Introduction to Compliance Matters and KYC

BAF 354: Banking and

• Emerging Fraud Risks – By one published estimate, 2%-5% of global Gross
Foreign Trade domestic product (GDP) is laundered, amounting to as much as USD 2
trillion. Todays’ banking environment, the word “Compliance” became the
11th Week most important issue as the political developments do force the banks to
Compliance Matters and KYC behave as police stations.

Regulatory Compliance Regulatory Compliance

A common challenge for the above technologies is whether they can address the growing costs
and complexities of complying with financial crime regulations in trade finance. For banks in
particular, technologies must support regulatory compliance requirements for:
• Know your customer (KYC)
Banks are responsible for knowing and verifying the identity of their clients to minimise risks
of fraud, corruption/bribery, money-laundering, financing of terrorism, and identity theft
• Anti-money laundering (AML)
Inaccuracy in the price, nature, volume, and quality of goods on an invoice could inadvertently
enable money laundering across borders. Trade banks are responsible for verifying transactions,
to spot and prevent such activity
• Sanctions
Banks are responsible for screening all aspects of the transaction for conflicts with any sanctions regimes, including both
parties, the counterparty bank, transport company, vessel, all ports involved, and the goods being shipped.
Sanctions/embargoes seek to achieve political and economic ends by using trade as a means of foreign policy. Economic
sanctions are used to counter terrorism, to battle drug trafficking, to reduce trade exports and/or imports. Financial sanctions
also reduce trade by denying investment, foreign exchange or credit to the target country or by raising its cost of credit.
The enforceability of sanctions is a question to be decided by courts, national regulators or administrative agencies and is not
an issue that can be addressed by rules of banking practice.
Banks are compelled to comply with sanctions in accordance with the applicable national law or regulation in the jurisdictions
in which they operate.
Some sanction clauses can bring into question the bank's commitment or the irrevocable nature of a transaction.
 Collection of Information and Documents
Risk-Based Approach
• Process Trigger The purpose of collecting information and documents is to:
The KYC process must be undertaken at each key stage of the client relationship: • Identify the client, its Ultimate Beneficial Owners and other related persons
• At onboarding • Detect risk factors to input into the risk assessment system
• In the course of the relationship • Understand the client’s business or activity, as well as the nature and intended
• During periodic recertification purpose of the business relationship.
• Following a trigger event
• At the relationship termination

Risk Assessment Decision Making

A client’s final risk level depends on two elements: The decision is made by the Business Line except for the riskiest files which
• A scoring system based on objective and quantifiable criteria require Compliance intervention or a Customer Acceptance Committee.

• A qualitative assessment based on information not taken in account in the

scoring grid (questionnaire filled in by the RM, transactional profile, adverse
information)
 Money Laundering Summary
Money Laundering is the act or attempted act to conceal or disguise the
proceeds of illegal activities so that they appear to come from legitimate
sources or activities. Money Laundering usually occurs in three stages:
placement, layering and integration:
• Placement - The first stage focuses on depositing criminal funds into the
financial system. For example, a criminal may deposit cash from the sale of
illegal drugs into his bank account claiming that it is earnings from a
business.
Terrorist Financing Summary
• Terrorist Financing describes the process by which funds are sent to terrorist
organisations. The process for financing terrorism is similar to Money
Laundering – both try to disguise the route that money takes through the
system.
• Terrorist Financiers use similar methods to money launderers, with the key
difference being that the terrorist financier’s objective is to disguise the
destination (rather than the source) of funds.
Money Laundering Summary
• Layering - Here, the criminal uses financial transactions to disguise the audit
trail and make it more difficult to identify the source and ownership of the
funds. For example, the criminal buys and sells investment products, creating
a complex set of financial transactions.
• Integration - Here, the criminal’s motivation changes from hiding the origin
of the money to using it. For example, the criminal may buy property or
luxury goods to create assets or funds that appear to be clean.
Terrorist Financing Summary
Certain industries, products and services are more susceptible to Money Laundering or
Terrorist Financing (for example, those which facilitate cash payments or payments to third
parties)
• There are a number of warning signs or ‘red flags’ that can be used to help identify potential
Terrorist Financing. These include: Clients trying to hide their identity
• Activity that has no business rationale or economic justification
• Transactions that are inconsistent with the client’s business
• Transactions that are deliberately structured below reporting requirements to avoid
detection
• Unnecessary use of intermediaries in a transaction
 Politically Exposed Persons
• A politically exposed person (PEP) is defined by the Financial Action Task
Force (FATF) as an individual who is or has been entrusted with a prominent
public function. Due to their position and influence, it is recognised that
many PEPs are in positions that potentially can be abused for the purpose of
committing money laundering (ML) offences and related predicate offences,
including corruption and bribery, as well as conducting activity related to
terrorist financing (TF).
• Anyone in any of the following roles should be considered a potential PEP.
PEPs in Organisations and Institutions
Central Financial Institutions: Examples here would be the Court of Auditors
and members on the boards of central banks
• Armed Forces: In this situation a PEP rating would typically only apply to a
high-ranking officer
• International Sports Committees: Members of these committees may be
influenced to vote on the location of major sporting events/contracts for
building venues, etc., so have recently been included by FATF under their
definition of a PEP
PEPs in Government Roles
Legislative Bodies: A good example here would be a Member of Parliament
• Executive Bodies: A PEP could range from the head of state down to the assistant
ministers
• Diplomatic Roles: Ambassadors or charges d’affaires would be considered PEPs
• Judiciary Bodies: Key people working within supreme courts, constitutional courts
or high-level judicial bodies
• State-Owned Enterprises: A PEP would typically be anyone from a senior executive
upwards. However, even former members of the board of directors no longer
associated with an organisation may retain influence and still be flagged as PEPs
Known ‘Close Associates’ who are Considered
PEPs
• Anyone who has a close business relationship or joint beneficial ownership
of legal entities or legal arrangements with a PEP
• Anyone who has the sole beneficial ownership of a legal entity which is
known to have been set up for the benefit de facto of the PEP
 Immediate Family Members who are
High Sensivity Operations
Considered PEPs
• Parents and children of PEPs Account opening
• Spouse or partner • Opening an account with no apparent economic reason (e.g. for a non-resident
• Siblings without a connecting link or activity in the country)
• Uncles and aunts • Account opening followed by significant cash deposits without apparent economic
• Even slightly indirect family members (such as in-laws) will be considered as a reason or consistency with the client’s assets, particularly when there is no activity
politically exposed person • Opening an account for the capital deposits of an entity where the origin of funds
Note: Each country may have different local PEP regulations that you need to comply is opaque or the amount seems disproportionate to the business purpose of the
with when doing business in that region. entity

High Sensivity Operations High Sensivity Operations

Transactions with high-sensitivity countries
• Transit accounts to/from overseas operations including high sensitivity or tax
noncooperative countries
• International transfers received/sent without apparent economic reason, especially with high
sensitivity or tax non-cooperative countries
• Foreign cheque issue or encashment with no apparent economic reason
• Regular and significant transactions with countries associated with the production,
processing or sale of drugs without apparent economic reasons
• Bank or travel cheques, negotiable instruments, precious metals and products favouring
anonymity
Transactions with no apparent economic reason
• Inconsistent or significant financial transactions, with no apparent connection to the
client’s assets or usual activities
• A significant, unexplained increase over a short period of the amounts credited to
an account that has been opened recently, previously had little activity or was
dormant
• Receipt of a third party payment with no apparent link with the client
• Cheque encashment in favour of a third party on behalf of the client
 High Sensivity Operations
Transactions with no apparent economic reason
• Frequent and significant fund remittances related to gambling winnings
• Operations relating to capital movements where the origin is opaque due to
the complexity of the structure or a capital increase without apparent
economic reason
• Transactions involving shell companies and/ or trusts with no apparent
economic reason
High Sensivity Operations
Cash transactions
• Cash deposits made in atypical conditions (including ATMs)
• Deposits/cash withdrawals of significant amount compared to the relationship
profile
• Deposits/cash withdrawals unrelated to the known activity of the client or
disproportionate to its business
• Frequent or significant operations carried out by high sensitivity clients including
PEPs
High Sensivity Operations
Transactions with no apparent economic reason
• Transactions in favour of companies where there have been frequent
statutory changes with no apparent economic reason
• Operations on behalf of companies where the beneficial owners are difficult
to identify
• Operations on behalf of companies which have legal arrangements and/ or
structures that are hard to identify
High Sensivity Operations
Cash transactions
• Transfers of significant amounts of cash to/ from foreign countries, especially
when the client’s account, activities or residence are not related to the country of
origin or destination of the transfer (e.g. Western Union)
• Withdrawals/cash deposits in countries or areas associated with the production,
processing or sale of drugs without apparent economic reason (e.g. non-resident
client or having no regular business with the country) including multi-site clients
• Deposits or withdrawals that are excessive in relation to a company’s turnover or the
client’s income
 High Sensivity Operations
Inconsistencies in operational documents
• Anomalies identified in the documents presented (e.g. invoices, purchase
orders without registration number of the company, invoice number, address
or date etc)
• Where the client refuses to produce supporting documents as to the source
of the funds received or in relation to the rationale for payments or
transactions
High Sensivity Operations
Financing activities
• Early credit repayment when the source of funds is not established
• Early credit repayment with funds disproportionate to the amount of credit
or the client’s circumstances (KYC)
• Credit requests that are guaranteed by a third party or by assets where the
origin is unknown or inconsistent with the client’s assets

High Sensivity Operations High Sensivity Operations

Financing activities Insurance contract operations
• Loan requests that are secured by assets or resources held abroad without • Subscription by people whose resources are not known
clear justification
• Multiple subscriptions by the same people over a very short time
• Import/export guarantees or financing with no apparent reason in the light • Situations where the subscriber is not paying the premiums
of the entity’s activities
• Contracts for a beneficiary with no apparent economic link to the subscriber
 High Sensivity Operations
Insurance contract operations
• Premium payments from accounts abroad with no apparent reason
• Early redemption (with or without loss) with no apparent economic reason
• Pledge contracts and early repayment of mortgage loans
• Accidents occurred shortly after the conclusion of an insurance contract
High Sensivity Operations
Real estate
• Transactions at a price that clearly over or undervalue the property or do not match
the trend of the national or local market
• Transactions where the origin of funds is opaque or disproportionate to the client’s
income
• Unusual payments (e.g. significant cash deposits, transfers to a high sensitive
country)
• Transactions by non-residents with no apparent economic reason Complex
arrangements on acquisition for no apparent reason
High Sensivity Operations
Investment transactions
• Use of wealth management services where the source of funds is opaque or
disproportionate to the apparent standard of living of the client
• Deposit of values and/or securities that favour anonymity (bearer securities, gold,
etc)
• Securities cash payments • Payments to/from third parties
• Purchase/resale of securities for no apparent reason, in unusual circumstances or
where the frequency or amount is unusual
High Sensivity Operations
Real estate
• Remote transactions or transactions through intermediaries, especially when they are
based in countries with high sensitivity or no regulation
• Transfers of real estate to a third party that does not have an apparent relationship
with the client
• Successive real estate sales with significant margins
• Client cancellation with repayment of the deposit to a third party or a separate
account
 High Sensivity Operations
Currency exchange,
• Splitting transactions so that they fall below the identification threshold
• Exchange of small bills in large denominations of the same currency
• Exchange of cash against foreign currencies for significant amounts
• Transactions that are obviously disproportionate to the client’s standard of living
• Absence of apparent economic interest to perform a transaction
• Significant exchange transactions conducted from various points of sale by
connected clients
High Sensivity Operations
Safety deposits
• Renting a safety deposit box with no apparent economic reason (e.g. companies,
associations) or where the cost is disproportionate to the client’s standard of living
• Rent by a high sensitivity client (e.g. PEP or other exposed function)
• Rent by occasional clients
• Frequent and repeated visits toa safety deposit box
• Requests for issuance of multiple keys