AMLA Notes

Anti-Money Laundering, Anti-Terrorism Financing
and Proceeds of Unlawful Activities Act

(AMLATFPUAA) 2001
 Dr. Mohd Johan Lee
 LLB, MCL (IIUM), MA (Econs) (KCL),
 Ph.D (Comm & Business Law) (Monash)
 Advocate & Solicitor (High Court Malaya)
 Advocate (High Court Sabah & Sarawak)
 Peguam Syarie
 Advocate & Solicitor (Supreme Court Brunei)
 Messrs. J. Lee & Associates

 Shariah Advisory Committee, AIBIM
29/11/2019 (c) Dr. Mohd Johan Lee 2019 1

“After foreign exchange and the
oil industry, the laundering of
dirty money is the world’s third-
largest business.”
Jeffrey Robinson, The Laundrymen
How Much Is Laundered?

IMF ESTIMATE = 2-5% Global GDP

What is Money Laundering?
 Money laundering is the process by which the proceeds of the
crime, and the true ownership of those proceeds, are concealed
or made opaque so that the proceeds appear to come from a
legitimate source.
 Generally money laundering is the process by which one
conceals the existence, illegal source, or illegal application of
income to make it appear legitimate. In other words, it is the
process used by criminals through which they make “dirty”
money appear “clean” or the profits of criminal activities are
made to appear legitimate.
 “a process of converting cash or property derived from
criminal activities to give it a legitimate appearance. It is a
process to clean ‘dirty’ money in order to disguise its criminal
origin” BNM

 Section 4 of the AMLATFPUAA 2001 defines money laundering
as:
 “an act that engages, directly or indirectly, in a transaction that
involves proceeds of an unlawful activity or instrumentalities of
an offence; acquires, receives, possesses, disguises, transfers,
converts, exchanges, carries, disposes of or uses proceeds of an
unlawful activity or instrumentalities of an offence; removes from
or brings into Malaysia, proceeds of an unlawful activity or
instrumentalities of an offence; or conceals, disguises or impedes
the establishment of the true nature, origin, location, movement,
disposition, title of, rights with respect to, or ownership of,
proceeds of an unlawful activity or instrumentalities of an
offence”.

Money Laundering
 Money laundering generally refers to ‘washing’ of the

proceeds or profits generated from:
(i) Drug trafficking
(ii) People smuggling
(iii) Arms, antique, gold smuggling
(iv) Prostitution rings
(v) Financial frauds
(vi) Corruption, or
(vii) Illegal sale of wild life products and other specified
predicate offences

Money Laundering
 Money launderers are big time criminals who operate through

international networks without disclosing their identity.
 The money laundered every year could be in the range of $600
bio to $2 trio. This gives money launderers enormous financial
power to engage or coerce or bribe people to work for them
 Generally, money launderers use professionals to create legal
structure/ entities which act as ‘front’ and use them for
laundering of funds

Money Laundering Process
 Money Laundering consists of three stages:

1. The first stage involves the Placement of proceeds derived
from illegal activities – the movement of proceeds,
frequently currency, from the scene of the crime to a place,
or into a form, less suspicious and more convenient for the
criminal.
2. The second stage is called Layering. It involves the
separation of proceeds from illegal source through the use
of complex transactions designed to obscure the audit trail
and hide the proceeds. The criminals frequently use shell
corporations, offshore banks or countries with loose
regulation and secrecy laws for this purpose.

Money Laundering Process
3. The third stage is called Integration. It represents the

conversion of illegal proceeds into apparently legitimate
business earnings through normal financial or commercial
operations. Integration creates the illusion of a legitimate
source for criminally derived funds and involves techniques as
numerous and creative as those used by legitimate businesses.
For e.g false invoices for goods exported, domestic loan
against a foreign deposit, purchasing of property and co-
mingling of money in bank accounts.

What is Money Laundering ?
Money Laundering is the process by which illegal funds and

assets are converted into legitimate funds and assets.
Investments
Purchases
Placement: Illegal funds or assets Layering: Use of multiple Integration: Laundered funds are
are first brought into the financial accounts, banks, intermediaries, made available as apparently
system corporations, trusts, countries to legitimate funds.
disguise the origin.
Important: All money laundering transactions need not go through this three-stage process.

Money Laundering Cycle 1.
Predicate Crimes
• Corruption and Bribery
• Fraud
• Organized crime
• Drug and human trafficking
• Environmental crime
• Terrorism
• Other serious crimes…
4. 2.
INTEGRATION PLACEMENT
• The last stage in the laundering
• Initial introduction of criminal
process.
proceeds into the stream of
• Occurs when the laundered
commerce
proceeds are distributed back to
• Most vulnerable stage of money
the criminal.
laundering process
• Creates appearance of
legitimate wealth.
3.
LAYERING
• Involves distancing the money
from its criminal source:
• movements of $ into
different accounts
• movements of money to
different countries
• Increasingly difficult to detect
Money is laundered
through…
Banks
Financial services
Brokerage firms
Other Examples: Insurance companies,

Money remitters,
Cash intensive businesses,
Brokerage firms,
Realtors
29/11/2019
Crooked LAWYERS and ACCOUNTANTS
(c) Dr. Mohd Johan Lee 2019 12
Simple Bribe and Money Laundering Transaction
Country 3
Country 1
Company owned by Minister’s cousin

Company A
• Needs to generate
$1 million for bribe to
Finance Minister.
• Uses invoices from
company in Country
2
Company Bank Account $500,000 - Purchase $500,000 - Purchase

of Real Estate of Bearer Share
Country 4
29/11/2019 Country 2 (c) Dr. Mohd Johan Lee 2019 13
What Are The Benefits Of Money
Laundering Laws?
 Money Laundering is a separate offense which carries additional jail
time. Allows for seizure and confiscation of proceeds of crime.
 Allows law enforcement access to bank and other financial institution
records.
 Requires financial institutions to file suspicious and sometimes cash
transaction reports, and to identify the beneficial owners of legal
entities.
 Requires establishment of Financial Intelligence Units which receive
reports from financial institutions and can provide new channels for
international exchange of information.

Incentives to Launder
 Large amount of proceeds from corruption that

need to be hidden
 Low confidence in the security of assets in
country
 Asset disclosure requirements
 Political instability or possible regime change
 Greater risk for corruptors and corruptees of
investigation and prosecution

What are some of the Challenges?
 Developing political will at senior levels of government.

 Tighter AML can be costly and reduce resources from
other needs.
 Building capacity in developing countries for
investigation and prosecution.
 Knowing your client is not always easy. Knowing your
client’s client is difficult to impossible.
 Coordination among countries law enforcement,
financial intelligence units, regulators, and judiciaries.
 Application of AML regime in a cash based economy.

Typologies/ Techniques
employed
 Deposit structuring or smurfing
 Connected Accounts
 Payable Through Accounts
 Loan back arrangements
 Forex Money Changers
 Credit/ Debit cards
 Investment Banking and the Securities Sector
 Insurance and Personal Investment Products
 Companies Trading and Business Activity
 Correspondent Banking
 Lawyers, Accountants & other Intermediaries
 Misuse of Non-Profit Organisations

Financing of terrorism
 Money to fund terrorist activities moves through the global

financial system via different typologies and in and out of
personal and business accounts. It can sit in the accounts of
illegitimate charities and be laundered through buying and
selling securities and other commodities, or purchasing and
cashing out insurance policies.
 Although terrorist financing is a form of money laundering, it
doesn’t work the way conventional money laundering works.
The money frequently starts out clean i.e. as a ‘charitable
donation’ before moving to terrorist accounts. It is highly time
sensitive requiring quick response.

Combating financing of
terrorism
 (i) State Sponsored
 (ii) Other Activities- legal or non-legal
 Legal Sources of terrorist financing
 Collection of membership dues
 Sale of publications
 Cultural of social events
 Door to door solicitation within community
 Appeal to wealthy members of the community
 Donation of a portion of personal savings

Combating financing of
terrorism
 Illegal Sources
 Kidnap and extortion;
 Smuggling;
 Fraud including credit card fraud;
 Misuse of non-profit organisations and charities fraud;
 Thefts and robbery; and
 Drug trafficking

Macroeconomic impact
 Money laundering can have a range of severe macroeconomic

consequences on countries.
 IMF has cited unpredictable changes in money demand,
prudential risks to the soundness of banking systems,
contamination of legal financial transactions, and increased
volatility of international capital flows and exchange rates due
to unanticipated cross-border asset transfers.

Macroeconomic impact
 The economic and political influence of criminal

organizations can weaken the social fabric; collective
ethical standards and ultimately the democratic institutions
of the society. Organized crime can infiltrate financial
institutions, acquire control of large sectors of the economy
through investment, or other bribes to public officials and
indeed governments
 Money Laundering can also have a dampening effect on
FDI if a country’s financial sectors are perceived to be
under control and influence of organized crime.

Money Laundering Risks
What are the risks to banks?

(i) Reputational risk
(ii) Legal risk
(iii) Operational risk (failed internal processes, people and
systems & technology)
(iv) Concentration risk (either side of balance sheet)
All risks are inter-related and together have the potential of
causing serious threat to the survival of the bank

What KYC means?
 Customer?
 One who maintains an account, establishes business relationship, on
who’s behalf account is maintained, beneficiary of accounts
maintained by intermediaries, and one who carries potential risk
through one off transaction
 Your? Who should know?
 Branch manager, audit officer, monitoring officials, PO
 Know? What you should know?
 True identity and beneficial ownership of the accounts
 Permanent address, registered & administrative address

What KYC means?
 Making reasonable efforts to determine the true identity and

beneficial ownership of accounts;
 Sources of funds
 Nature of customers’ business
 What constitutes reasonable account activity?
 Who your customer’s customer are?

Core elements of KYC
 Customer Acceptance Policy

 Customer Identification Procedure- Customer Profile
 Risk classification of accounts- risk based approach
 Risk Management
 Ongoing monitoring of account activity
 Reporting of cash and suspicious transactions

Know Your Customer (KYC) Guidelines
Customer Acceptance - Ensure that only

legitimate and bona fide customers are
accepted.
Customer Identification- Ensure that

customers are properly identified to
understand the risks they may pose.
Transactions Monitoring- Monitor

customers accounts and transactions to
prevent or detect illegal activities.
Risk Management- Implement processes

to effectively manage the risks posed by
customers trying to misuse facilities.
Guidelines issued by FATF

Advantages of KYC norms
 Sound KYC procedures have particular relevance to the

safety and soundness of banks, in that:
1. They help to protect banks’ reputation and the integrity of
banking systems by reducing the likelyhood of banks
becoming a vehicle for or a victim of financial crime and
suffering consequential reputational damage;
2. They provide an essential part of sound risk management
system (basis for identifying, limiting and controlling risk
exposures in assets & liabilities)

Risk based approach
 The potential risk that a customer carries depends on:

(a) Identity of the customer including beneficial ownership
(b) The nature of customer’s business and his product profile-
jewels, precious metals, arms, antiques
(c) Location of business
(d) Products and services offered
(e) Customer’s customer or clientrs; their location & business

High risk countries
 Geography
 Drug producing nations
 Drug transshipment countries
 Drug using countries
 Secrecy jurisdictions and tax havens, particularly those that

grant offshore banking licenses.
 Countries with high degree of public corruption
 Countries linked to terrorist financing
 Non Cooperative Countries and Territories

High risk customers
 Non-bank financial institutions ( money transmitters, cheque

cashiers, full fledged money changers, sellers of stored value
cards, security brokers & dealers etc. )
 Travel agencies / Property dealers/ builders
 Professional and consulting firms
 Exporters or importers of goods and services
 Cash intensive business e.g. retail stores, restaurants,
gambling casinos, second hand car dealerships etc.
 Off-shore corporations, banks in secrecy heavens
 Non-profit organisations e.g charities

High risk products & services
 Wire transfers
 Electronic banking services which includes services offered
through internet, credit cards, stored value cards
 Private banking relationships
 Correspondent banking relationships

Cross border accounts-deposits
 All KYC procedures to be observed

 Third party verification of documents through Correspondent
bank which is committed to KYC regime and is willing to
share KYC information on demand
 Verification of document during visit to India
 Remittance through banking channels

Operational deficiencies
Factors that facilitated the scam

 Photographs not obtained
 Proper introductions not obtained
 Signatures not taken in the presence of bank official
 Failure to independently verify the identity and address of

all joint account holders
 Directors identity/ address not verified
 Customer Due Diligence done by a subsidiary

Operational Deficiencies
 Objective of large number of jt. account holders opening

account not ascertained
 Purpose of relationship not clearly established
 Customer profiling based on risk classification not done
 Poor monitoring and reporting system due to inadequate
appreciation of ML issues
 Absence of investigation about use and sources of funds

Operational Deficiencies
 Unsatisfactory training of personnel

 No system of fixing accountability of bank officials
responsible for opening of accounts and complying with
KYC procedures
 Ineffective monitoring and control

Measures to deter money
laundering
 Board and management oversight of AML risks
 Appointment a senior executive as principal officer with
adequate authority and resources at his command
 Systems and controls to identify, assess & manage the money
laundering risks
 Make a report to the Board on the operation and effectiveness
of systems and control
 Appropriate documentation of risk management policies, their
application and risk profiles

Measures to deter money
laundering
 Appropriate measures to ensure that ML risks are taken into
account in daily operations, development of new financial
products, establishing new business relationships and changes
in the customer profile
 Screening of employees before hiring and of those who have
access to sensitive information
 Appropriate quality training to staff
 Quick and timely reporting of suspicious transactions
But it doesn't work they way we want

Because
‘The law hath not been dead, though it hath slept’

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Anti-Money Laundering, Anti-Terrorism Financing

and Proceeds of Unlawful Activities Act

 Messrs. J. Lee & Associates

29/11/2019 (c) Dr. Mohd Johan Lee 2019 1

How Much Is Laundered?

29/11/2019 (c) Dr. Mohd Johan Lee 2019 3

29/11/2019 (c) Dr. Mohd Johan Lee 2019 4

29/11/2019 (c) Dr. Mohd Johan Lee 2019 5

 Money laundering generally refers to ‘washing’ of the

29/11/2019 (c) Dr. Mohd Johan Lee 2019 6

 Money launderers are big time criminals who operate through

29/11/2019 (c) Dr. Mohd Johan Lee 2019 7

 Money Laundering consists of three stages:

29/11/2019 (c) Dr. Mohd Johan Lee 2019 8

3. The third stage is called Integration. It represents the

29/11/2019 (c) Dr. Mohd Johan Lee 2019 9

Money Laundering is the process by which illegal funds and

29/11/2019 (c) Dr. Mohd Johan Lee 2019 10

Other Examples: Insurance companies,

Company owned by Minister’s cousin

Company Bank Account $500,000 - Purchase $500,000 - Purchase

29/11/2019 (c) Dr. Mohd Johan Lee 2019 14

 Large amount of proceeds from corruption that

29/11/2019 (c) Dr. Mohd Johan Lee 2019 15

 Developing political will at senior levels of government.

29/11/2019 (c) Dr. Mohd Johan Lee 2019 16

29/11/2019 (c) Dr. Mohd Johan Lee 2019 17

 Money to fund terrorist activities moves through the global

29/11/2019 (c) Dr. Mohd Johan Lee 2019 18

 Cultural of social events

 Door to door solicitation within community

 Appeal to wealthy members of the community

 Donation of a portion of personal savings

29/11/2019 (c) Dr. Mohd Johan Lee 2019 19

 Fraud including credit card fraud;

 Misuse of non-profit organisations and charities fraud;

 Thefts and robbery; and

29/11/2019 (c) Dr. Mohd Johan Lee 2019 20

 Money laundering can have a range of severe macroeconomic

29/11/2019 (c) Dr. Mohd Johan Lee 2019 21

 The economic and political influence of criminal

29/11/2019 (c) Dr. Mohd Johan Lee 2019 22

What are the risks to banks?

29/11/2019 (c) Dr. Mohd Johan Lee 2019 23

29/11/2019 (c) Dr. Mohd Johan Lee 2019 24

 Making reasonable efforts to determine the true identity and

29/11/2019 (c) Dr. Mohd Johan Lee 2019 25

 Customer Acceptance Policy

29/11/2019 (c) Dr. Mohd Johan Lee 2019 26

Customer Acceptance - Ensure that only

Customer Identification- Ensure that

Transactions Monitoring- Monitor

Risk Management- Implement processes

Guidelines issued by FATF

29/11/2019 (c) Dr. Mohd Johan Lee 2019 27

 Sound KYC procedures have particular relevance to the

29/11/2019 (c) Dr. Mohd Johan Lee 2019 28

 The potential risk that a customer carries depends on:

29/11/2019 (c) Dr. Mohd Johan Lee 2019 29

 Drug transshipment countries

 Drug using countries

 Secrecy jurisdictions and tax havens, particularly those that

 Countries linked to terrorist financing

 Non Cooperative Countries and Territories