaces which posing a threat to global
security. By using Money-laundering processes criminals may disguise the illegal or illicit
origins of their wealth and guard their assets to evade any transcribe by law enforcement
agencies and trail of incriminating facts. Similarly Terrorists and terrorist groups also depend on
masked money to perform and prolong their terrorist intents and acts.
History of Financial Intelligence Unit

Since the mid-1980s, the world has been compelled by perils of these menaces to develop
contemporary anti-money-laundering approaches. The development of “United Nations
Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (1988)” was
very initial effort to combat the money laundering and terrorist financing. The application of
intelligence and analytical techniques can identify and curtail money-laundering & terrorist
financing by detecting and disrupting the activities of terrorists and money launders. In
pursuance of formation of these effective intelligence and investigative techniques to fight
against money laundering and financing to terrorists, the world ultimately recognized the
indispensable need to develop Financial Intelligence Units at jurisdictional level. Followings are
chronological proceedings which directly or indirectly contributed in formation and signifying
the imperativeness of FIUs at country level.

 UN Convention against the Illicit Traffic in Narcotic Drugs and Psychotropic Substances
(1988)
 Financial Action Task Force (FATF) 40 Recommendations (1990)
 The formation of Egmont Group (1995)
 United Nations’ Special Assembly Session, Political Declaration and Action Plan against
Money Laundering (1998)
 International Convention for the Suppression of the Financing of Terrorism (2002)
 UN Convention against Transnational Organized Crime (2003) and UN Convention
against Corruption (2005)
 UN Security Council Resolution 1617 (2005) and the Annexed Plan of Action of
Resolution 60/288 of the UN General Assembly (20 Sept 2006)
 UN General Assembly Resolution 60/288 (Sep. 2006)

To curb the global threat of money laundering & terrorist financing, various government
agencies and international delegates joined their hands at the Egmont-Arenberg Palace in
Brussels in June 1995. The outcome of meeting was the Egmont Group (“Egmont”), an
informal body of government disclosure receiving agencies that share a common goal – to
provide a forum to enhance mutual cooperation and to share information that has utility in
detecting and combating money laundering and, more recently, terrorism financing. Later on
The Legal Working Group of (“Egmont”) described a purposeful definition of government

agencies, called Financial Intelligence Units (“FIUs”). The interpretation of FATF’s 29 th
Recommendation suggests that all countries should establish a financial intelligence unit (FIU)
and apply for membership with the Egmont Group.

Definition of Financial Intelligence Unit

Initially Legal Working Group, Egmont worked on and approved the following definition of an
FIU in 1996, consequently amended in 2004 to reflect the FIU’s role in combating terrorism
financing:

“A central, national agency responsible for receiving, (and as permitted, requesting), analysing
and disseminating to the competent authorities, disclosures of financial information: (i)
concerning suspected proceeds of crime and potential financing of terrorism, or (ii) required by
national legislation or regulation, in order to combat money laundering and terrorism
financing”.

Functions of Financial Intelligence Unit

Followings are prime functions of FIUs.

(A) Receipt

The financial intelligent unit acts as the central agency for receiving of disclosures submitted by
reporting entities e.g., banks, insurance companies, casinos etc. The information should be
communicated as per guidance of FATF’s Recommendations No. 20 th and Recommendations No
23rd. additionally other information e.g., (CTR, WTR, and disclosures) should be reported
accordingly in compliance of national legislation.

(B) Analysis

FIU analysis should be based on critical information received from reporting entities. The
process of examination of information or disclosures is assisted by analytical software along with
human judgment approach. Generally two forms of analysis are used e.g., Operational analysis &
Strategic analysis.
Operational analysis interprets information to notify definite persons, properties, illicit
networks and links), with objective to pursue the track of suspicious transactions and
involvements. This analysis also focuses to identify the relationship between origin of illicit
proceeds of crime, predicate offences, money laundering, or the financing of terrorism and their
end users.
Strategic analysis performs its role to identify trends and patterns of money laundering and the
terrorist financing by using definite information from various sources (competent & state
authorities). Strategic analysis assesses the possible threats and vulnerabilities due to money
laundering and the financing of terrorism and devises appropriate strategies suggestions for the
FIU.


(C) Dissemination
mation to relevant
The financial intelligence unit is fully functional entity to disseminate the inform
competent authorities on spontanneously and upon request basis. Dedicated, secu ure and protected
channels are used for the purposee dissemination.

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Figure: Functions of Financial Inntelligence Unit

Models of financial intelligen

nce units:

A country may establish onee of the four models of FIUs (Judicial, laaw enforcement,
Administrative, and hybrid FIUs)) in light of its jurisdictional and legal system.
The Judicial Model is functionaal with powers of seizing funds, freezing acco ounts, conducting
interrogations, detaining people, conducting searches. The Law Enforcement Model executes
anti-money laundering sections and measures in coordination of law enforcem ment systems and
jurisdictional authority to probee money laundering and terrorist financing. Th he Administrative
Model performs as a buffer bettween the financial entities & law enforcemen nt agencies. It is
characterized as a centralized, independent, administrative unit with basic function to receive and
process information from the fiinancial sectors and route results to concerned d authorities like
judicial or law enforcement agenncies. The Hybrid Model is combination of any twot FIU models.


PAKISTAN: ML& FT PROFILE

In 2010, The Financial Action Task Force, an inter-governmental body endeavoring to counter
money laundering and terrorist funding has listed the countries like Angola, Ecuador, Ethiopia,
Iran, North Korea, Pakistan, Sao Tome and Principe, and Turkmenistan with tags “a risk to the
international financial system.”

Keeping the gravity of ineffective measures and pursuant to FATF recommendation and the
Egmont Group’s statement of purpose, on June 25, 2010 the FATF recommended a fully
operational and effectively functioning Financial Intelligence Unit (FIU) for Pakistan. In 2012,
Pakistan was placed in Grey list (a country not fully compliant with the standards and measures
to efficiently contest the issues of money laundering & financing to terrorists).

The Financial Monitoring Unit of Pakistan has played a fundamental role to place Pakistan in
catalog of jurisdictions with effective compliance measures against money laundering & terrorist
financing.


CHAPTER III

ANTI MONEY LAUNDERING & TERRORIST FINANCING: INTERNATIONAL

STANDARDS AND PAKISTAN
Money laundering and terrorist financing are serious threats to global security, the legal economy
and affect the integrity of financial institutions. Over the last three decades phenomenal growth
of financial services has been observed due to advancement in technology and globalization.
This growth has led to increased cross-border activities to boost up global financial
intermediation. But on other side, this development has promoted transnational organized crimes
including Money Laundering and Terrorist Financing (ML/ TF) enacted by underground
economies.

In response to the growing concern about money laundering and terrorist activities, the
international community has acted on many fronts. Some are as under;

The United Nations

The United Nations (UN) was the first international organization to undertake significant action
to fight money laundering on a truly world-wide basis. The UN is important in this regard for
several reasons. First, it is the international organization with the broadest range of membership.
Founded in October of 1945, there are currently 191 member states of the UN from throughout
the world. Second, the UN actively operates a program to fight money laundering; the Global
Program against Money Laundering (GPML), which is headquartered in Vienna, Austria, is part
of the UN Office of Drugs and Crime (UNODC). Third, and perhaps most importantly, the UN
has the ability to adopt international treaties or conventions that have the effect of law in a
country once that country has signed, ratified and implemented the convention, depending upon
the country’s constitution and legal structure. In certain cases, the UN Security Council has the
authority to bind all member countries through a Security Council Resolution, regardless of other
action on the part of an individual country.

Global Program against Money Laundering the UN Global Program against Money Laundering
(GPML) is within the UN Office of Drugs and Crime (UNODC). The GPML is a research and
assistance project with the goal of increasing the effectiveness of international action against
money laundering by offering technical expertise, training and advice to member countries upon
request. It focuses its efforts in the following areas:

• Raise the awareness level among key persons in UN member states;

• Help create legal frameworks with the support of model legislation for both common and civil
law countries;
• Develop institutional capacity, in particular with the creation of financial intelligence units;
• Provide training for legal, judicial, law enforcement regulators and the private financial sectors;
• Promote a regional approach to addressing problems; develop and maintain strategic
relationships with other organizations

• Maintain a database of information and undertake analysis of relevant information.

Thus, the GPML is a resource for information, expertise and technical assistance in establishing
or improving a country’s AML infrastructure.

The Vienna Convention

Due to growing concern about increased international drug trafficking and the tremendous
amounts of related money entering the banking system, the UN, through the United Nations
Drug Control Program (UNDCP) initiated an international agreement to combat drug trafficking
and money laundering. In 1988, this effort resulted in the adoption of the United Nations
Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (1988) (Vienna
Convention). The Vienna Convention, which was named for the city in which it was signed,
deals primarily with provisions to fight the illicit drug trade and related law enforcement issues;
169 countries are party to the convention. Although it does not use the term money laundering,
the convention defines the concept and calls upon countries to criminalize the activity. The
Vienna Convention is limited, however, to drug trafficking offenses as predicate offenses and
does not address the preventive aspects of money laundering. The convention came into force on
November 11, 1990.

The Palermo Convention

In order to expand the effort to fight international organized crime, the UN adopted The
International Convention against Transnational Organized Crime (2000) (Palermo Convention).
This convention, also named for the city in which it was signed, contains a broad range of
provisions to fight organized crime and commits countries that ratify this convention to
implement its provisions through passage of domestic laws. With respect to money laundering,
the Palermo Convention specifically obligates each ratifying country to:

• Criminalize money laundering and include all serious crimes as predicate offenses of money
laundering, whether committed in or outside of the country, and permit the required criminal
knowledge or intent to be inferred from objective facts
• Establish regulatory regimes to deter and detect all forms of money laundering, including
customer identification, record-keeping and reporting of suspicious transactions; Authorize the
cooperation and exchange of information among administrative, regulatory, law enforcement and
other authorities, both domestically and internationally, and consider the establishment of a
financial intelligence unit to collect, analyze and disseminate information;
• Promote international cooperation.

This convention went into force on the 29th of September 2003, having been signed by 147
countries and ratified by 82 countries. The Palermo Convention is important because its AML
provisions adopt the same approach previously adopted by the Financial Action Task Force on
Money Laundering (FATF) in its Forty Recommendations on Money Laundering.


International Convention for the Suppression of the Financing of Terrorism

The financing of terrorism was an international concern prior to the attacks on the United States
of September 11, 2001. In response to this concern, the UN adopted the International Convention
for the Suppression of the Financing of Terrorism (1999).This convention came into force on
April 10, 2002, with 132 countries signing the convention and 112 countries ratifying it. This
convention requires ratifying states to criminalize terrorism, terrorist organizations and terrorist
acts. Under the convention, it is unlawful for any person to provide or collect funds with the (1)
intent that the funds be used for, or (2) knowledge that the funds be used to, carry out any of the
acts of terrorism defined in the other specified conventions that are annexed to this convention.

Security Council Resolution 1373

Unlike an international convention, which requires signing, ratification, and implementation by

the UN member country to have the effect of law within that country, a Security Council
Resolution passed in response to a threat to international peace and security under Chapter VII of
the UN Charter, is binding upon all UN member countries. On September 28, 2001, the UN
Security Council adopted Resolution 1373, which obligates countries to criminalize actions to
finance terrorism. It further obligates countries to:
• deny all forms of support for terrorist groups;
• suppress the provision of safe haven or support for terrorists, including freezing funds or assets
of persons, organizations or entities involved in terrorist acts;
• prohibit active or passive assistance to terrorists
• cooperate with other countries in criminal investigations and sharing information about planned
terrorist acts.

Security Council Resolution 1267 and Successors

The UN Security Council has also acted under Chapter VII of the UN Charter to require member
States to freeze the assets of the Taliban, Osama Bin Laden and Al-Qaeda and entities owned or
controlled by them, as designated by the “Sanctions Committee” (now called the 1267
Committee). The initial Resolution 1267 of October 15, 1999, 19 dealt with the Taliban and was
followed by 1333 of December 19, 2000,20 on Osama Bin Laden and Al-Qaeda. Later
Resolutions established monitoring arrangements (1363 of July 30, 200121), merged the earlier
lists (1390 of January 16, 200222), provided some exclusions (1452 of December 20, 200223),
and measures to improve implementation (1455 of January 17, 200324). The 1267 Committee
issues the list of individuals and entities whose assets are to be frozen and has procedures in
place to make additions or deletions to the list on the basis of representations by member States.
The most recent list is available on the website of the 1267 Committee.

The Counter-Terrorism Committee

As noted above, on September 28, 2001, the UN Security Council adopted a resolution
(Resolution 1373) in direct response to the events of September 11, 2001. That resolution
obligated all member countries to take specific actions to combat terrorism. The resolution,


which is binding upon all member countries, also established the Counter Terrorism Committee
(CTC) to monitor the performance of the member countries in building a global capacity against
terrorism. The CTC, which is comprised of the 15 members of the Security Council, is not a law
enforcement agency; it does not issue sanctions, nor does it prosecute or condemn individual
countries. Rather, the Committee seeks to establish a dialogue between the Security Council and
member countries on how to achieve the objectives of Resolution 1373.
Resolution 1373 calls upon all countries to submit a report to the CTC on the steps taken to
implement the resolution’s measures and report regularly on progress. In this regard, the CTC
has asked each country to perform a self-assessment of its existing legislation and mechanism to
combat terrorism in relation to the requirements of Resolution 1373. The CTC identifies the
areas where a country needs to strengthen its statutory base and infrastructure, and facilitate
assistance for countries, although the CTC does not, itself, provide direct assistance. The CTC
maintains a website with a directory for countries seeking help in improving their counter-
terrorism infrastructures. It contains copies of model legislation and other helpful information.

The Financial Action Task Force on Money Laundering

Formed in 1989 by the G-7 countries, the Financial Action Task Force on Money Laundering
(FATF) is an intergovernmental body whose purpose is to develop and promote an international
response to combat money launder-ing. In October of 2001, FATF expanded its mission to
include combating the financing of terrorism. FATF is a policy-making body, which brings
together legal, financial and law enforcement experts to achieve national legislation and
regulatory AML and CFT reforms. Currently, its membership consists of 31 countries and
territories and two regional organizations. In addition, FATF works in collaboration with a
number of international bodies and organizations. These entities have observer status with FATF,
which does not entitle them to vote, but otherwise permits full participation in plenary sessions
and working groups. FATF’s three primary functions with regard to money laundering are:

1. Monitoring members’ progress in implementing anti-money laundering measures

2. Reviewing and reporting on laundering trends, techniques and countermeasures
3. Promoting the adoption and implementation of FATF anti-money laundering standards
globally.

The Forty Recommendations

FATF has adopted a set of 40 recommendations, The Forty Recommendations on Money

Laundering (The Forty Recommendations), which constitute a comprehensive framework for
AML and are designed for universal application by countries throughout the world. The Forty
Recommendations set out principles for action; they permit country flexibility in implementing
the principles according to the country’s own particular circumstances and constitutional
requirements. Although not binding as law upon a country, The Forty Recommendations have
been widely endorsed by the international community and relevant organizations as the
international standard for AML.


The Forty Recommendations are actually mandates for action by a country if that country wants
to be viewed by the international community as meeting international standards. The Forty
Recommendations were initially issued in 1990 and have been revised in 1996 and 2003 to take
account of new developments in money laundering and to reflect developing best practices
internationally.

Chronological Revisions in FATF Recommendations

In 1990, FATF introduced its 40 recommendations as an initiative to fight against money

laundering. In 1996, FATF revised the recommendations by following the varying trends and
techniques of money laundering. In 2001, FATF realized the significant impacts of funding of
terrorist acts and terrorist organisations (attacks of 9/11) and initiated nine Special
Recommendations on Terrorist Financing. In 2003, FATF again revised the recommendations
for efficient management of ML/TF. In 2008, the mandate of FATF was expanded in connection
to financing of proliferation of weapons of mass destruction (WMD). In 2012, body has
remodeled the forty recommendations to redress the perils of Money laundering and terrorist
financing with effective measures.

Following were major changes lastly introduced in recommendations of Financial Action Task
Force.

 The Risk-based approach.

 Transparency about the ownership and control of legal persons and legal arrangements.
 International Cooperation
 Operational Standards
 New Threats & New Priorities
 Corruption & Politically Exposed Persons
 Financing of Proliferation
 Tax Crimes
 Terrorist Financing
 Clarifying obligations

The FATF’s 40 Recommendations: Summary

A. AML/CFT Policies and Coordination

1- Assessing risks and applying a risk-based approach: In order to manage the detrimental
consequences of money laundering and terrorist financing countries should require financial
institutions and designated non-financial businesses and Professions (DNFBPs) to take
appropriate mitigating measures; (a) identify (b) assess (c) effective actions to combat their
money laundering and terrorist financing risks. After assessment phase, countries should devise
and apply a risk-based approach (RBA) as a tool of prevention of money laundering and terrorist
financing.


2- National cooperation and coordination: All Countries should arrange for national
AML/CFT policies and ensure that all authorities at policy making level and operational level
have effective cooperation & coordination to fight against ML/FT & financing of proliferation
of WMD.

B. Money Laundering and Confiscation

3- Money laundering offence: Based on the Vienna Convention and the Palermo Convention
Countries should criminalize money laundering offences.
4- Confiscation and provisional measures: By legislative and other measures as described in
Vienna Convention, the Palermo Convention, and the Terrorist Financing Convention countries
should empower the competent authorities to freeze or seize and confiscate the (a) property
laundered, (b) proceeds used in or intended for use in money laundering or predicate offences,
(c) property that is the proceeds of, or used in, or intended or allocated for use in, the financing
of terrorism, terrorist acts or terrorist organisations, or (d) property of corresponding value.

C. Terrorist Financing and Financing of Proliferation

5- Terrorist financing offence: Based on terrorist financing convention, countries should

criminalize the financing of terrorist organisations and individual terrorists.
6- Targeted financial sanctions related to terrorism and terrorist financing: In compliance
of United Nations Security Council resolutions No. 1267 (1999) and 1373 (2001), countries
should implement targeted financial sanctions regimes.
7- Targeted financial sanctions related to proliferation: In compliance of United Nations
Security Council Chapter VII of the Charter of the United Nations (prevention, suppression and
disruption of
Proliferation of WMD and its financing), countries should implement targeted financial
sanctions.
8- Non-profit organisations: To avoid the financing of terrorism by misusing the NPOs, the
adequacy of laws and regulations should be reviewed by countries.

D. Preventive Measures

9- Financial institution secrecy laws: Countries should make sure that financial institution
secrecy laws are not hindrances to the implementation of the FATF Recommendations.

Customer Due Diligence and Record-Keeping

10- Customer due diligence: Financial institutions should conduct due diligence measures and
take steps to prohibit the presence of anonymous accounts or accounts in obviously fictitious
names.
11-Record-keeping: To facilitate the competent authorities, the record of domestic and
international transaction should be maintained for at least five years.


 Additional Measures for Specific Customers and Activities

12-Politically exposed persons: Reasonable measures should be taken by financial institutions

to determine whether a customer or beneficial owner is a domestic politically exposed person
(PEPs) or foreign PEPs.
13-Correspondent banking: while extending cross-border correspondent banking, in addition
to normal CDD measures, the financial institutions should determine the nature of business,
reputation, quality of supervision, AML/CFT controls of respondent institution.
14- Money or value transfer services: Measures such as registration, licensing, monitoring and
effective compliance for money or value transfer services should be taken by countries.
15- New technologies: New products and business practices may pose for money laundering and
terrorist financing risks. Countries and financial institutions should devise proper identification
and assessment mechanisms for new products and business practices.
16- Wire transfers: In transactions of wire transfer countries should make instruct the financial
institutions to have monitoring and detecting measures both for originator and beneficiary.
Financial institutions should process the wire transfers in accordance of United Nations Security
Council resolutions, such as resolution 1267 (1999) & 1373 (2001) etc.

Reliance, Controls and Financial Groups

17- Reliance on third parties: Financial institutions may rely on third parties to perform the
CDD measures by obtaining prior permission from its country.
18- Internal controls and foreign branches and subsidiaries: Financial groups should ensure
the implementation of group wide programs against ML/TF. Measures for AML/CFT should be
in accordance the requirements of the home country.
19- Higher-risk countries: While going to have business and transactions with high risk
countries (As per FATF), effective and proportionate measures such as enhanced due diligence
and other counter measures should be applied by financial institutions.

Reporting of Suspicious Transactions

20- Reporting of suspicious transactions: If FI suspects that the funds are ensuing the criminal
activity or having any connection to terrorist financing. On prompt basis, financial intelligence
unit (FIU) should be communicated about these suspicions.
21-Tipping-off and confidentiality: Law should endorse protection to financial institutions,
their directors, officers and employees from criminal and civil liability on account of information
disclosure to FIUs. Financial institutions, their directors, officers and employees should be
prohibited by law to tip off the facts.

Designated Non-Financial Businesses and Professions

22- DNFBPs: customer due diligence: Designated non-financial businesses and professions
(DNFBPs) are Casinos, real estates, Dealers in precious metals and dealers in precious stones,
lawyers, notaries, other independent legal professionals and accountants and Trust and


company service providers. Customer due diligence and record-keeping requirements derived
from Recommendations 10, 11, 12, 15, and 17 also apply to DNFBPs.
23- DNFBPs: Other measures: The requirements proposed in Recommendations 18 to 21 apply
to all designated non-financial businesses and professions.

Transparency and Beneficial Ownership of Legal Persons and Arrangements

24- Transparency and beneficial ownership of legal persons: Misuse of legal persons for
ML/TF should be prevented by adequate measures from countries. Adequate, accurate and
timely information regarding beneficiary ownership and control of legal persons should be
accessible to authorities.
25-Transparency and beneficial ownership of legal arrangements: Misuse of legal
arrangements e.g., trusts for ML/TF should be prevented by adequate measures from countries.
Adequate, accurate and timely information regarding beneficiary ownership and control of legal
arrangements should be accessible to authorities.

Powers and Responsibilities of Competent Authorities, and other Institutional

Measures

26- Regulation and supervision of financial institutions: Necessary legal or regulatory

measures should be taken to prevent criminals from holding or controlling or managing the
financial institution for ML/TF purposes. Financial institutions should undergo sufficient
regulatory and supervisory measures & be implementing the FATF Recommendations.
27- Powers of supervisors: To combat menaces of money laundering and terrorist financing
financial institutions should give enough powers to supervisors for supervision, monitoring,
compliance and inspection. Authority to compel for production of information, imposing
disciplinary and financial sanctions should be given to them.
28- Regulation and supervision of DNFBPs: DNFBPs should be subject to regulatory and
supervisory measures.

Operational and Law Enforcement

29- Financial intelligence units: For receipt and analysis of suspicious transactions and other
ML/TF related information, a national centre (Financial intelligence unit) should be established.
30- Responsibilities of law enforcement and investigative authorities: For effective money
laundering and terrorist financing investigations, countries should establish designated law
enforcement authorities (LEAs) which perform with responsibility within the framework of
national AML/CFT policies.
31- Powers of law enforcement and investigative authorities: The competent authorities
engaged in AML/CFT operations should be empowered to compel for production of information,
search of persons and premises. Countries should empower LE&IAs to have effective
undercover operations, intercepting communications, accessing computer systems and controlled
delivery.
32- Cash couriers: To prevent physical cross-border transportation of currency and bearer
negotiable instruments, countries should empower their LEAs with legal authority. Declaration
system and/or disclosure system should be used to restrain or stop this transportation.


 General Requirements

33- Statistics: To build an effective and efficient AML/CFT system, comprehensive statistics on
STRs, ML/TF prosecutions, investigations, convictions, property (frozen, seized, confiscated),
mutual legal assistance and requests for international cooperation should be maintained.
34- Guidance and feedback: For application of national measures to combat money laundering
and terrorist financing, the competent authorities, supervisors and SRBs should formulate
guidelines and provide feedback.

Sanctions

35- Sanctions: To deal with non compliant (natural or legal persons mentioned in
Recommendations 6, and 8 to 23,) of AML/CFT requirements, the countries should ensure for
effective, proportionate and dissuasive sanctions.

International Cooperation

36- International instruments: Being a key player in combat of ML/TF, countries should take
urgent actions to be party and implement fully the Vienna Convention, 1988; the Palermo
Convention, 2000; the United Nations Convention against Corruption, 2003; and the Terrorist
Financing Convention, 1999.
37- Mutual legal assistance: Treaties, arrangements or other mechanisms on mutual legal
assistance should be developed by countries on rapid, constructive and effective footings.
38- Mutual legal assistance; freezing and confiscation: In terms of MLA, countries should
have powers to extend its prompt action by identifying, freezing, seizing and confiscating
property as requested by foreign countries.
39- Extradition: Without any impediment countries should honored the extradition requests on
constructive and effective grounds.
40- Other forms of international cooperation: On lawful basis, countries should extend their
international cooperation against money laundering, associated predicate offences and terrorist
financing.

Monitoring Members Progress

Monitoring the progress of members to comply with the requirements of the Forty
Recommendations is facilitated by a two-stage process: self assessments and mutual evaluations.
In the self-assessment stage, each member responds to a standard questionnaire, on an annual
basis, regarding its implementation of The Forty Recommendations. In the mutual evaluation
stage, each member is examined and assessed by experts from other member countries.

Reporting on Money Laundering Trends and Techniques

One of FATF’s functions is to review and report on money laundering trends, techniques and
methods (also referred to as typologies). To accomplish this aspect of its mission, FATF issues

annual reports on developments in money laundering through its Typologies Report. These
reports are very useful for all countries, not just FATF members, to keep current with new
techniques or trends to launder money and for other developments in this area.

The NCCT List

One of FATF’s objectives is to promote the adoption of international AML/ CFT standards for
all countries. Thus, its mission extends beyond its own membership, although FATF can only
sanction its member countries and territories. Thus, in order to encourage all countries to adopt
measures to prevent, detect and prosecute money launderers, i.e., to implement The Forty
Recommendations, FATF has adopted a process of identifying those jurisdictions that serve as
obstacles to international cooperation in this area. The process uses 25 criteria, which are
consistent with The Forty Recommendations, to identify such non-cooperative countries and
territories (NCCT’s) and place them on a publicly available list.

An NCCT country is encouraged to make rapid progress in remedying its deficiencies. In the
event an NCCT country does not make sufficient progress, counter-measures may be imposed.
Counter measures consist of specific actions by FATF member countries taken against an
NCCT-listed country. In addition to the application of applying special attention to business
relationships and transactions from such countries,40 the FATF can also impose further counter-
measures, which are to be applied in a gradual, proportionate and flexible manner; these include:

• Stringent requirements for identifying clients and enhancement of advisories, including

jurisdiction-specific financial advisories, to financial institutions for identification of the
beneficial owners before business relationships are established with individuals or companies
from these countries.
• Enhanced relevant reporting mechanisms or systematic reporting of financial transactions on
the basis that financial transactions with such countries are more likely to be suspicious.
• In considering requests for approving the establishment in FATF member countries of
subsidiaries or branches or representative offices of banks, taking into account the fact that the
relevant bank is from an NCCT.
• Warning non-financial sector businesses that transactions with entities within the NCCTs might
run the risk of money laundering.

Finally, these counter measures may include FATF-member countries terminating transactions
with financial institutions from such a country. Most countries make a concerted effort to be
taken off the NCCT list because it causes significant problems for their financial institutions and
businesses with respect to international transactions, as well as their reputation internationally.

Terrorist Financing

FATF also focuses its expertise on the world-wide effort to combat terrorist financing. To
accomplish this expanded mission FATF has adopted nine Special Recommendations on
Terrorist Financing (Special Recommendations). As part of this effort, FATF members use a
self-assessment questionnaire of their country’s actions to come into compliance with the Special
Recommendations. FATF is continuing to develop guidance on techniques and mechanisms used
in the financing of terrorism.


Methodology for AML/CFT Assessments

In 2002, following lengthy consultations, the FATF, International Monetary Fund (IMF), and
World Bank adopted a single assessment methodology to be used both by FATF in its mutual
evaluations and by the IMF and World Bank in their assessments under their financial sector
assessment and offshore financial center programs. The FATF-style regional bodies (FSRBs),
geographical sector organizations, which had been involved in the development of the
methodology, subsequently agreed to use it for their mutual evaluations.

The methodology was revised in 2004, following the 2003 revision of The Forty
Recommendations. The methodology sets out over 200 “essential criteria” that assessors should
examine when carrying out assessments of an AML and CFT regime. It covers the legal and
institutional AML/CFT framework for a country, including financial intelligence units. The
methodology also includes relevant elements from United Nations Security Council resolutions
and international conventions, as well as supervisory and regulatory standards for the banking,
insurance and securities sectors. Those essential criteria describe the mandatory elements that
need to be present to comply fully with each of The Forty Recommendations and Special
Recommendations. The methodology includes guidance on how to rate compliance and is based
on performance against the essential criteria. The methodology also includes a number of
“additional elements,” which are options for further strengthening AML/CFT systems. Although
Performance against these elements is reviewed as part of the overall assessment; they are not
mandatory and are not assessed for compliance purposes. The adoption of this single,
comprehensive assessment methodology by the FATF, IMF, World Bank, and the FSRBs means
a more uniform approach worldwide to the conduct of assessments and the ratings of country
performance. A country undergoing an assessment will be required, at the first stage of the
assessment, to prepare a self-assessment of its AML/CFT system according to the methodology
document. The document is also a useful detailed guide to a country on measures that need to be
in place to comply with the international standards.

The Basel Committee on Banking Supervision

The Basel Committee on Banking Supervision (Basel Committee) was formed in 1974 by the
central bank governors of the Group of 10 countries. Individual countries are represented by their
central bank or by the relevant authority with formal responsibility for prudential supervision of
banking where that authority is not the central bank. The committee has no formal international
supervisory authority or force of law. Rather, it formulates broad supervisory standards and
guidelines and recommends statements of best practices on a wide range of bank supervisory
issues. These standards and guidelines are adopted with the expectation that the appropriate
authorities within each country will take all necessary steps to implement them through detailed
measures, statutory, regulatory or otherwise, that best suit that country’s national system. Three
of the Basel Committee’s supervisory standards and guidelines concern money laundering issues.


Statement of Principles on Money Laundering

In 1988, the Basel Committee issued its Statement on Prevention of Criminal Use of the Banking
System for the Purpose of Money Laundering (Statement on Prevention). The Statement on
Prevention outlines basic policies and procedures that bank managements should ensure are in
place within their institutions to assist in suppressing money laundering through the banking
system, both domestically and internationally. The statement notes that banks can be used
“unwittingly” as intermediaries by criminals. Thus, the committee considers the first and most
important safeguard against money laundering to be “the integrity of banks own managements
and their vigilant determination to prevent their institutions from becoming associated with
criminals or being used as a channel for money laundering.” There are essentially four principles
contained in the Statement on Prevention:

• Proper customer identification

• High ethical standards and compliance with laws
• Cooperation with law enforcement authorities
• Policies and procedures to adhere to the statement
.
Core Principles for Banking

In 1997, the Basel Committee issued its Core Principles for Effective Banking Supervision (Core
Principles), which provides a comprehensive blueprint for an effective bank supervisory system
and covers a wide range of topics. Of the total 25 Core Principles, one of them, Core Principle
deals with money laundering; it provides: Banking supervisors must determine that banks have
adequate policies, practices and procedures in place, including strict “know your customer”
rules, that promote high ethical and professional standards in the financial sector and prevent the
bank from being used; intentionally or unintentionally, by criminal elements. These “know your
customer” or “KYC” policies and procedures are a crucial part of an effective AML/CFT
institutional framework for every country.

Customer Due Diligence

In October of 2001, the Basel Committee issued an extensive paper on KYC principles entitled,
Customer due diligence for banks (Customer Due Diligence).This paper was issued in response
to noted deficiencies in KYC procedures on a world-wide basis. These KYC standards build
upon and provide more specific information on the Statement on Prevention and Core Principle.
The essential elements of KYC standards are set out in detail in this document. It is worth noting
that these KYC standards set out in Customer Due Diligence are intended to benefit banks
beyond the fight against money laundering by protecting the safety and soundness of banks and
the integrity of banking systems. In addition, the Basel Committee, in this document, strongly
supports the “adoption and implementation of the FATF recommendations, particularly those
relating to banks,” and intends that the standards of Customer Due Diligence “be consistent with
the FATF recommendations.


International Association of Insurance Supervisors

Established in 1994, the International Association of Insurance Supervisors (IAIS) promotes

worldwide cooperation among insurance supervisors in setting standards for insurance sector
supervision and enhancing coordination between insurance sector supervisors and other financial
market supervisors. The IAIS has 180 members. In October 2003, the IAIS approved and issued
the Insurance Core Principles and Methodology, which revised the core principles for the
supervision of insurers. The Insurance Core Principle requires insurance supervisory authorities
to take effective measures to deter, detect, and report money laundering and financing of
terrorism consistent with the FATF Recommendations. In 2004, the IAIS issued Guidance Paper
on Anti–Money Laundering and Combating the Financing of Terrorism for Insurance
Supervisors and Insurance Entities. This document elaborated on the possibilities for, and
methods of, money laundering in the insurance sector and the duties of both the supervisors and
the supervised entities in fighting money laundering.

Its primary objectives are to:

• Promote cooperation among insurance regulators,
• Set international standards for insurance supervision,
• Provide training to members, and
• Coordinate work with regulators in the other financial sectors and international financial
institutions.

In addition to member regulators, the IAIS has more than 60 observer members, representing
industry associations, professional associations, insurance and reinsurance companies,
consultants and international financial institutions. While the IAIS covers a wide range of topics
including virtually all areas of insurance supervision, it specifically deals with money laundering
in one of its papers. In January 2002, the association issued Guidance Paper No. 5, Anti-Money
Laundering Guidance Notes for Insurance Supervisors and Insurance Entities (AML Guidance
Notes). It is a comprehensive discussion on money laundering in the context of the insurance
industry. Like other international documents of its type, the AML Guidance Notes are intended
to be implemented by individual countries taking into account the particular insurance companies
involved, the products offered within the country, and the country’s own financial system,
economy, constitution and legal system.

The AML Guidance Notes contain four principles for insurance entities:
• Comply with anti-money laundering laws
• Have “know your customer” procedures
• Cooperate with all law enforcement authorities
• Have internal AML policies, procedures and training programs for employees.

International Organization of Securities Commissioners

IOSCO is recognized as the international standard setter for securities markets and its wide
membership regulates more than 90 percent of the world’s securities markets. IOSCO promotes
cross-border enforcement and exchange of information among the international community of
securities regulators. IOSCO’s objectives and principles of securities regulation include actions


that supervisory authorities should take to minimize risk of money laundering in the sector. In
2002, IOSCO established a Task Force on Client Identification and Beneficial Ownership and
issued a report in May 2004 entitled “Principles on Client Identification and Beneficial
Ownership for the Securities Industry.” Subsequently in October 2005, Anti-Money Laundering
Guidance for Collective Investment Schemes was issued to clarify application of global
standards to the operation of collective investment schemes.

The International Organization of Securities Commissioners (IOSCO) is an organization of

securities commissioners and administrators that have day-today responsibilities for securities
regulation and the administration of securities laws in their respective countries. The current
membership of IOSCO is comprised of regulatory bodies from 105 countries. In the event that
there is no governmental authority charged with administration of securities laws in a given
country, a self-regulatory body, such as a stock exchange, from that country is eligible for voting
membership. There are also associate members, which are international organizations, and
affiliate members, which are self regulatory organizations; neither of these two types of
membership has voting privileges.

IOSCO has three core objectives for securities regulation:

• The protection of investors
• Ensuring that markets are fair, efficient and transparent
• The reduction of systematic risk

With regard to money laundering, IOSCO passed a “Resolution on Money Laundering” in 1992.
Like other international organizations of this type, IOSCO does not have law-making authority.
Similar to the Basel Committee and IAIS, it relies on its members to implement its
recommendations within their respective countries. The resolution provides as follows: Each
IOSCO member should consider:

• The extent to which customer identifying information is gathered and recorded by

financial institutions under its supervision, with a view to enhancing the ability of
relevant authorities to identify and prosecute money launderers.
• The extent and adequacy of record-keeping requirements, from the perspective of
providing tools to reconstruct financial transactions in the securities and future markets
• Together with their national regulators charged with prosecuting money laundering
offenses, the appropriate manner in which to address the identification and reporting of
suspicious transactions
• The procedures in place to prevent criminals from obtaining control of securities and
futures businesses, with a view to working together with foreign counterparts to share
such information as needed
• The appropriate means to ensure that securities and futures firms maintain monitoring
and compliance procedures designed to deter and detect money laundering
• The use of cash and cash equivalents in securities and futures transactions, including the
adequacy of documentation and the ability to reconstruct any such transactions.
• The most appropriate means, given their particular national authorities and powers, to
share information in order to combat money laundering.


The Egmont Group of Financial Intelligence Units

As part of the effort to fight money laundering, governments have created agencies to analyze
information submitted by covered entities and persons pursuant to money laundering reporting
requirements. Such agencies are commonly referred to as financial intelligence units (FIUs).
These units serve as the focal point for national AML programs, because they provide for the
exchange of information between financial institutions and law enforcement.

Because money laundering is practiced on a worldwide scale, there has also been the need to
share information on a cross-border basis. In 1995, a number of governmental units known today
as FIUs began working together and formed the Egmont Group of Financial Intelligence. Units
(Egmont Group) (named for the location of its first meeting at the Egmont-Arenberg Palace in
Brussels). The purpose of the group is to provide a forum for FIUs to improve support for each
of their national AML programs and to coordinate AML initiatives. This support includes
expanding and systematizing the exchange of financial intelligence information, improving
expertise and capabilities of personnel, and fostering better communication among FIUs through
technology, and helping to develop FIUs worldwide.

The mission of the Egmont Group was expanded in 2004 to include specifically financial
intelligence on terrorist financing. To be a member of the Egmont Group, a country’s FIU must
first meet the Egmont FIU definition, which is “a central, national agency responsible for
receiving (and, as permitted, requesting), analyzing and disseminating to the competent
authorities, disclosures of financial information: (i) concerning suspected proceeds of crime and
potential financing of terrorism, or (ii) required by national regulation, in order to counter money
laundering and terrorist financing.” A member must also commit to act in accordance with the
Egmont Group’s Principles for Information Exchange between Financial Intelligence Units for
Money Laundering Cases. These principles include conditions for the exchange of information,
limitation on permitted uses of information, and confidentiality. Membership of the Egmont
Group is currently comprised of 94 jurisdictions. Members of the Egmont Group have access to a
secure website, which is not available to the public, to exchange information. The Egmont Group
is an informal body without a secretariat or a permanent location. The Egmont Group meets in a
plenary session once a year, and in working group sessions three times a year. Within the
Egmont Group, the FIU heads make all the policy decisions, including membership.

FATF-Style Regional Bodies

Financial Action Task Force on Money Laundering (FATF) regional groups or FATF-Style
Regional Bodies (FSRBs) are very important in the promotion and implementation of anti-
money laundering (AML) and combating the financing of terrorism (CFT) standards within their
respective regions. FSRBs are to their regions what FATF is to the world. They are modeled
after FATF and, like FATF, have AML and CFT efforts as their sole objectives. They encourage
implementation and enforcement of FATF’s The Forty Recommendations on Money Laundering
(The Forty Recommendations) and the nine Special Recommendations on Terrorist Financing
(Special Recommendations). They also administer mutual evaluations of their members, which
are intended to identify weaknesses so that the member may take remedial action. Finally, the


FSRBs provide information to their members about trends, techniques and other developments
for money laundering in their Typology Reports, which are usually produced on an annual basis.

The Asia/Pacific Group on Money Laundering

The Asia/Pacific Group on Money Laundering (APG) was established in 1997. Its regional scope
covers South Asia, Southeast Asia, and East Asia and the South Pacific with 38 member
jurisdictions as of July 2008. The purpose of the APG is to facilitate the adoption,
implementation, and enforcement of internationally accepted standards against money laundering
and the financing of terrorism. The functions of the APG include improving the understanding of
money laundering and terrorist financing typologies in the region through systematic analyses of
typologies, monitoring the implementation of international standards through processes of self-
assessment and mutual evaluation, and providing technical assistance to member jurisdictions.

The World Bank and the International Monetary Fund

In July 2002, the Boards of the World Bank and the IMF made a decision to add the FATF
Recommendations to the list of standards and codes that are relevant to the operational work of
the Bank and the IMF, and from which Reports on the Observance of Standards and Codes could
be prepared. This decision acknowledged the FATF Recommendations as an international
standard for money laundering control and prevention and included an assessment of compliance
with this standard in financial sector assessment programs that the Bank and the IMF carry out.
Since then, the Bank and the IMF have expanded their involvement in anti–money laundering
and terrorist financing efforts. In April 2004 the Boards of the Bank and the IMF made a
decision to endorse the continued involvement of the Bank and the IMF in fighting money
laundering and terrorist financing, and adopted a more integrated and comprehensive approach to
their work in this area. While the Bank and the IMF would continue to assess countries’
compliance with the standards, they would commit more resources to supplying technical
assistance to help countries bring their systems into compliance with international standards. As
part of their technical assistance efforts, the Bank and the IMF organized a Global Policy
Dialogue Series that promoted awareness of money laundering and terrorist financing control
and prevention. The Bank and the IMF also provided technical assistance to jurisdictions on a
bilateral basis or through regional initiatives.

The Asian Development Bank

The Asian Development Bank (ADB) has long been involved in money laundering control and
prevention both directly and indirectly. In April 2003, the ADB adopted a policy to refine its role
in this area according to three principles: (1) to streamline the ADB’s efforts so they fall within
the wider context of its goals and objectives; (2) to avoid duplicating the work of other agencies,
including the FATF and the APG; and (3) to consider carefully the needs of the ADB’s
developing member countries. The policy has three key elements:
1) Assisting developing member countries in the establishment and implementation of effective
legal and institutional systems for AML/CFT


2) Increasing collaboration with other international organizations and aid agencies
3) Strengthening internal controls to safeguard the ADB’s funds

The ADB finances technical assistance projects to combat money laundering and terrorist
financing. This sometimes takes the form of a standalone project and is introduced as an element
in wider financial sector and legal reform projects.

Wolfsberg Group of Banks

The Wolfsberg Group is an association of 12 global banks, representing primarily international

private banking concerns. The group, which was named after the Château Wolfsberg in north-
eastern Switzerland where the group was formed, has established four sets of principles for
private banking.

Anti-Money Laundering Principles for Private Banking: These principles represent the group’s
view of appropriate AML guidelines when dealing with the high net worth individuals and the
private banking departments of financial institutions. They deal with customer identification,
Including establishing beneficial ownership for all accounts, and situations involving extra due
diligence, such as unusual or suspicious transactions.

The eleven principles involve:

1. Client acceptance: general guidelines
2. Client acceptance: situations requiring additional diligence/attention
3. Updating client files
4. Practices when identifying unusual or suspicious activities
5. Monitoring
6. Control responsibilities
7. Reporting
8. Education, training and information
9. Record retention requirements
10. Exceptions and deviations
11. Anti-money-laundering organization.

Statement on the Suppression of the Financing of Terrorism

The Wolfsberg Statement on the Suppression of the Financing of Terrorism describes the role
that financial institutions should play in combating terrorist financing, with a view toward
enhancing the contribution financial institutions can make toward this international problem.
The statement emphasizes that financial institutions need to assist competent authorities in
fighting terrorist financing through prevention, detection and information sharing.
This statement provides that “know your customer” (KYC) policies and procedures should be
enhanced with searches of lists of known or suspected terrorists. In addition, banks should play
an active role in helping governments by applying extra due diligence whenever they see
suspicious or irregular activities. Extra due diligence is especially important when customers


are engaged in sectors or activities that have been identified by competent authorities as being
used for the financing of terrorism. The statement goes on to endorse the need for enhanced
global cooperation and adoption of the FATF Special Recommendations.

Anti-Money Laundering Principles for Correspondent Banking

The Wolfsberg Group has adopted a set of 14 principles to govern the establishment and
maintenance of correspondent banking relationships on a global basis. The principles prohibit
international banks from doing business with “shell banks.” In addition, the principles use a risk-
based approach to correspondent banking that is designed to ascertain the appropriate level of
due diligence that a bank should adopt with regard to its correspondent banking clients.

In evaluating prospective risks, the Wolfsberg principles require a correspondent bank to

consider the client’s particulars;
• Domicile
• Ownership and management structure
• Business portfolio
• Client base
This risk profile is intended to assist the banks in the application of KYC procedures when
providing correspondent banking services. The principles also specify the identification and
follow-up of unusual or suspicious transactions or activities.
The principles for correspondent banking cover the following topics:
1. Preamble
2. Correspondent Banking
3. Responsibility and Oversight
4. Risk-Based Due Diligence
5. Due Diligence Standards
6. Enhanced Due Diligence
7. Shell Banks
8. Central Banks and Supra-National Organizations
9. Branches, Subsidiaries and Affiliates
10. Application to Client Base
11. Updating Client Files
12. Monitoring and Reporting of Suspicious Activities
13. Integration with Anti-Money Laundering Program
14. Recommendation for an International Registry

Monitoring Screening and Searching

This set of principles identifies issues that should be addressed in order for financial institutions
to develop suitable monitoring, screening and searching processes, using a risk-based profile
approach. The principles recognize that the risk profile may be different for a financial
institution, as a whole, than for its individual units, depending on the business conducted in a
particular unit (e.g., retail, private banking, correspondent banking, broker dealer). The principles
further recognize that any process for monitoring, screening or searching is limited to detecting


those clients and transactions that have identifiable characteristics that are distinguishable from
apparently legitimate behavior. Under these principles, financial institutions should have
appropriate processes in place that provide for the identification of unusual activity and unusual
patterns of activity or transactions. Since unusual transactions, patterns or activity need not be
suspicious in all cases, financial institutions must have the ability to analyze and determine if
particular activity, patterns and transactions are suspicious in nature with regard to, among other
things, potential money laundering.

The principles encourage the use of a risk-based approach to monitoring activities. Further, the
principles encourage the use of real-time screening or filtering, which involves the examination
of the transaction prior to actual execution, whenever there is an embargo or sanction in place.
Retroactive searches are encouraged based upon the institution’s risk-based approach. The
majority of ongoing monitoring for unusual and potentially suspicious activity should be
accomplished by transaction monitoring. Risk based transaction monitoring for potential money
laundering requires the development of risk models that identify the potential risks to money
laundering and provide a means of ranking the risks in order to compare the risks to completed
transactions. An appropriate transaction monitoring process should compare the transaction
information against the identified risks (such as geographic location of transaction, the type of
products and services being offered and the type of client engaging in the transaction) with the
different typologies for money laundering and other illicit activities to determine if transaction is
unusual or suspicious.

European Union Directives on Money Laundering

First Directive: The first European Union Directive on Prevention of the Use of the Financial
System for the Purpose of Money Laundering (Directive 91/308/EEC) was adopted by the
Council of Europe in June 1991. The first directive of 1991 was confined to drug trafficking, as
defined in the 1988 Vienna Convention. However, member states were encouraged to extend the
predicate offenses to other crimes.

Second Directive: In December 2001, the EU agreed on a Second Directive (Directive

2001/97/EEC) that amended the prior one. The Second Directive required stricter money
laundering controls across the continent. The Second Directive was a tremendous step forward
because its applicability included many of the important financial centers of the world. It went
well beyond similar standards issued by other organizations such as the UN and even FATF. In
many respects, it exceeded the norms contained in U.S. law and regulations. It extended the
scope of the First Directive beyond drug-related crimes, brought bureaux de change and money
remittance offices under AML coverage, provided a more precise definition of money laundering
and widened the businesses and professions that are subject to the obligations of the Directive.

Third Directive: A Third EU Directive on the Prevention of the Use of the Financial System for
the Purpose of Money Laundering and Terrorist Financing, based on elements of the Financial
Action Task Force’s revised 40 Recommendations, was adopted in 2005.The scope of the Third
Money Laundering Directive differs from the Second Money Laundering Directive in that:

• It specifically includes the category of trust and company service providers.


 • It covers all dealers trading in goods who trade in cash over 15,000 Euros.
• The definition of financial institution includes certain insurance intermediaries.

USA Patriot Act

Motivated by the attacks of September 11, 2001, and the urgent need to decipher and disable
mechanisms that finance terrorism, the U.S. Congress enacted the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act
(USA Patriot Act) in October 2001 to strengthen money laundering laws and the Bank Secrecy
Act to levels unseen since the original passage of the BSA in 1970 and the world’s first anti-
money laundering law in 1986. Title III of the USA Patriot Act (U.S. Public Law 107-56),
entitled the International Money Laundering Abatement and Anti-Terrorist Financing Act of
2001, contains most, though not all, of the antimony laundering-related provisions in this diverse
law. The USA Patriot Act has implications for U.S. institutions and non-U.S. institutions that do
business in the United States. It is important to note that the regulations issued under the USA
Patriot Act by the U.S. Treasury Department provides the detailed requirements that financial
institutions must follow to comply with the provisions of the Act. These regulations are compiled
in 31 Code of Federal Regulation Part 103. Key provisions of the USA Patriot Act stem from the
premise that international access points to the U.S. financial system must be controlled. Thus, the
law covers a wide range of anti-money laundering and terrorism financing provisions affecting
foreign businesses. These include:

Section 311: Special Measures for Primary Money Laundering Concerns (31 U.S.C. 5318A).
This section provides the U.S. Treasury Department with the authority to apply graduated,
proportionate measures against a foreign jurisdiction, a foreign financial institution, a type of
international transaction or a type of account that the Treasury Secretary determines to be a
“primary money laundering concern.” By designating a country or a financial institution as a
“primary money laundering concern,” the U.S. government can force U.S. banks to halt many of
their financial dealings with the designee.

Section 312: Correspondent and Private Banking Accounts (31 U.S.C. 5318(i)). Requires due
diligence and, in certain situations, “enhanced due diligence” for foreign correspondent (which
includes virtually all account relationships that institutions can have with a foreign financial
institution) and private banking accounts for non- U.S. persons.

Section 313: Prohibition on correspondent accounts for foreign shell banks (31 U.S.C. 5318(j)).
Prohibits U.S. banks and securities brokers and dealers from maintaining correspondent accounts
for foreign unregulated “shell” banks that have no physical presence anywhere. The term
“physical presence” is defined as a place of business that is maintained by a foreign bank; is
located at a fixed address (as opposed to solely an electronic address) where it is authorized to
conduct banking activities; employs one or more individuals on a full-time basis at that location;
maintains operating records at that location; and is subject to inspection by the banking authority
which licensed it at that location. The term shell bank
does not include a bank that is a regulated affiliate of a bank that maintains a physical presence.


Section 319(a): Forfeiture from U.S. Correspondent Account (18 U.S.C. 981(k)). In situations
where funds have been deposited with a foreign bank, this section permits the U.S. Government
to seize funds in the same amount from a correspondent bank account in the U.S. that has been
opened and maintained for the foreign bank. The U.S. Government is not required to trace the
funds, as they are deemed to have been deposited into the correspondent account. However, the
owner of the funds may contest the seizure order.

Section 319(b): Records relating to Correspondent Accounts for Foreign Banks (31 U.S.C.
5318(k)). Allows the appropriate Federal banking agency to require a financial institution to
produce within 120 hours (five days) records or information related to the institution’s AML
compliance or related to a customer of the institution or any account opened, maintained,
administered or managed in the U.S. by the financial institution.

Pakistan – A country Committed to combat money laundering & terrorist financing

Pakistan is facing significant risks of money laundering and even more significant risks of
terrorism financing. The country has sacrificed many lives in result of terrorist attacks. Latest
Taliban massacre at a school that killed more than 150 people in December 2014, (Army Public
School massacre) forced the civil-military authorities to have countering measures e.g., legal,
financial, strategic, & operational. The core predicate offenses in Pakistan are ransom seeking,
prevalence of corruption, narcotics trafficking, money laundering and terrorism.

Pakistan’s Chronological actions against money laundering & terrorist financing;

1997- The Anti Terrorism Act [ATA] was formulated.

1999-Pakistan signed the OIC Convention on Combating International Terrorism.
2001- Pakistan joined the Asia Pacific Group on Money Laundering (APGML).
2003- Pakistan became a signatory to the UN Convention against Corruption.
2003- Pakistan effectively banned and sanctioned some NPOs and charity based organizations.
2004- State Bank of Pakistan taken steps to freeze terrorist funds and to assist financial
institutions to identify such funds.
2004- The Anti-Terrorism Act (ATA) of 1997 was amended to extend its scope.
2007- Pakistan ratified the United Nations Convention against Corruption (2003)
2007- Pakistan has criminalized money laundering through the Anti-Money Laundering
ordinance (AMLO). In same year Pakistan set up its Financial Intelligence Unit (FMU).
2009- Pakistan acceded the International Convention for the Suppression of the Financing of
Terrorism (1999)
2009- Money laundering was made an extraditable offence.
2010- Pakistan ratified the United Nations Convention on Transnational Organized Crime (2000)
2010- Anti-Money Laundering Ordinance was revised and passed as the Anti Money Laundering
Act.
2015- The National Action Plan was established to counter terrorism financing and related
offences.


In addition to above, Government has decided to ink reciprocal pacts with the United States of
America (USA) and United Arab Emirates (UAE). Pakistan is a State party to 10 out of 13 UN
Conventions relating to terrorism. Pakistan has signed and ratified SAARC Regional Convention
on Suppression of Terrorism and its additional protocol. Pakistan has signed and ratified the UN
Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances 1988 (The
Vienna Convention). Pakistan is signatory to the UN Convention against Transnational
Organized Crime 2000 (The Palermo Convention) and the UN Convention against Corruption
(2003). Pakistan is implementing UN Security Council Resolutions against the financing of
terrorism and is cooperating with the 1373 and 1267 Committees to ban terrorist organisations,
to dismantle their apparatus, to choke terrorist funding and to freeze terrorist assets. Pakistan
SROs No.773(I) 2003 and 155(I/2004) were issued in pursuance of UN Security Council
Resolution Nos. 1267(1999), 1333(2000), 1373(2001), 1390(2002), 1455(2003) and 1526
(2004), whereby the directions were issued to freeze the funds and other resources of certain
individuals and entities. Pakistan has signed 29 Bilateral / Multilateral Agreements with other
countries regarding terrorism and Extradition Treaties with 29 countries (APG report 2004).

Pakistan’s Current Status

In December, 2014 FATF’s Regional Review Group conducted an onsite review of AML/CFT
reforms in Pakistan and generally expressed its note as satisfactory performance on technical
compliance to the requirements of the FATF Action Plan for the country.

Recently, Asia Pacific Regional Review Group (AP-RRG) reported that Pakistan met the
challenges of enforcement actions against the UN-designated entities (terrorist persons and
organizations). Financial institutions have not extended any financial services to such entities
and associated individuals. Due to strict compliance monitoring, Personal accounts have not been
exploited to rout charitable donations.

As per FATF Public Statement dated 27 February 2015, the FATF updated its list about
“Jurisdictions no longer subject to monitoring”. Following countries qualified for this status in
result of their effective measures.

Albania

Cambodia

Kuwait

Namibia

Nicaragua

Pakistan

Zimbabwe

The FATF appreciated the Pakistan’s significant progress in improving its AML/CFT regime and
commented that “The FATF welcomes Pakistan’s significant progress in improving its
AML/CFT regime and notes that Pakistan has established the legal and regulatory framework to
meet its commitments in its action plan regarding the strategic deficiencies that the FATF had


identified in June 2010. Pakistan is therefore no longer subject to the FATF’s monitoring
process under its on-going global AML/CFT compliance process. Pakistan will work with APG
as it continues to address the full range of AML/CFT issues identified in its mutual evaluation
report, in particular, fully implementing UNSC Resolution 1267”.

The Way Forward

Primarily, Pakistan is facing two menaces that causing social, economic and political disparities
in the country- Money laundering & terrorist financing. By devising and implementing effective
actions & strategies, Pakistan has successfully combated the ML/TF. International community
has appreciated the Pakistan’s continuous endeavors against money laundering and terrorist
financings. The worldwide admiration and acknowledgment is result of these persuasive
commitments. Consequent upon handy measures e.g., legal and regulatory framework from
Pakistan, FATF, World Bank & IMF have acknowledged the effective efforts and suggested
more actions especially to counter the exploitation of Nonprofit organizations.

Being the major victim of money laundering & terrorist financing, Pakistan should exercise
further functions in terms of technology, legal, administrative and national and international
mutual cooperation.


 CHAPTER IV

Red Flags of Money Laundering & Terrorist Financing Activities: An Overview

Red flags

Red flag is defines as a warning signal that should bring attention to a potentially suspicious
situation, transaction or activity.

While there is no comprehensive list of suspicious activity red flags. But for bankers or other
related businesses, there are many common indicators of financial crime and money laundering
activity that officials and institution should be ready for.

Suspicious Customer Behavior

The following situations may indicate money laundering. These lists are not exhaustive, but may
be helpful.

 Customer has an unusual or excessively  Customer frequently exchanges small bills

nervous demeanor.
 Customer discusses your record-keeping or
reporting requirements with the apparent
intention of avoiding them.
 Customer threatens an employee in an effort
to discourage required recordkeeping or
reporting.
 Customer is reluctant to proceed with a
transaction after being told it must be
reported.
 Customer suggests paying a gratuity to an
employee.
 Customer appears to have a hidden agenda
or behaves abnormally, such as turning
down the chance to obtain a higher interest
rate on a large account balance.
 Customer, who is a public official, opens
account in the name of a family member
who begins making large deposits not
consistent with the known sources of
legitimate family income.
 Customer makes large cash deposit without
having counted the cash.
for large bills.
 Customer’s cash deposits often contain
counterfeit bills or musty or extremely dirty
bills.
 Customer, who is a student,
uncharacteristically transfers or exchanges
large sums of money.
 Account shows high velocity in the
movement of funds, but maintains low
beginning and ending daily balances.
 Transaction involves offshore institutions
whose names resemble those of well-known
legitimate financial institutions.
 Transaction involves unfamiliar countries or
islands that are hard to find on an atlas or
map.
 Agent, attorney or financial advisor acts for
another person without proper
documentation, such as a power of attorney.
 Customer indulges in foreign exchange
transactions/ currency swaps without caring
about the margins.


 Customer submits account documentation
showing an unclear ownership structure.
 Customer is unwilling to provide personal
background information when opening an
account.
 Customer tries to open an account without
identification, references or complete local
address.
 Customer’s permanent address is outside of
the institution’s service area.
 Customer’s home or business telephone is
disconnected.
 Customer does not wish a statement of his
account or any mail sent to him.
 Customer asks many questions about how
the financial institution disseminates
Suspicious Cash Transactions
 Customer comes in with another customer
and they go to different tellers to conduct
currency transactions under the reporting
threshold.
 Customer makes large cash deposit
containing many larger denomination bills.
Customer opens several accounts in one or
more names, and then makes several cash
deposits under the reporting threshold.
 Customer withdraws cash in amounts under
the reporting threshold.
 Customer withdraws cash from one of his
accounts and deposits the cash into another
account the customer owns.
 Customer conducts unusual cash
transactions through night deposit boxes,
especially large sums that are not consistent
with the customer’s business.
 Customer makes frequent deposits or
withdrawals of large amounts of currency
for no apparent business reason, or for a
 Customer makes frequent purchases of
monetary instruments with cash in amounts
less than the reporting threshold.
Suspicious Non-Cash Deposits
 Customer deposits a large number of
traveler’s checks, often in the same
denominations and in sequence.
information about the identification of its
customers.
 A business customer is reluctant to reveal
details about the business activities or to
provide financial statements or documents
about a related business entity.
 Customer provides no record of past or
present employment on a loan application.
 Customer claims to be a law enforcement
agent conducting an undercover operation
when there are no valid indicators to support
that claim.
business that generally does not generate
large amounts of cash.
 Customer conducts large cash transactions at
different branches on the same day, or
coordinates others to do so in his behalf.
 Customer deposits cash into several
accounts in amounts below the reporting
threshold and then consolidates the funds
into one account and wire transfers them
abroad.
 Customer attempts to take back a portion of
a cash deposit that exceeds the reporting
threshold after learning that a currency
transaction report will otherwise be filed.
 Customer conducts several cash deposits
below the reporting threshold at ATMs.
 Corporate account has deposits or
withdrawals primarily in cash, rather than
checks.
 Customer frequently deposits large sums of
cash wrapped in currency straps.231
 Customer conducts an unusual number of
foreign currency exchange transactions.
 Customer deposits large numbers of
consecutively numbered money orders.


 Customer deposits checks and/or money
orders that are not consistent with the stated
purpose of the account or nature of business.
 Customer deposits a large number of third
party checks.
 Funds withdrawn from the accounts are not
consistent with the normal business or
personal activity of the account holder or
Suspicious Wire Transfer Transactions
 Non-accountholder sends wire transfer with
funds that include numerous monetary
instruments, each in an amount under the
reporting threshold.
 A wire transfer directs large sums to secrecy
havens.
 An incoming wire transfer, followed by an
immediate purchase by the beneficiary of
monetary instruments for payment to
another party.
 An increase in international wire transfer
activity in an account with no history of
such activity or where the stated business of
the customer does not warrant it.
Suspicious Safe Deposit Box Activity
 Customer spends an unusual amount of time in the safe deposit box area, possibly indicating the
safekeeping of large amounts of cash.
 Customer often visits the safe deposit box area immediately before making cash deposits of sums
under the reporting threshold.
 Customer rents multiple safe deposit boxes.
Suspicious Activity in Credit Transactions
 A customer’s financial statement makes
representations that do not conform to
accounting principles.

include transfers to suspicious international
jurisdictions.
 Funds deposited are moved quickly out of
the account via payment methods
inconsistent with the established purpose of
the account.
 Customer frequently shifts purported
international profits by wire transfer out of
the country.
 Customer receives many small incoming
wire transfers and then orders a large
outgoing wire transfer to another country.
 Customer deposits bearer instruments
followed by instructions to wire the funds to
a third party.
 Account in the name of a currency exchange
house receives wire transfers or cash
deposits under the reporting threshold.
 An incoming wire transfer has instructions
to convert the funds to cashier’s checks and
to mail them to a non-accountholder.
 A transaction is made to appear more
complicated than it needs to be by use of
impressive but nonsensical terms such as
 emission rate, prime bank notes, stand by
commitment, arbitrage or hedge contracts.
 Customer requests loans either made to
offshore companies or secured by
obligations of offshore banks.
 Customer suddenly pays off a large problem
loan with no plausible explanation as to the
source of funds.
Suspicious Commercial Account Activity
 Business customer presents financial
statements noticeably different from those of
similar businesses.
 Large business presents financial statements
that are not prepared by an accountant.
 Retail business that provides check-cashing
services does not make withdrawals of cash
234
Suspicious Trade Financing Transactions
 Customer seeks trade financing on the
export or import of commodities whose
stated prices are substantially more or less
than those in a similar market situation or
environment.
 Customer makes changes to a letter of credit
beneficiary just before payment is to be
made.
 Customer changes the place of payment in a
letter of credit to an account in a country
other than the beneficiary’s stated location.
 Customer’s standby letter of credit is used as
a bid or performance bond without the
normal reference to an underlying project or
contract, or designates unusual beneficiaries.
 Letter of Credit is inconsistent with
customer’s business.
Suspicious Investment Activity
 Customer uses an investment account as a
pass through vehicle to wire funds to off-
shore locations.

 Customer purchases certificates of deposit
and uses them as collateral for a loan.
 Customer collateralizes a loan with cash
deposits.
 Customer uses cash collateral located
offshore to obtain a loan.
 Customer’s loan proceeds are unexpectedly
transferred offshore.
against check deposits, possibly indicating
that it has another source of cash.
 Customer maintains an inordinately large
number of accounts for the type of business
purportedly being conducted.
 Corporate account shows little or no regular,
periodic activity.
 Letter of Credit covers goods that have little
demand in importer’s country.
 Letter of Credit covers goods that are rarely
if ever produced in the exporter's country.
 Documents arrive without title documents.
 Letter of Credit is received from countries
with a high risk for money laundering.
 Commodities are shipped through one or
more jurisdictions for no apparent economic
or logistical reason.
 Transaction involves the use of repeatedly
amended or frequently extended letters of
credit.
 Size of the shipment appears inconsistent
with the regular volume of business of the
importer or of the exporter.
 Investor seems uninterested in the usual
decisions to be made about investment
accounts, such as fees or the suitability of
the investment vehicles.
 Customer wants to liquidate a large position
through a series of small transactions.
 Customer deposits cash, money orders,
traveler’s checks or cashier’s checks in
Suspicious Employee Activity
 Employee exaggerates the credentials,
background or financial ability and
resources of a customer in written reports
the bank requires.
 Employee is involved in an excessive
number of unresolved exceptions.
 Employee lives a lavish lifestyle that could
not be supported by his or her salary.
Suspicious Activity in a Broker-Dealer Setting
In 2002, the U.S. National Association of Securities Dealers (NASD), a self-regulatory
organization that oversees the NASDAQ Stock Market under the authority of the U.S. Securities
and Exchange Commission, offered in its “Special NASD Notice to Members” signs of
suspicious activity to the securities field:
 The customer appears to be acting as an
agent for an undisclosed principal, but
declines or is reluctant, without legitimate
commercial reasons, to provide information,
or is otherwise evasive regarding that person
or entity.
 For no apparent reason, the customer has
multiple accounts under a single name or
multiple names, with a large number of
inter-account or third-party transfers.
238
 The customer engages in excessive journal
entries between unrelated accounts without
any apparent business purpose.
 The customer requests that a transaction be
processed in such a manner so as to avoid
the firm’s normal documentation
requirements.
 The customer, for no apparent reason or in
conjunction with other “red flags,” engages
in transactions involving certain types of

amounts under the reporting threshold to
fund an investment account.
 Customer cashes out annuities during the
“free look” period or surrenders the
annuities early.
 Employee frequently overrides internal
controls or established approval authority or
circumvents policy.
 Employee uses company resources to further
private interests.
 Employee assists transactions where the
identity of the ultimate beneficiary or
counter party is undisclosed.
 Employee avoids taking periodic vacations.
 The customer’s account has unexplained or
sudden extensive wire activity, especially in
accounts that had little or no previous
activity.
 The customer makes a funds deposit for the
purpose of purchasing a long-term
investment followed shortly thereafter by a
request to liquidate the position and transfer
the proceeds from the account.
securities, such as penny stocks, Regulation
“S” (Reg S) stocks, and bearer bonds,
which, although legitimate, have been used
in connection with fraudulent schemes and
money laundering activity. (Such
transactions may warrant further due
diligence.)
 The customer’s account shows an
unexplained high level of activity with very
low levels of securities transactions.
 Suspicious Activity Indicators of Black Market Peso Exchange Money Laundering Method

A 1999 U.S. Customs “trade advisory” titled “The Black Market Peso Exchange” to businesses
dealing in Latin America described the mechanics of the BMPE and provided guidance on
reporting suspected laundering activity. The advisory describes these “red flags” as indicators of
BMPE:

 Payment made in cash by a third party with
no connection to the underlying transaction.
 Payment made by wire transfers from third
parties unconnected to the underlying
transaction.
 Payment made with checks, bank drafts or
money orders not drawn on the account of
the purchaser.239
 Structured currency deposits to individual
checking accounts with multiple daily
deposits to multiple accounts at different
branches of the same bank on the same day.
 Consumer checking accounts which are used
for a period of time and then become
dormant.
 Personal checking accounts opened by
foreign nationals who come to the bank
together.
 Multiple accounts opened on the same day
or held by the same foreign nationals at
various banks.
 Increases in the frequency or amounts of
currency deposits by U.S. business account
holders who export to Colombia.

Suspicious Activity in a Money Remitter/ Currency Exchange House Setting

 Unusual use of money orders, traveler’s  Transaction altered to avoid completion of

checks or funds transfers.
 Two or more persons working together in
transactions.
 Transaction altered to avoid filing a
Currency Transaction Report (CTR).
 Customer comes in frequently to purchase
less than $3,000 in instruments each time (or
the local threshold).
record of funds transfer, money order or
traveler’s checks of $3,000 or more (or the
local threshold).
 Same person uses multiple locations in a
short time period.
 Two or more persons use the same
identification.
 One person uses multiple identification
documents.

Suspicious Activity in an Insurance Company Setting

 Cash payments on insurance policies.
 Refunds requested during a policy’s “legal
cancellation period.”37
 Policy premiums paid from abroad,
especially from an offshore financial center.
 A policy calling for the periodic payment of
premiums in large amounts.
 Changing the named beneficiary of a policy
to a person with no clear relationship to the
policyholder.
 Lack of concern for significant tax or other
penalties assessed when canceling a policy.
 Redemption of insurance bonds originally
subscribed to by an individual in one
country by a business entity in another
country.


 Trade-Based Money Laundering Techniques

Misrepresentations or manipulations of the price, quantity or quality of imports or exports are

basic techniques used for trade based laundering.


 




 
 


!



 Use of letters of credit to move money letters of credit without reasonable

between those countries, where such trade
would not normally occur and / or is not
consistent with the customer’s usual
business activity. A Letter of credit is
generally resorted to so as to accord more
legitimacy to the transaction in order to
conceal the real facts.
 below reporting threshold limit) to fund
 The method of payment requested by the
client appears inconsistent with the risk
characteristics of the transaction. For
example receipt of an advance payment, for
a shipment, from a new seller in a high-risk
jurisdiction.
 TBML activity.
 The transaction involves the receipt of cash
(or by other payment methods) from third
party entities that have no apparent
connection with the transaction or which
involve front or shell companies or wire
instructions / payment from parties which
were not identified in the original letter of
credit or other documentation. The
transactions that involve payments for goods
through cheques, bank drafts, or money
orders not drawn on the account of the entity
that purchased the items also need further
verification.
 of the transaction and not for export leg, it
 The transaction involves the use of
repeatedly amended or frequently extended
justification or that includes changes in
regard to the beneficiary or location of
payment without any apparent reason.
 Unusual deposits i.e. use of cash or
negotiable instruments (such as traveller’s
cheques, Cashier’s cheques and money
orders) in round denominations (to keep
bank accounts and to pay for goods and
services. The negotiable instruments may be
sequentially numbered or purchased at
multiple locations and may frequently lack
payee information. Further, cash payments
for high-value orders are also indication of

 Inward remittances in multiple accounts and
payments made from multiple accounts for
trade transaction of same business entity are
indicators for TBML. In this regard the
study of foreign exchange remittances may
help detect the offence.
 In the case of merchanting trade, the trade
finance mechanism should be in place for
both export leg as well as import leg of
transaction. If the Trade Finance
mechanism, for example, Letters of Credit,
have been provided for only the import leg
also indicates the possibility of TBML.

Non-profit organisations (NPOs)

Non-profit organisations (NPOs) are a vibrant and integral part of the contemporary global
environment and play a significant role in combating terrorism. The wide range, geographic
reach, and operational endurance of their activities arguably make NPOs unique among


 international actors. FATF define a non-profit organisation as a legal person or arrangement or
organisation that primarily engages in raising or disbursing funds for purposes such as charitable,
religious, cultural, educational, social or fraternal purposes, or for the carrying out of other types
of “good works”. Good works may be included the help of famine, flood, earth quick etc.
effected people on earth.

Red Flags indicating abuse of NPOs:

Here are list of red flags which highlight the possible exploitation of NPOs, excerpted from
FATF’s report ³5LVNRIWHUURULVWDEXVHLQQRQSURILWRUJDQLVDWLRQV´ DQG ³Best practices
paper on combating the abuse of non-profit organisations”.

 Use of cash couriers to transfer NPO funds
into areas with known terrorist activity.
NPO transactions are structured to avoid
transaction reporting.
 Requests to transfer NPO funds are
accompanied by vague justifications. NPO
uses a shell organisation as a funding
conduit.
 NPO representatives fail to declare large
currency amounts at international borders.
NPO bank accounts are used by entities
whose own accounts are under restrictions.
 NPO funds are transferred to other entities
believed to be engaged in, or supporting,
terrorist activities.
 NPO receives funds from entities believed to
support terrorist activities.
 NPO funds are comingled with personal or
private business funds.
 Bank accounts related to some programs or
activities are concealed.
 NPO funds are transferred to entities not
associated with declared programs or
activities.
 NPO facilities are frequented by individuals
believed to support terrorist activities.
 NPO procures dual-use equipment.
 Resources of an NPO are transferred to an
entity known to be engaged in, or
supporting, terrorist activity.
 NPO receives resources from an entity
believed to support or be engaged in terrorist
activities.
 NPO shares property with another
organisation believed to support terrorist
activity.
 NPO activities are found to support
individuals or organisations whose identities
correspond to those of listed entities.
 Existence of reliable information indicating
an NPO or its representatives are engaged in
supporting terrorist activity.
 Existence of reliable information indicating
an NPO or its representatives are linked to
third parties that support or are engaged in
terrorist activity.
 The identities of proscribed terrorist entities
are found to match the identities of NPO
directing officials or employees.
 Entities operating in areas with known
terrorist activity transfer funds into the bank
accounts of an NPO, directing officials, or
employees.
 NPO transfers resources or conducts
activities in an area where terrorist entities
are known to have a substantial presence.
 NPO records are maintained in an area
where terrorist entities are known to have a
substantial presence.
 NPO representatives travel frequently into
areas where terrorist entities are known to
have a substantial presence.
 NPO has unreported activities, programs, or
partners.
 NPO uses an unusually complex financial
network for its operations.


 NPO avoids mandatory reporting
requirements.
 NPO programs and activities are vaguely
explained to oversight or regulatory bodies.
 Third parties are used to open NPO bank
accounts or carry out some transactions.
 NPO expenditures are not consistent with its
programs and activities.
 NPO is unable to account for the final use of
all of its resources.
 NPO is unable to account for the origin of
its
 A lead from the public alleges that an NPO
is engaged in activities related to terrorism.
 NPO merges with another organisation
believed to support terrorist activities.
Specific Red Flags indicating abusing of Islamic NPOs:
 Fund raising is advertised through posters,
personal contacts, electronic & print media
and social media by tagging the Islamic
humanity causes.
 Terrorists use NPO as front source.
 Islamic volunteers contact the businessmen
and live lavish life.
 The NPOs have religious affiliations with
extremist circles.
 The managing heads of NPOs are alumni of
schools, madrasas promoting extremism.
 The NPO is seeking guidance and opinions
from advisors, having extremist motives.
 The NPO has fictitious budgetary plans to
disguise the trail of money.
 The key officials of NPO are educated but
having inclination towards extremism.
 There is internal audit of funds but based on
fake system.
 The expenses actually incurred are not in
accordance to expenses mentioned in books.
The hawala system

 NPO humanitarian assistance is targeted
towards supporting individuals directly
linked to terrorist entities.
 Directing officials of an NPO are, or have
been, directing officials of other
organisations believed to support terrorist
activity.
 NPO suffers from an internal conflict, where
one faction is known to be sympathetic or
actively supportive towards terrorist entities.
 NPO has inconsistencies in its accounting
and/or mandatory reporting.
 NPO has opaque leadership or decision-
making structures.
 The NPO frequently arrange for lectures of
some person from extremist circle.
 The NPO covertly manage food, residence
and travelling arrangements of some
unknown people, having suspicious
activities.
 The NPO’s bank account is being used by
some unknown persons.
 The NPO focuses the areas for welfare
working, where terrorist lobbies have
operational dominance.
 The NPO represent the cause of terrorist
circles by providing its own resources.
 The NPO’s officials, donors or beneficiaries
support the terrorist teachings, planning,
motives and intents directly or indirectly.
 The NPO is working for Islamic
publications but no significant publications
arrangemenst are there.
 The hawala system is an alternative remittance system (ARS) or informal value transfer system
or underground banking is based on trust which subsists and channelizes its activities outside of,
or parallel to conventional banking or financial institutions. Apart from the risk-free remittance
of money from expatriates, the ancient system of hawala is being used both by terrorists and
money launderers to move their money in ways to avoid detection and reporting.

This is a list of identifiers for hawala service providers:

 They generally deal with cash-in and cash-

out businesses
 They perform their services in areas with
expatriates
 They mostly offer legitimate financial
services to migrants
 Sometimes they offer services for
illegal/illicit transportation of money across
borders
 They are visible and available to their
customers
 They run front businesses
 They are linked to similar operators in other
countries
 They only share partial information or have
limited communication with their customers
 Their bank accounts show heavy deposit
activities
 They are engaged in other business like car
rentals (usually non-chain or franchise),
telephones/pagers import/export, travel and
related services, jewelry (gold, precious
stones) foreign exchange, rugs/carpets and
used cars.




 "










“I keep six honest serving-men (They taught me all I knew)
Their names are what and Why and When and How and Where and Who.”
(Rudyard Kipling)

The FATF has defined “money laundering” as the processing of criminal proceeds to disguise
their illegal origin in order to legitimize the ill-gotten gains of crime. The United Nations 2000
Convention against Transnational Organized Crime, also known as the “Palermo Convention,”
defines money laundering as:

“The conversion or transfer of property, knowing it is derived from a criminal offense, for the
purpose of concealing or disguising its illicit origin or of assisting any person who is involved in
the commission of the crime to evade the legal consequences of his actions. The concealment or
disguising of the true nature, source, location, disposition, movement, rights with respect to, or
Ownership of property knowing that it is derived from a criminal offense. The acquisition,
possession or use of property, knowing at the time of its receipt that it was derived from a
criminal offense or from participation in a crime”.

Financing of Terrorism (FT) involves both legitimate and illegitimate money characterized by
concealment of the origin or intended criminal use of the funds. The term Terrorist refers to any
natural person who commits, or attempts to commit, participates as an accomplice, organizes or
directs others or contributes to terrorist acts.

Why to combat money laundering & terrorist financing?

Money laundering is primary motive of mala fide circles to give their illicit funds a tint of
legitimacy. Criminals derive significant sums of money by committing crimes such as drug
trafficking, human trafficking, theft, investment fraud, extortion, corruption, embezzlement and
tax fraud. In Terrorist financing the miscreant use funds for illegal religious, political or specified
purposes, but the trail of money is not necessarily may come from donations, governmental
covert funds or aid from agencies. Terrorist financing may be supported both by legitimate and
illegitimate proceeds. Money laundering and terrorist financing are serious threat to the legal
economy and affects the integrity of financial institutions, jurisdictions and world. It also
changes the economic balances in certain sectors. Fighting money laundering serves several
purposes.

The social, economical and security aspects

  
On social note, it may lose public confidence due to imbalance of returns, rents and prices.
Crime causes tangible and intangible damage to third parties, individuals and society as a whole.
Money laundering can result in reducing the public’s confidence in certain professions such as
lawyers, accountants and notaries and economic sectors such as real estate, hospitality and banks
and other financial institutions. Investing the proceeds of crime may also distort competition
between businesses and entrepreneurs. Money laundering allows the criminal to start, continue
and expand activities in legitimate sectors of the economy.

Why Banks are important for money launderer & terrorist groups?

Criminal circles have been, and still exploiting the banking industry by using their instruments,
products and services for disposal of criminal proceeds.

Electronic Transfers of Funds

An electronic transfer of funds is preferred when someone intents to rapidly move money from
one bank account to another, he or she sends a wire or electronic transfer of funds. It can happen
within a country or across borders, and trillions of dollars are transferred in millions of
transactions each day. EFT is any transfer of funds that is initiated by electronic means, such as
an automated clearinghouse (ACH), computer, automated teller machine (ATM), electronic
terminal, mobile phone, telephone or magnetic tape. Electronic funds transfer systems offer
money launderers a fast conduit for moving money between countries and accounts. Illicit
fund transfers are easily hidden among the millions of legitimate transfers that occur each day.
Systems like Fedwire, SWIFT and CHIPS move millions of wires or transfer messages on a daily
basis. To avoid detection, the money launderer may take basic precautions, such as varying the
amounts sent, keeping them relatively small and, where possible, using reputable organizations.

Banker’s initiatives to prevent ML/TF;

Following practices and measures should be adopted by banker to prevent ML/TF.

 He should monitor the movement of Funds, he should detect, monitor and report the
transfers that occur to or from a financial secrecy haven, or to or from a high-risk
geographic location without an apparent business reason, or when the activity is
inconsistent with the customer’s business or history.

 He should report inward movement of funds transfers that are received on behalf of a
foreign client, with little or no explanation or apparent reason.
 Banker should monitor the deposits, aggregated by small, incoming transfers of funds
that are
 Received or deposits that are made using checks and money orders or other financial
instruments.
 He should prudently follow the money, which involves transfers or deposits, wired to
another account in a different city or country in a manner inconsistent with the
customer’s business or history.
 Funds activity that is unexplained, repetitive or shows unusual patterns.

  
  Payments or receipts are received that have no apparent link to legitimate contracts,
goods or services.
 Funds transfers that are sent or received from the same person to or from different
accounts.

Correspondent Banking

Correspondent banking is the provision of banking services by one bank (the “correspondent
bank”) to another bank (the “respondent bank’”). By establishing multiple correspondent
relationships globally, banks can undertake international financial transactions for themselves
and for their customers in jurisdictions where they have no physical presence.

Banker’s role to prevent ML/TF risks;

 Banker should determine the effectiveness of the respondent bank's AML controls e.g.,
due diligence on the customers it allows to use the correspondent account.
 Banker should understand that to what extent other bank is using its correspondent
account by providing such facilities to other institutions (“nesting”).
 Banker should practice risk based due diligence to mitigate the money laundering risks
posed by foreign financial institutions.
 He should refuse to entertain the correspondent account maintained for a foreign bank
operating under an offshore license.
 It is mandatory for a banker to maintain records with the names and contact information
of the owners of foreign banks for which they maintain correspondent accounts.

Payable through Accounts

In some correspondent relationships, the respondent bank’s own customers are permitted to
conduct their own transactions — including sending wire transfers, making and withdrawing
deposits and maintaining checking accounts — through the respondent bank’s correspondent
account without needing to clear the transactions through the respondent bank. Those
arrangements are called payable-through accounts (PTAs). PTAs differ from normal
correspondent accounts in that the foreign bank’s customers have the ability to directly control
funds at the correspondent bank. This is different from the traditional correspondent relationship,
where the respondent bank will take orders from their customers and pass them on to the
Correspondent bank. In these cases, the respondent bank has the ability to perform some level of
oversight prior to executing the transaction.

Banker’s role to prevent ML/TF risks;

 Banker must consider that the foreign institutions having license from offshore financial
services sectors with weak or absent bank supervision and weak licensing laws should
not be allowed to use PTAs.
 PTA arrangements for respondent bank shouldn’t be permissible where Customer Due
Diligence policies and procedures have lapses.
 Currency deposit and withdrawal privileges for sub-account holders should be denied.
 Strict supervision must be practiced to follow the legitimacy of transactions.

  
Concentration Accounts

Concentration accounts are internal accounts established to facilitate the processing and
settlement of multiple or individual customer transactions within the bank, usually on the same
day. These accounts are also known as special-use, omnibus, settlement, suspense, intraday,
sweep or collection accounts. Concentration accounts are frequently used to facilitate
transactions for private banking, trust.

For bankers, some anti-money laundering practices are as under;

 Inter-connect customer transactions in the customer’s account statements.

 Banker should practice to have dual signatures on general ledger tickets.
 Prohibit direct customer access to concentration accounts.
 Never give options to customers for knowledge of concentration accounts or their ability
to direct employees to conduct transactions through the accounts.
 Develop a system to retain transaction and customer identifying information.
 Practice should be observed to reconcile accounts frequently.

Structuring
Designing a transaction to evade triggering a reporting or recordkeeping requirement is called
“structuring.” Structuring is possibly the most commonly known money laundering method.
It is a crime in many countries, and must be reported by filing a suspicious transaction report.
The individuals engaged in structuring are runners, hired by the launderers. These individuals
go from bank to bank depositing cash and purchasing monetary instruments in amounts under the
reporting threshold. Structuring can be done in many settings or industries, including banking,
money services businesses and casinos.

How a banker can prevent structuring;

 Banker should follow the deposits in accounts.

 Bankers should identify the runners.
 He should report the suspicious transaction report.
 Proper documentation should be made before allowing to deposit the money.

Cuckoo Smurfing

Refers to a form of money laundering linked to alternative remittance systems, in which criminal
funds are transferred through the accounts of unwitting persons who are expecting genuine
Funds or payments from overseas. The main difference between traditional structure and cuckoo
smurfing is that in the latter the third parties who hold the bank accounts being used are not
aware of the fact that illicit money is being deposited into their accounts.

Banker’s practices to combat cuckoo smurfing;

 Identify depositors who pay cash into third-party accounts.

 Banker should monitor unusual cash deposits.
 Deposits in third party account should be followed.
  
E-Purses & Pre Paid Cards

Electronic purses (also called e-purses or stored-value cards) are cards that electronically store
value on integrated circuit chips. Unlike pre-paid credit cards with magnetic stripes that store
account information, e-purses actually store funds on memory chips. Pre-paid cards have the
same characteristics that make cash attractive to criminals: they are portable, valuable,
exchangeable and anonymous. The cards, many of which are branded by Visa or MasterCard,
can be purchased and “loaded” with money by one person and used like regular debit cards by
another person to make purchases or ATM withdrawals anywhere in the world. Prepaid payment
cards provide access to monetary funds that are paid in advance by the cardholder. While there
are many different types of prepaid cards that are used in a variety of ways, the cards typically
operate in the same way as a debit card and ultimately rely on access to an account.
Measures recommended for bankers:

 Limit the functions and capacity of smart cards (including the maximum value and
turnover limits, as well as the number of smart cards per customer).
 Linking new payment technology to financial institutions and bank accounts.
 Requiring standard documentation and recordkeeping procedures for these systems to
facilitate their examination.
 Allowing for the examination and seizure of relevant records by investigating authorities.

Know Your Customers & Customer Due Diligence: A Consolidated Approach

Anti-money laundering policies and procedures used to determine the true identity of a customer
and the type of activity that is “normal and expected,” and to detect activity that is “unusual” for
a particular customer. Many experts believe that a sound KYC program is one of the best tools in
an effective antimony laundering program.

Key elements of KYC which should be followed by a banker to minimize the ML/TF risks are;

Customer identification

Risk management

Customer acceptance

Monitoring

A sound Customer Due Diligence (CDD) program is being considered as the best way to prevent
money laundering. It has recognized that sound Customer Due Diligence (CDD) policies and
procedures are critical in protecting the safety and soundness of banks and the integrity of
banking systems.
Key elements of CDD which should be followed by a banker to minimize the ML/TF risks are;

Full identification of customer, business and source of funds

Development of transaction and activity profiles

Definition and acceptance of the customer

Assessment and grading of risks

Account and transaction monitoring
  

Investigation and examination of unusual activities

Documentation of findings

  
CHAPTER V

ANTI-MONEY LAUNDERING AND COMBATING THE FINANCING OF

TERRORISM (AML/CFT) REGULATIONS FOR BANKS & DFIs

State Bank of Pakistan is central bank of Pakistan. It issues Regulations regarding Anti-Money
Laundering/ Combating Financing of Terrorism from time to time for convenience of banks &
DFIs. The amendments are made in these regulations through issuance of Circulars/Circular
letters. The below mentioned regulations have been updated up to March 31, 2015.

Regulations on Anti-Money Laundering/ Combating Financing of Terrorism cover following key

areas;

o Customer Due Diligence (CDD)

o Correspondent Banking
o Wire Transfers/Fund Transfers
o Reporting of Transactions (STRs/CTRs)
o Record Keeping
o Policies, Compliance, Audit & Training

REGULATIONS

REGULATION – 1

CUSTOMER DUE DILIGENCE (CDD)

  
When CDD measures are to be applied
1. Banks/DFIs shall apply CDD measures
(a) When establishing business relationship
(b) While dealing with occasional customers/ walk-in customers in line with Para 13 below
(c) In other situations/scenarios when there is suspicion of money laundering/financing of
terrorism, regardless of threshold.

CDD Measures for Establishing Business Relationship Identification of Customers

2. Every customer shall be identified for establishing business relationship.

3. For identity and due diligence purposes, at the minimum following information shall also be
obtained, verified and recorded on KYC/CDD form or account opening form;
(a) Full name as per identity document
(b) CNIC/Passport/NICOP/POC/ARC number or where the customer is not a natural person, the
registration/ incorporation number or business registration number (as applicable)
(c) Existing residential address, registered or business address (as necessary), contact telephone
number(s) and e-mail (as applicable)
(d) Date of birth, incorporation or registration (as applicable)
(e) Nationality or place of birth, incorporation or registration (as applicable)
(f) Nature of business, geographies involved and expected type of counter-parties (as applicable)
(g) Purpose of account;
(h) Type of account;
(i) Source of earnings;
(j) Expected monthly credit turnover (amount and No. of transactions); and
(k) Normal or expected modes of transactions.

Verification of Identity

4. The Bank/ DFI shall verify identities of the customers (natural persons) and in case of legal
persons, identities of their natural persons from relevant authorities or where necessary using
other reliable, independent sources and retain on record copies of all reference documents used
for identification and verification. The verification shall be the responsibility of concerned
bank/DFI for which the customer should neither be obligated nor the cost of such verification be
passed on to the customers.
Identification and Verification of Natural Persons Acting on Behalf of Customer

5. In relation to Para 4 above, where one or more natural persons are acting on behalf of a
customer or where customer is legal person, bank/ DFI shall identify the natural persons who act
on behalf of the customer and verify the identity of such persons.

  
6. Authority of such person to act on behalf of the customer shall be verified through
documentary evidence including specimen signature of the persons so authorized.

Identification and Verification of Identity of Beneficial Owners

7. In case of beneficial owner(s) in relation to a customer, reasonable measures shall be taken to

obtain information to identify and verify the identities of the beneficial owner(s).
8. Where the customer is not a natural person, the bank/DFI shall (i) take reasonable measures to
understand the ownership and control structure of the customer for obtaining information
required under Para 9 below and (ii) determine that the natural persons who ultimately own or
control the customer.

Information on the Purpose and Intended Nature of Business Relations

9. Banks/ DFIs shall obtain from customers information as to the purpose and intended nature of
business relations.

Timing of Verification

10. Verification of the identity of the customers and beneficial owners shall be completed before
business relations are established including verification of CNIC/NICOP/POC from NADRA
wherever required for customers under these regulations.
11. In exceptional cases, banks/ DFIs may allow business relationship without prior verification
if the deferral of completion of the verification of the identity of the customer and beneficial
owner is essential in order not to interrupt the normal conduct of business operations and the
risks can be effectively managed.
12. In relation to Para 11 above, banks/DFIs shall define criteria in their AML/CFT Policies
clearly specifying the circumstances, authority levels and types of customers where such deferral
will be allowed. In this regard, following should also be observed;
(a) Verification shall be completed as soon as it is reasonably practicable but not later than 5
business days from the date of opening of the account.
(b) No debit will be allowed or cheque book is issued until positive verification is completed.
(c) Half yearly list is to be maintained by banks/DFIs highlighting all accounts/deposits where
the business relationship needed to be closed on account of negative verification.

CDD Measures for Occasional Customers/ Walk-in Customers and Online Transactions

13. Banks/DFIs shall;

(a) in case of occasional customers/walk-in-customers;
(i) obtain copy of CNIC while conducting cash transactions above rupees 0.5 million; and

  
(ii) obtain copy of CNIC while issuing remittance instruments e.g. POs, DDs and MTs etc.
(b) obtain copy of CNIC (regardless of threshold) while conducting online transactions by
occasional customers/walk-in-customers (except deposits through Cash Deposit Machines or
cash collection/management services). If transaction exceeds Rs. 100,000 the name and CNIC
No. shall be captured in system and made accessible along with transaction details at
beneficiary’s branch.

Where CDD Measures are Not Completed

14. In case banks/ DFIs are not able to satisfactorily complete required CDD measures, account
shall not be opened or any service provided and consideration shall be given if the circumstances
are suspicious so as to warrant the filing of an STR. If CDD of an existing customer is found
unsatisfactory, the relationship should be treated as high risk and reporting of suspicious
transaction be considered as per law and circumstances of the case.

Ongoing Monitoring

15. All business relations with customers shall be monitored on an ongoing basis to ensure that
the transactions are consistent with the bank/ DFI’s knowledge of the customer, its business and
risk profile and where appropriate, the sources of funds.
16. Banks/DFIs shall obtain information and examine, as far as possible the background and
purpose of all complex, unusual large transactions, and all unusual patterns of transactions,
which have no apparent economic or visible lawful purpose. The background and purpose of
these transactions shall be inquired and findings shall be documented with a view to making this
information available to the relevant competent authorities when required.
17. Banks/ DFIs shall periodically review the adequacy of customer information obtained in
respect of customers and beneficial owners and ensure that the information is kept up to date,
particularly for higher risk categories of customers. The review period and procedures thereof
should be defined by banks/DFIs in their AML/CFT policies, as per risk based approach.
18. In relation to Para 17 above, customers’ profiles should be revised keeping in view the spirit
of KYC/CDD and basis of revision shall be documented and customers may be consulted, if
necessary.

Anonymous or Fictitious Account

19. Banks/DFIs shall not open or maintain anonymous accounts or accounts in the name of
fictitious persons or numbered accounts.

  
Review of Products and services

20. Banks/DFIs shall establish criteria of identifying and assessing ML/FT risks that may arise in
relation to new products, services, business practices and delivery mechanisms including the
review of existing products and services on on-going basis.

Joint Accounts

21. In the case of joint accounts, CDD measures on all of the joint account holders shall be
performed as if each of them were individual customers of the bank/DFI.

Government Accounts

22. Government accounts shall not be opened in the personal names of the government
official(s). Government account which is to be operated by an officer of the
Federal/Provincial/Local Government in his/her official capacity, shall be opened only on
production of a special resolution/authority from the concerned administrative department duly
endorsed by the Ministry of Finance or Finance Department of the concerned Government.
23. However, in case of autonomous entities and Armed Forces including their allied offices,
banks/DFIs may open bank accounts on the basis of special resolution/authority from the
concerned administrative department or highest executive committee/management committee of
that entity duly endorsed by their respective unit of finance. The banks/DFIs shall also take into
account any rules, regulations or procedures prescribed in the governing laws of such entities
relating to opening and maintaining of their bank accounts.

Existing Customers

24. A bank/DFI shall perform such CDD measures as may be appropriate to its existing
customers having regard to its own assessment of materiality and risk but without compromise
on identity and verification requirements.
25. Banks/ DFIs shall not provide any banking services to proscribed entities and persons or to
those who are known for their association with such entities and persons, whether under the
proscribed name or with a different name. The banks/DFIs should monitor their relationships on
a continuous basis and ensure that no such relationship exists. If any such relationship is found,
the same should be immediately reported to Financial Monitoring Unit (FMU) and other actions
shall be taken as per law.
26. For existing customers who opened accounts with old NICs, banks/DFIs shall ensure that
attested copies of CNICs shall be present in bank’s/DFI’s record. Banks/DFIs shall block
accounts without CNIC (after serving one month prior notice) for all debit
transactions/withdrawals, irrespective of mode of payment, until the subject regulatory

  
requirement is fulfilled. However, debit block from the accounts shall be removed upon
submission of attested copy of CNIC and verification of the same from NADRA.

Dormant accounts

27. For customers whose accounts are dormant or in-operative, bank/DFIs may allow credit
entries without changing at their own, the dormancy status of such accounts. Debit transactions/
withdrawals shall not be allowed until the account holder requests for activation and produces
attested copy of his/her CNIC if already not available and bank/DFI is satisfied with CDD of the
customer.
28. In relation to Para 26 and 27 above, it may be noted that transactions e.g. debits under the
recovery of loans and markup etc. any permissible bank charges, government duties or levies and
instruction issued under any law or from the court will not be subject to debit or withdrawal
restriction.

Prohibition of personal accounts for business purposes

29. Banks/DFIs shall not allow personal accounts to be used for business purposes except
proprietorships, small businesses and professions where constituent documents are not available
and the banks/DFIs are satisfied with KYC profile of the account holder, purpose of relationship
and expected turnover of the account keeping in view financial status & nature of business of
that customer.

Politically Exposed Persons (PEPs)

30. In relation to PEPs and their close associates or family members, banks/DFIs shall:
(a) implement appropriate internal policies, procedures and controls to determine if a customer or
beneficial owner is a PEP;
(b) obtain approval from the bank’s senior management to establish or continue business
relations where the customer or a beneficial owner is a PEP or subsequently becomes a PEP;
(c) establish, by appropriate means, the sources of wealth or beneficial ownership of funds, as
appropriate; including bank/DFI’s own assessment to this effect; and
(d) conduct during the course of business relations, enhanced monitoring of business relations
with the customer.

NGOs/NPOs/ Charities’ accounts

  
31. Banks/DFIs should conduct enhanced due diligence (including obtaining senior management
approval) while establishing relationship with Non-Governmental Organizations (NGOs)/Not-
for-Profit Organizations (NPOs) and Charities to ensure that these accounts are used for
legitimate purposes and the transactions are commensurate with the stated objectives and
purposes.
32. The accounts should be opened in the name of relevant NGO/NPO as per title given in its
constituent documents of the entity. The individuals who are authorized to operate these accounts
and members of their governing body should also be subject to comprehensive CDD.
Banks/DFIs should ensure that these persons are not affiliated with any proscribed entity,
whether under the same name or a different name.
33. In case of advertisements through newspapers or any other medium, especially when bank
account number is mentioned for donations, Banks/DFIs will ensure that the title of the account
is the same as that of the entity soliciting donations. In case of any difference, immediate caution
should be marked on such accounts and the matter should be considered for filing STR.
34. Personal accounts shall not be allowed to be used for charity purposes/collection of
donations.
35. All existing relationships of NGOs/NPOs/Charities should be reviewed and monitored to
ensure that these organizations, their authorized signatories, members of their governing body
and the beneficial owners are not linked with any proscribed entities and persons, whether under
the same name or a different name. In case of any positive match, Banks/ DFIs should consider
filing STR and/or take other actions as per law.

REGULATION – 2

CORRESPONDENT BANKING
1. In addition to measures required under Regulation 1 (as deemed necessary by the bank/DFI),
banks/ DFIs shall take the following measures for providing correspondent banking services-
(a) assess the suitability of the respondent bank by taking the following steps:
(i) gather adequate information about the respondent bank to understand fully the nature of the
respondent bank’s business, including the following, where applicable;
o Know your customer policy (KYC)
o Information about the respondent bank’s management and ownership
o Major business activities
o Their geographical presence/jurisdiction (country) of correspondence
o Money laundering prevention and detection measures
o The purpose of the account or service
o The identity of any third party that will use the correspondent banking services (i.e. in
case of payable through accounts)
o Condition of the bank regulation and supervision in the respondent’s country

  
(ii) Determine from any available sources the reputation of the respondent bank and, as far as
practicable, the quality of supervision over the respondent bank, including where possible
whether it has been the subject of money laundering or financing of terrorism investigation or
regulatory action; and
(iii) assess the respondent bank in the context of sanctions/embargoes and Advisories about risks.
(b) clearly understand and document the respective AML/CFT responsibilities of each bank; and
(c) obtain approval of senior management, before establishing new correspondent banking
relationship.
2. Where the cross-border banking services involve a payable-through account, the
correspondent bank shall be satisfied that -
(a) the respondent bank has performed appropriate CDD measures at least equivalent to those
specified in Regulation 1 on the third party having direct access to the payable-through account;
(b) the respondent bank is able to perform ongoing monitoring of its business relations with that
third party and is willing and able to provide customer identification information to the
correspondent bank/ DFI upon request.
3. Banks/ DFIs shall pay special attention when establishing or continuing correspondent
relationship with banks/ financial institutions which are located in jurisdictions that have been
identified or called for by FATF for inadequate and poor AML/CFT standards in the fight
against money laundering and financing of terrorism.
4. No bank/ DFI shall enter into or continue correspondent banking relations with a shell bank
and shall take appropriate measures when establishing correspondent banking relations, to satisfy
them that their respondent banks do not permit their accounts to be used by shell banks.
5. In case where a Pakistani bank/DFI is availing correspondent banking services from a
bank/financial institution abroad, the CDD measures specified under Para 1(a), 1(b) 1(c), 3 and 4
above should be applied, as considered necessary to mitigate ML/TF risks.

REGULATION – 3

WIRE TRANSFERS/ FUND TRANSFERS

1. The requirement under this Regulation shall apply to a bank/ DFI during the course of sending
or receiving funds by wire transfer except transfer and settlement between the banks where both
the banks are acting on their own behalf as originator and the beneficiary of the wire transfer;

Responsibility of the Ordering Institution

2. Bank/DFI as ordering institution (whether domestic or cross border wire transfer and
regardless of threshold) shall;

  
(a) identify and verify the originator (if it has not already done under Regulation
1); and obtain details of beneficial owner(s) of funds; and
(b) record adequate details of the wire transfer so as to permit its reconstruction, including the
date of the wire transfer, the type and amount of currency involved, the value date, the purpose
and details of the wire transfer beneficiary and the beneficiary institution, and relationship
between originator and beneficiary, as applicable etc.
3. Bank/DFI shall include the following information in the message or payment instruction
which should accompany or remain with the wire transfer throughout the payment chain:
(a) the name of the originator;
(b) the originator’s account number (or unique reference number which permits traceability of
the transaction)
(c) the originator’s address or CNIC/passport number.

Responsibility of the Beneficiary Institution

4. Beneficiary institution shall adopt risk-based internal policies, procedures and controls for
identifying and handling in-coming wire transfers that are not accompanied by complete
originator information. The incomplete originator information may be considered as a factor in
assessing whether the transaction is suspicious and whether it merits reporting to FMU or
termination thereof is necessary. Banks/ DFIs shall remain cautious when entering into
relationship or transactions with institutions which do not comply with the standard requirements
set out for wire transfers by limiting or even terminating business relationship.

Responsibility of Intermediary Institution

5. A bank/DFI that is an intermediary institution shall, in passing onward the message or

payment instruction, maintain all the required originator information with the wire transfer.

REPORTING OF TRANSACTIONS (STRs/CTRs)

1. Banks/ DFIs shall comply with the provisions of AML Act, rules and regulations issued there
under for reporting suspicious transactions/currency transactions in the context of money
laundering or financing of terrorism.
2. Banks/ DFIs shall implement appropriate internal policies, procedures and controls for
meeting their obligations under AML Act.
3. Banks/ DFIs shall pay special attention to all complex, unusually large transactions, and all
unusual patterns of transactions, which have no apparent economic or visible lawful purpose.
The back ground and purpose of such transactions shall, as far as possible, be examined, the
findings established in writing, and be available to assist the relevant authorities in inspection
and investigation.

  
4. Examples and characteristics of some suspicious transactions (Red Alerts) that may be a cause
for increased scrutiny for AML/CFT purposes.
5. Banks/DFIs are advised to make use of technology and upgrade their systems and procedures
in accordance with the changing profile of various risks. Accordingly, all banks/DFIs are advised
to implement automated Transaction Monitoring Systems (TMS) capable of producing
meaningful alerts based on pre-defined parameters/thresholds and customer profile, for analysis
and possible reporting of suspicious transactions. Further, banks/DFIs shall establish criteria in
their AML/CFT Policies and/or Procedures for management of such alerts.
6. The transactions, which are out of character or are inconsistent with the history, pattern, or
normal operation of the account including through heavy deposits, withdrawals and transfers,
shall be viewed with suspicion, be properly investigated and referred to Compliance Officer for
possible reporting to FMU under AML Act.
7. Banks/ DFIs should note that STRs, including attempted transactions, should be reported
regardless of the amount of the transactions; and, the CTRs should be reported for the
transactions of rupees two million and above as per requirements of AML, Act.
8. The basis of deciding whether an STR is being filed or not shall be documented and kept on
record together with all internal findings and analysis done in relation to a suspicion irrespective
of the fact that transaction is subsequently reported or not.
9. Banks/ DFIs, without disclosing the contents of STRs, shall intimate to State Bank of Pakistan
on bi-annual basis the number of STRs reported to FMU. The status report (indicating No. of
STRs only) shall reach to Director, BPRD within seven days of close of each half year.
10. The employees of the banks/ DFIs are strictly prohibited to disclose the fact to the customer
or any other quarter that a suspicious transaction or related information is being or has been
reported to any authority, except if required by law. This shall be made part of Code of Ethics to
be signed by employees and Directors of the bank/DFI.

REGULATION – 5

RECORD KEEPING
1. Banks/ DFIs shall maintain all necessary records on transactions, both domestic and
international, including the results of any analysis undertaken (e.g. inquiries to establish the
background and purpose of complex, unusual large transactions) for a minimum period of ten
years from completion of the transaction.
2. The records shall be sufficient to permit reconstruction of individual transactions including the
nature and date of the transaction, the type and amount of currency involved and the type and
identifying number of any account involved in the transactions so as to provide, when necessary,
evidence for prosecution of criminal activity. The transactions records may be maintained in
paper or electronic form or on microfilm, provided it is admissible as evidence in a court of law.

  
3. The records of identification data obtained through CDD process like copies of identification
documents, account opening forms, KYC forms, verification documents and other documents
along with records of account files and business correspondence, shall be maintained for a
minimum period of ten years after the business relationship is ended. The identification records
may be maintained in document as originals or copies subject to bank’s attestation.
4. Banks/DFIs shall, however, retain those records for longer period where transactions,
customers or accounts involve litigation or it is required by court or other competent authority.
5. Banks/ DFIs shall satisfy, on timely basis, any enquiry or order from the relevant competent
authorities including law enforcement agencies and FMU for supply of information and records
as per law.

REGULATION – 6

INTERNAL CONTROLS, POLICIES, COMPLIANCE, AUDIT AND TRAINING

Bank/DFIs own AML/CFT policies, procedures & controls

1. Each Bank/ DFI shall formulate its own AML/CFT policy duly approved by their Board of
Directors and cascade the same down the line to each and every business location and concerned
employees for strict compliance. The detailed procedures and controls shall be developed by
banks/ DFIs in the light of policy approved by the Board.
2. The policies, procedures and controls shall include, amongst other things, CDD measures,
record retention, correspondent banking, handling wire transfers, risk assessment procedures, the
detection of unusual and/or suspicious transactions and the obligation to report suspicious
transaction etc.
3. In formulating policies, procedures and controls, banks/ DFIs shall take into consideration
money laundering and financing of terrorism threats that may arise from the use of new or
developing technologies, especially those having features of anonymity or inconsistency with the
spirit of CDD measures.

Foreign Branches and Subsidiaries

4. Banks/ DFIs shall pay particular attention to their branches and subsidiaries located in
countries which do not or insufficiently comply with FATF Recommendations (as determined by
FATF or identified by State Bank of Pakistan) and ensure that their AML/ CFT policy is
observed by branches and subsidiaries in those countries.
5. Banks/ DFIs shall apply their AML/ CFT policies to all of their branches and subsidiaries
outside Pakistan to the extent that laws and regulations of the host country permit. Where the
AML/CFT requirements in the host country or jurisdiction differ from those in Pakistan, bank/

  
DFI shall require their overseas branches or subsidiaries to apply the higher of the two standards,
to the extent that the law of the host country or jurisdiction so permits.
6. Where the law of the host country conflicts with the AML/ CFT requirements of Pakistan so
that the overseas branch or subsidiary is unable to fully observe the higher standards, the bank/
DFI through its head office shall report this to the State Bank of Pakistan and comply with such
further directions as may be issued.

Compliance

7. Banks/ DFIs shall develop appropriate AML/ CFT compliance program, including at least, the
appointment of a management level officer as the compliance officer in line with Regulation G-1
(Para D) of Prudential Regulations on Corporate/ Commercial Banking as amended from to time.
8. Banks/ DFIs shall ensure that the compliance officer, as well as any other persons appointed to
assist him, has timely access to all customer records and other relevant information which they
may require to discharge their functions.

Audit
9. Banks/ DFIs shall maintain an independent audit function in line with Code of Corporate
Governance that is adequately resourced and able to regularly assess the effectiveness of the
bank’s internal policies, procedures and controls, and its compliance with regulatory
requirements.

Employee Due Diligence

10. The Banks/ DFIs shall develop and implement a comprehensive employee due diligence
policy and procedure to be implemented/ carried out at the time of hiring all employees
permanent, contractual, or through outsourcing. This shall include but not limited to verification
of antecedents and screening procedures to verify that person being inducted/ hired has a clean
history.

Training

11. Banks/ DFIs shall chalk out and implement suitable training program for relevant employees
on annual basis, in order to effectively implement the regulatory requirements and banks’/DFIs’
own policies and procedures relating to AML/ CFT. The employees training shall enable them to
understand new developments, money laundering and financing of terrorism techniques, methods
and trends. The training should also include their responsibilities relating to AML/ CFT
especially requirements relating to CDD and analysis of abnormal/out of pattern transactions and
alerts generated thereof for possible reporting of suspicious transactions.

  
12. Banks/ DFIs should note that the relevant AML/CFT training combined with optimum use of
technology is becoming inevitable due to ever changing nature of methods and trends in illicit
activities. It is also important to test the capability and knowledge of the relevant staff on
periodic basis. The online trainings and AML/CFT Tests of varying nature are available in the
market offering opportunity for Banks/DFIs to equip their staff with relevant skills as per
respective roles and responsibilities within the institution. As the periodic training of the front
end staff is crucial, which is the first point of contact with customer; Banks/DFIs shall either
purchase or internally develop comprehensive AML/CFT Computer-based/online Training
Programs and Tests under a comprehensive plan with clear timelines for its implementation.

  
 Glossary of AML/CFT Terms

“Alternative remittance system (ARS)” Underground banking or informal value transfer

systems. Often associated with ethnic groups from the Middle East, Africa or Asia, and
commonly involves the transfer of values among countries outside of the formal banking system.
The remittance entity can be an ordinary shop selling goods that has an arrangement with a
correspondent business in another country. There is usually no physical movement of currency
and a lack of formality with regard to verification and recordkeeping. The money transfer takes
place by coded information that is passed through chits, couriers, letters or faxes, followed by
telephone confirmations. Almost any document that carries an identifiable number can be used
by the receiver to pick up the values in the other country. The systems are referred to by different
names depending upon the country: Hawala (an Arabic word meaning “change” or “transform”),
Hundi (a Hindi word meaning “collect”), Chiti banking (referring to the way the system
operates), Chop Shop banking (China), and Poey Kuan (Thailand).

“Beneficial owner” in relation to a customer of a bank/ DFI, means the natural person(s) who
ultimately own(s) or controls a customer or the person on whose behalf a transaction is being
conducted and includes the person(s) who exercise(s) ultimate effective control over a person or
a body of persons whether incorporated or not.

“Beneficiary” means the person to whom or for whose benefit the funds are sent or deposited in
bank.

“Beneficiary institution” means the financial institution that receives the funds on behalf of the
wire transfer or fund transfer beneficiary.

“Control” in relation to a legal person, means the power to exercise a controlling influence over
the management or the policies of the undertaking, and, in relation to shares, means the power to
exercise a controlling influence over the voting power attached to such shares.

“Correspondent bank” means the bank in Pakistan which provides correspondent banking
services to bank or financial institution situated abroad and vice versa.

“Correspondent banking” means provision of banking services by one bank (correspondent) to

another bank (respondent) including but not limited to opening and maintaining accounts in
different currencies, fund transfers, cheque clearing, payable through accounts, foreign
exchanges services or similar other banking services.

“Cross-border wire transfer” means a wire transfer where the ordering institution and the
beneficiary institution are located in different countries or jurisdictions.

“Cuckoo Smurfing” a form of money laundering linked to alternative remittance systems in

which criminal funds are transferred through the accounts of unwitting persons who are
expecting genuine funds or payments from overseas. The term cuckoo smurfing first originated
in investigations in the U.K., where it is a significant money laundering technique.

  
“Currency Transaction Report” (CTR) a report that documents a currency transaction that
exceeds a certain monetary threshold. A CTR can also be filed on multiple currency transactions
that occur in one day that add up to or are greater than the required reporting amount. In some
countries, including the U.S., currency transaction reports must be filed with government
authorities under specific circumstances.

“Customer” means a person having relationship with the bank which includes but not limited to
holding of deposit/deposit certificate/ or any instrument representing deposit/placing of money
with a bank/DFI, availing other financial services, locker facility, safe deposit facility, or
custodial services from the bank/DFI.

“Customer due diligence or CDD” in broader terms includes;

a) Identifying the customer and verifying the customer’s identity on the basis of documents, data
or information obtained from customer and/or from reliable and independent sources;
b) identifying, where there is a beneficial owner who is not the customer, the beneficial owner
and taking adequate measures, to verify his identity so that the bank/DFI is satisfied that it knows
who the beneficial owner is, including, in the case of a legal person, trust or similar legal
arrangement, measures to understand the ownership and control structure of the person, trust or
arrangement;
c) Understanding and, as appropriate, obtaining information on the purpose and intended nature
of the business relationship; and
d) monitoring of accounts/transactions on ongoing basis to ensure that the transactions being
conducted are consistent with the banks/DFIs knowledge of the customer, their business and risk
profile, including, where necessary, the source of funds and, updating records and data/
information to take prompt action when there is material departure from usual and expected
activity through regular matching with information already available with bank/DFI.

“Customer identification program” (CIP) the policies and procedures of an institution that
aim to identify and verify the identity of its customers. In general, the program must be in
writing, have senior board approval and include procedures for customer notification.

“Domestic wire transfer” means any wire transfer where the originator and beneficiary
institutions are located in Pakistan regardless the system used to effect such wire transfer is
located in another jurisdiction.

“Dormant or in-operative account” means the account in which no transaction has been taken
place from last one year.

“Electronic banking” a form of banking in which funds is transferred through an exchange of

electronic signals among financial institutions rather than through an exchange of cash, checks or
other negotiable instruments.

“Enhanced Due Diligence” (EDD) additional examination and cautionary measures aimed at
identifying customers and confirming that their activities and funds are legitimate.

  
“Extradition” The surrender by one country to another of an accused or convicted person under
a bilateral agreement that specifies the terms of such exchanges, such as the persons subject to
being exchanged and the crimes for which exchanges will be permitted. The 1988 Vienna
Convention against Illicit Traffic in Narcotics and Psychotropic Substances makes money
laundering an internationally extraditable offense.

“FATF Recommendations” means the Recommendations of Financial Action Task Force as

amended from time to time.

“FMU” means financial monitoring unit established under the AML Act; A central
governmental office that obtains information from financial reports, processes it and then
discloses it to an appropriate government authority in support of a national anti money
laundering effort. The activities performed by an FIU include receiving, analyzing and
disseminating information and, sometimes, investigating violations and prosecuting individuals
indicated in the disclosures.

“Fund transfer/wire transfer” means any transaction carried out by financial institution on
behalf of originator person by way of electronic means or otherwise to make an amount of
money available to beneficiary person at another beneficiary institution, irrespective of whether
the originator and the beneficiary are the same person.

“Government entity” means federal or provincial government, a ministry within such a

government, a local government or an agency specially established by any such government, or a
department, organization or corporation owned or controlled by such government under federal,
provincial or local law.

“Intermediary institution” is an intermediary in the wire transfer payment chain; that receives
and transmits a wire transfer on behalf of the ordering institution and the beneficiary institution,
or another intermediary institution.

“Monetary threshold” expressed in Pak rupee includes a reference to the equivalent amount
expressed in any other currency.

“Money laundering and financing of terrorism or ML/TF” has the same meaning as ascribed
to them in AML Act.

“Mutual legal assistance treaty” (MLAT) Agreement among countries allowing for mutual
assistance in legal proceedings and access to documents and witnesses and other legal and
judicial resources in the respective countries, in private and public sectors, for use in official
investigations and prosecutions.

“Non-Profit Organizations” (NPO) These can take on a variety of forms, depending on the
jurisdiction and legal system, including associations, foundations, fund-raising committees,
community service organizations, corporations of public interest, limited companies and public
benevolent institutions. FATF has suggested practices to help authorities protect organizations

  
that raise or disburse funds for charitable, religious, cultural, educational, social or fraternal
purposes from being misused or exploited by financiers of terrorism.

“Occasional customer” or “walk-in-customer” means the person conducting occasional

transactions and is not a customer; having relationship with the bank/DFI.

“Occasional transaction” or “walk-in-transaction” means a transaction carried by or on behalf

of a person who is not a customer; having relationship with the bank/DFI.

“Online transaction” means deposit or withdrawal of cash using different branches of a bank
through electronic means.

“Operational risk” The risk of direct or indirect loss of operations due to inadequate or failed
internal processes, people or systems, or as a result of external events. Public perception that a
bank is not able to manage its operational risk effectively can disrupt or harm the business of the
bank.

“Ordering institution” means the financial institution that initiates a wire transfer on the
instructions of the wire transfer originator in transferring the funds.

“Originator” means the person who allows or places the order to initiate a fund transfer/wire
transfer or an online transaction.

“Payable-through account” means an account maintained at the correspondent bank by the

respondent bank which is accessible directly by a third party to effect transactions on its own
(respondent bank’s ) behalf.

“Person” has the same meaning as ascribed to it under the AML Act, 2010.

“Politically exposed persons or PEPs” are individuals who are entrusted with prominent public
functions either domestically or by a foreign country, or in an international organization, for
example Heads of State or of government, senior politicians, senior government, judicial or
military officials, senior executives of state owned corporations/departments/autonomous bodies.
This does not intend to cover middle ranking or more junior individuals in the foregoing
categories.

“Ponzi scheme” A money laundering system named after Charles Ponzi, an Italian immigrant
who spent 10 years in jail in the U.S. for a scheme that defrauded 40,000 people out of
15,000,000. Ponzi’s name became synonymous with the use of new investors’ money to pay off
prior investors. Ponzi schemes involve fake, non-existent investment schemes in which the
investors are tricked into investing on the promise of unusually attractive returns. The operator of
the scheme can keep the operation going by paying off early investors with the money from new
investors until the scheme collapses under its own weight and/or the promoter vanishes with the
remaining money. The scheme recently engaged in by Bernie Madoff is an example of a Ponzi
scheme. The prime bank guaranty, roll program, bank debenture program and high yield
promises are frequently used to entice investors into participating in Ponzi schemes.

  
“Respondent bank” means the bank or financial institution outside Pakistan to whom
correspondent banking services in Pakistan are provided and vice versa.

“Reputational risk” The potential that adverse publicity regarding a financial institution’s
business practices and associations, whether accurate or not, will cause a loss of confidence in
the integrity of the institution. Banks and other financial institutions are especially vulnerable to
reputational risk because they can become a vehicle for, or a victim of, illegal activities
perpetrated by customers. Such institutions may protect themselves through Know Your
Customer and Know Your Employee programs.

“Risk” refers to risk associated with money laundering and financing of terrorism.

“Risk-Based Approach” The assessment of the varying risks associated with different types of
businesses, clients, accounts and transactions in order to maximize the effectiveness of an anti-
money laundering program.

“Senior management” means the officer(s) not below the rank of Executive Vice President as
designated by the board of a bank/DFI for the purpose of AML/CFT regulations.

“Shell bank” means a bank that has no physical presence (mind and management), in the
country in which it is incorporated and licensed and/or which is not affiliated with a regulated
financial services group that is subject to effective consolidated supervision.

“Smurfing” A commonly used money laundering method; smurfing involves the use of multiple
individuals and/or multiple transactions for making cash deposits, buying monetary instruments
or bank drafts in amounts under the reporting threshold.

“Structuring” Illegal act of splitting cash deposits or withdrawals into smaller amounts, or
purchasing monetary instruments, to stay under a currency reporting threshold. The practice
might involve dividing a sum of money into lesser quantities and making two or more deposits or
withdrawals that add up to the original amount. Money launderers use structuring to avoid
triggering a filing by a financial institution. The technique is common in jurisdictions that have
compulsory currency reporting requirements.

“Suspicious Transaction Report” (STR) A government form that includes a financial

institution’s account of a questionable transaction. Many jurisdictions require financial
institutions to report suspicious transactions to relevant government authorities on a suspicious
transaction report, also known as a suspicious activity report or SAR.

“Tipping off” Improper or illegal act of notifying a suspect that he or she is the subject of a
Suspicious Transaction Report or is otherwise being investigated or pursued by the authorities.

“Typology” Refers to a money laundering method and is a term used by FATF.

  
“Vienna convention” Convention in 1988 against the Illicit Trade in Narcotic Drugs and
Psychotropic Substances. Countries that become parties to the Vienna Convention commit to
criminalizing drug trafficking and associated money laundering, and enacting measures for the
confiscation of the proceeds of drug trafficking. Article III of the Convention provides a
comprehensive definition of money laundering, which has been the basis of much subsequent
national legislation.

“Willful blindness” Legal principle that operates in money laundering cases in the U.S. and is
defined by courts as the “deliberate avoidance of knowledge of the facts” or “purposeful
indifference.” Courts have held that willful blindness is the equivalent of actual knowledge of the
illegal source of funds or of the intentions of a customer in a money laundering transaction.

  
 REFERENCES

Avira, the most phished brand in January 2011 remained PayPal, followed by other entries (ie.
Ebay, HSBC Bank, Chase Bank, etc) http://techblog.avira.com/2011/03/12/phishing-spam-and-
malware-statistics-for-february-2011/en/

Basel Committee on Banking Supervision’s paper Customer due diligence for banks, October
2001.

Commtouch reports that in the first quarter of 2010, some 305,000 zombie computers were
newly activated per day. Brazil (14%), India (10%), Vietnam (8%), the Russian Federation (7%)
and Ukraine (4%) produced most zombies. (www.commtouch.com/download/1679)

Cyber Laundering: The Risks to Online Banking and Ecommerce Companies. Retrieved May 29,
2008.

Facebook alone claimed some 845 million active users in December 2011
(http://www.facebook.com/press/info.php?statistics).

FATF Report: Virtual Currencies Key Definitions and Potential AML/CFT Risks, June 2014.

FATF’s paper & report “Risk of terrorist abuse in non-profit organisations” and “Best practices
paper on combating the abuse of non-profit organisations”.

FATF-GAFI - Money Laundering Using New Payment Methods, October 2010

http://www.banksafeonline.org.uk/moneymule_explained.html

http://www.fidis.net/fileadmin/fidis/publications/2006/DuD09_2006_553.pdf

http://www.imf.org/external/pubs/cat/longres.cfm?sk=20274.0

http://www.sophos.com/security/topic/security-report-2010.html 22 See for example: Symantec

Intelligence Quarterly April – June 2011

http://www.sophos.com/security/topic/security-report-2010.html).
http://www.sonicwall.com/downloads/SB_Security_Trends_US.pdf

Journal of Money Laundering Control, 10(2), 140156. Koops, Bert-Jaap/Leenes, Ronald (2006).
Microsoft Security Intelligence Report, Volume 9, January through June 2010 with a detailed
analysis of botnets (http://www.microsoft.com/security/sir/)

Money laundering! International conference (London, February, 2002) Web site:

0<<8

??? )6<1576-@4)=6,-:16/ =3. 6-<

8)8-:;
;741+1<7: 0<54

  
OECD (2007): Malicious Software (Malware) – A security threat to the Internet Economy.
http://www.oecd.org/dataoecd/53/34/40724457.pdf).
Rob McCusker, Underground Banking: Legitimate Remittance Network or Money Laundering
System?, Crime And Justice International 21(89), 4 (2005).

Robert S. Pasley, Study Guide for the CAMS Certification Examination, Fifth Edition.

SBP’s Anti-Money Laundering and Combating the Financing Of Terrorism (AML/CFT)

regulations for banks & DFIs, March 31, 2015. (www.sbp.gov.pk)

Schott P. Allan, Reference guide to anti money laundering and combating the financing of
terrorism, Second Edition and Supplement on Special Recommendation IX, 2006.

www.amlcft.org

www.apgml.org

www.fatf-gafi.org

www.worldbank.org