Course Code and Title : Special Topics in Financial Management

Lesson Number : 3-4

Topic : Anti Money Laundering (AML)

Professor : Brandy Valdez, MBA

Dave Keit Lappay, MBA, DBA*

Jusffer Alexander De Leon, MBM, DBA*

INTRODUCTION:

What Is Anti Money Laundering (AML)?

Anti-money laundering (AML) refers to the laws, regulations and procedures intended
to prevent criminals from disguising illegally obtained funds as legitimate income.
Though anti-money laundering laws cover a limited range of transactions and criminal
behavior, their implications are far-reaching. For example, AML regulations require
banks and other financial institutions that issue credit or accept customer deposits to
follow rules that ensure they are not aiding money-laundering.
LEARNING OBJECTIVES:

1. Understand the concept of Anti Money Laundering

2. Synthesize the importance of Anti Money Laundering

3. Illustrate the process on how the banks mitigate or eradicate money launderers

PRE-ASSESSMENT:

Why it is so important to know the customer?

LESSON:

How Anti Money Laundering Works?

• AML laws and regulations target criminal activities including market manipulation,
trade in illegal goods, corruption of public funds and tax evasion, as well as the
methods used to conceal these crimes and the money derived from them.

• Criminals often "launder" money they obtain through illegal acts such as drug trafficking
so the funds cannot be easily traced to them. One common technique is to run the
money through a legitimate cash-based business owned by the criminal organization or
its confederates. The supposedly legitimate business deposits the money, which the
criminals can then withdraw.

• Money launderers may also sneak cash into foreign countries to deposit, deposit cash
in smaller increments to avoid arousing suspicion, or use illicit cash to buy other cash
instruments. Launderers will sometimes invest the money, using dishonest brokers
willing to ignore the rules in return for large commissions.

• One rule in place is the AML holding period, which requires deposits to remain in an
account for a minimum of five trading days. This holding period is intended to help in
anti-money laundering and risk management.
AML Awareness: Three stages of money laundering

Money laundering has one purpose: to turn the

proceeds of crime into cash or property that looks
legitimate and can be used without suspicion. Here
are some of the most common ways this is
achieved.

There are usually two or three phases to the

laundering:

1. Placement
2. Layering
3. Integration / Extraction

Placement

• Cash businesses – adding the cash gained from crime to the legitimate takings. This works best in
business with little or no variable costs, such as car parks, strip clubs, tanning studios, car washes,
and casinos.
• False invoicing – putting through dummy invoices to match cash lodged, making it look like
payment in settlement of the false invoice
• Smurfing – lodging small amounts of money below the AML reporting threshold to bank accounts
or credit cards, then using these to pay expenses etc.
• Trusts and offshore companies – useful for hiding the identity of the real beneficial owners.
• Foreign bank accounts – physically taking small amounts of cash abroad, below the customs
declaration threshold, lodging in foreign bank accounts, then sending back to the country of origin.
• Aborted transactions – funds are lodged with a lawyer or accountant to hold in their client account
to settle a proposed transaction. After a short time, the transaction is aborted. Funds are repaid to
the client from an unimpeachable source

Layering

Layering is essentially the use of placement and extraction over and over again, using varying amounts
each time, to make tracing transactions as hard as possible.

Integration / Extraction

The final stage is getting the money out so it can be used without attracting attention from law
enforcement or the tax authorities. In this regard, criminals are often content to pay payroll and other
taxes to make the “washing” more legitimate and are often happy with a 50% “shrinkage” in the wash.

• Fake employees - a way of getting the money back out. Usually paid in cash and collected
• Loans - to directors or shareholders, which will never be repaid
• Dividends - paid to shareholders of companies controlled by criminals
FIVE WAYS TO HELP COMBAT MONEY LAUNDERING

1. Improve Searches with Technology

2. Have Regular Cross-Communication
3. Use Data Analytics to Find Patterns
4. Standardize Your Systems
5. Structured Training Is Essential

Know Your Customer (KYC) is a standard due diligence process used by investment
firms i.e., wealth management, broker dealers, private lenders, commercial real estate
investment, among others to assess investors they are conducting business with. Apart
from being a legal and regulatory requirement, KYC is a good business practice as well
to better understand investment objectives and suitability, and reduce risk from
suspicious activities.
So, what is KYC? In a nutshell, it is the process of identifying who your investors are
and their wealth status, verifying the sources of the client's funds (if they are legitimate
or not), and requiring detailed anti-money laundering (AML) information from the
clients. Getting the detailed information about your customer protects both parties in a
business transaction and relationship. KYC serves an important purpose for providing
superior service, preventing liability, and avoiding association with money laundering,
and types of fraud.
The importance of KYC

KYC is a standard requirement globally within the investment industry. It’s a process
from industry regulatory bodies to protect all stakeholders within the industry and it’s in
the best business interest of any investment firm or investor, especially if there is a lot
of money at stake.
In addition to the KYC process for new investors, it’s also a requirement to conduct
KYC on repeat investors or “renew” the KYC profile on file at the firm. Maintaining
accurate and updated records firmwide is critical.

For companies

If a business or issuer complies with KYC policies, they will reduce the financial risks of
their business arrangements with particular clients. Knowing the source of a client’s
income, gauging their capability of investing in your market, and obtaining their
complete financial portfolio and background are important aspects of KYC
requirements. Those checks can also be vital risk management strategies to avoid
getting entangled in business relationships with potential clients who have participated
in illegal activities.
KYC procedures also help establish trust in a business relationship and give an
organization insight into the nature of customer activities. On top of that, they are a
crucial part of the onboarding process and can significantly improve the servicing and
management of investors over the course of the relationship.

For clients

The importance of KYC may not be evident from the investor's point of view, however
their own protection is the priority of regulators. These rigorous checks can be a
burdensome process for the investor, however they create a secure and trustworthy
environment to enable financial or investment activities with the company. Digital
technology has allowed for a much smoother, streamlined onboarding experience, that
transforms a process that used to take months into an intuitive experience that can be
performed in minutes on any device. The technology behind protecting sensitive
information has also evolved, with methods such as advanced authentication and
encryption giving the client base confidence in every KYC procedure.
Seamless KYC workflows will make your clients feel they are working with a legitimate
company and more comfortable allocating funds to your firm or not.
What is the KYC process?

While the exact steps may differ based on KYC laws across different countries, most of
the frameworks include the same elements. A KYC process usually consists of
verifying the customer’s identity, investment suitability, and due diligence on various
documentation such as proof of address and income.

Customer identification

A critical element to a successful KYC methodology is risk assessment, and it’s up to

the individual organization to determine the exact KYC policy to counter any potential
issues and ensure compliance.

The minimum requirements for customer identification include the following

information:

• Name
• Date of birth
• Address
• Identification number
• Tax Number
• Investment Experience
• Investment Preferences
• Income and Assets

After gathering this information during onboarding, an organization must make sure to
verify the identity of the account holder within a reasonable timeframe. This process
can include documents, non-documentary methods (depending on information
availability), as well as a combination of the two.
KYC policies are decided based on the risk assessment strategy within an
organization, with factors such as the type of account and services offered, the
customer’s geographic location, the organization’s size and others playing a role.
Application / Real Life example:
The Money Laundering Case of RCBC: Philippine Experience:

The RCBC money-laundering investigation has evidently become a topic of conversation from
New York to Singapore; besides major newspapers in both those cities (and elsewhere
outside the Philippines). That should come as no surprise given the magnitude of the crime,
but unfortunately not many people here seem to have grasped yet just how damaging this is
to the country. The sad reality is that the all-too-typical way this scandal is being addressed
only serves to camouflage the relatively simple, broad facts of the case, and almost certainly
won’t lead to the swift, decisive solutions the country needs to implement to avoid becoming a
financial pariah. Imagine how our country involved in one of the biggest bank robberies in the
world that sometimes looks to be like in the movie. How $81 million or 3.8 billion was stolen
from Bangladesh Central Bank account maintained at the US Federal Reserve Bank of New
York was transfer electronically and the stolen money was transferred in several accounts at
the RCBC and the rest was moved into different casinos account. It could be argued that
casinos shouldn’t have been exempted from the anti-money laundering reporting provisions;
Casinos are not really the issue, laundering money through a casino? That’s like money
laundering 101, that’s probably the first lesson hey give at the money-laundering seminar.
Basically the last step in the process—the real crime has already happened by the time the
money reaches that stage, which makes finding a substitute path easier if the casino option
isn’t available.

GENERALIZATION:

• Anti Money Laundering (AML) seeks to deter criminals by making it harder for them to
hide ill-gotten money.
• Criminals use money laundering to conceal their crimes and the money derived from
them.
• AML regulations require financial institutions to monitor customers' transactions and
report on suspicious financial activity.

EVALUATION:
What do you think is the role of the banking sector in combating money laundering?
Using infographics, illustrate the process or ways how banks combat money laundering.

REINFORCEMENT:
Read the Republic Act 9160 or Anti-Money Laundering Act (AMLA).

REFERENCES:
https://www.icas.com/professional-resources/anti-money-laundering-resources/latest-
developments/aml-awareness-three-stages-of-money-laundering