Anti-Money Laundering Programmes – Regulations

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Money Laundering and the foundation for implementing an effective Anti-Money Laundering System

Money Laundering is the attempt to disguise the proceeds generated from criminal or illegal sources and activities as if they were produced by legitimate means. Unrestrained money laundering provides an incentive for criminal elements to fund, benefit from and expand their activities, thus corrupting the economic, social, security, reputational and political profile of those countries and financial institutions which do not have effective anti-money laundering (AML) regulations, policies and controls in place.

The laundering process is generally achieved in three phases. First, the illegal proceeds are introduced into the financial system, e.g. through large cash deposits made into banks. This is known as the placement stage. Once introduced into the system they are used in multiple transactions so as to conceal and complicate their trail and make it more difficult to assess their origins. This process is the layering stage. If layering is successful, the illicit proceeds can be retrieved by the money launderer in transactions that are apparently legitimate. This final stage is integration.

Numerous ways are employed by criminal elements to hide the source of ill-gotten funds. Their methods are continually evolving and getting more sophisticated as AML regulation changes over time to counter such dynamic threats to global, national and regional financial systems and economies. In turn, AML regulation too has to be responsive to this threat.

This articles reviews FATF recommendations, AML frameworks and compliance programs.

FATF Recommendations

The money laundering regulations of most countries are based on the Financial Action Task Force’s (FATF) 40 recommendations for developing and implementing AML/CTF policies.

FATF, an inter-governmental body makes policies for preventing and mitigating money laundering, terrorist financing and other related threats that impact the efficacy of the global financial system.  They have developed 40 Recommendations which are the international standard for developing and implementing AML/ CTF and weapons of mass destruction (WMD) proliferation policy world-wide.  These recommendations are periodically revised to ensure that they remain up to date and relevant.

A brief summary of the 40 Recommendations revised as of February 2012 (considering amendments made till June 2019) are listed below:

# FATF Recommendation
1. Assessing risk & applying risk-based approach:
Identify & assess money laundering and terrorism financing risks for the country. Apply a risk based approach to prevent and mitigate the risks.
2. National cooperation and coordination:
National AML/ CTF policies should be developed & implemented through cooperation and coordination between policy makers, supervisors and law enforcement authorities.
3. Money laundering offence:
Criminalize money laundering on the basis of the Vienna & Palermo Conventions. Identify and include all money laundering predicate offences.
4. Confiscation & provisional measures:
Seize, freeze or confiscate (including non – conviction based confiscation) property and proceeds used or intended to be used in money laundering or terrorist financing.
5. Terrorist financing offence:
Criminalize terrorist financing on the basis of the Terrorist Financing Convention. Also treat the offence as a money laundering predicate offence.
6. Targeted financial sanctions – terrorism & terrorist financing:
Implement targeted financial sanctions related to terrorism and terrorism financing to comply with UN security council resolutions.
7. Targeted financial sanctions – proliferation:
Implement targeted financial sanctions related to proliferation of weapons of mass destruction and its financing to comply with UN security council resolutions.
8. Non-profit organisations:
Review adequacy of laws and regulations that relate to non-profit organisations that are vulnerable to terrorist financing abuse and apply appropriate measures to counter this risk.
9. Financial institution secrecy laws:
Financial institution secrecy laws should not impede implementation of FATF recommendations.
10. Customer due diligence:
Financial institutions should undertake Customer Due Diligence (CDD) and not have any accounts that are anonymous or fictitious. They must make efforts to identify and verify the customer’s identity & the beneficial owner, understand the purpose and nature of the business relationship and scrutinize transactions for their consistency going forward. The financial institution is required to take necessary action (e.g. not open account or commence relationship, terminate an existing relationship or make a suspicious transaction report) if compliance is not possible.
11. Record keeping:
Financial institution must maintain records for at least five years. Records must be readily retrieved if information requests are made by appropriate authorities.
12. Politically exposed persons:
For foreign politically exposed persons (PEP) the financial institution must have risk management systems implemented to verify whether or not the customer or beneficial owner is a PEP. For either a foreign or domestic PEP, prior approval for commencing the relationship should obtained from senior management, sources of wealth and funds must be established, and the ongoing relationship needs to be closely scrutinized.
13. Correspondent banking:
Perform CDD of cross – border correspondent banking institutions. Review and understand information on the institutions, assess their AML/ CTF controls & CDD practices, and obtain senior management approval before setting up the relationship.
14. Money or value transfer services:
Ensure that money or value transfer service (MVTS) providers and their agents are licensed and registered, and that the MVTS agents are subject to the providers’ AML/ CTF programmes on an on-going basis.
15. New technologies:
Countries and financial institutions should identify and assess money laundering and terrorist financing risks when introducing new products and new technologies.   Virtual asset service providers should be regulated for AML/CFT purposes, be licensed or registered and subject to effective systems for monitoring and compliance to measures outlined in the FATF recommendations.
16. Wire transfers:
Financial institutions should include originator and beneficiary information on wire transfers and related messages throughout the payment chain. They should closely monitor those wire transfers which do not contain this information and freeze and prohibit any transactions carried out by designated persons and institutions.
17. Reliance on third parties:
Financial institutions may rely on third parties to undertake CDD measures on their behalf. These third parties must meet certain criteria to be relied on. However, the ultimate responsibility of the CDD measures rests with the financial institutions.
18. Internal controls and foreign branches and subsidiaries: Financial institutions are required to implement AML/CTF programmes, including across groups, foreign branches and majority owned subsidiaries.
19. Higher-risk countries:
Financial institutions are required to implement enhanced CDD to business relations and transactions from high risk countries.
20. Reporting of suspicious transactions:
Financial institutions are obligated to report suspicious transactions/ activities to the financial intelligence unit (FIU).
21. Tipping-off and confidentiality:
Financial institutions are protected by law against breach of confidentiality/ privacy / secrecy laws if they report to FIU on suspicious transactions/ activities in good faith. They are prohibited from disclosing filing of STR & SAR to the concerned client.
22. DNFBPs: Customer due diligence:
CDD and recording keeping measures also apply to certain designated non-financial businesses and professions (DFNBP), e.g. casinos, lawyers, real estate agents, precious stone dealers, etc.
23. DNFBPs: Other measures:
Recommendations 18-21 also apply to DFNBPs.
24. Transparency & BO of legal persons:
Prevent the misuse of legal persons (in particular, bearer shares & bearer shares warrant issuers, nominee shareholders and directors) for money laundering and terrorist financing. Enable access to information on beneficial ownership and controls.
25. Transparency & BO of legal arrangements:
Prevent the misuse of legal arrangements (e.g. express trusts) for money laundering and terrorist financing. Enable access to information on beneficial ownership and controls.
26. Regulation and supervision of financial institutions:
Countries should have in place adequate regulation and supervision of financial institutions, to prevent criminals from holding significant interest of a management function, to prevent shell banks from being established, to ensure consolidated group supervision, to ensure that financial institutions are licensed and registered to carry out their business.
27. Powers of supervision:
Supervisors should have adequate power to supervise, monitor, conduct inspections, ensure compliance of regulations, request and obtain information from financial institutions and impose disciplinary and financial sanctions and penalties.
28. Regulation and supervision of DNFBPs:
DFNBPs should be subject to regulation and supervision, including licensing, preventing criminals from holding significant interests or management functions, monitoring compliance with AML/CTF measures and imposing sanctions.
29. Financial Intelligence Units:
Financial Intelligence Unit (FIU) should be established by the country for receiving, reviewing and analysing STRs and other information submitted by financial institutions & DFNBPs. Access to other information needed for its analysis must also be ensured.
30. Responsibilities of law enforcement and investigative authorities:
Countries must ensure, in their national AML/ CTF policies that designated law enforcement & investigative authorities have the responsibility to carry out money laundering and terrorist financing investigations, freeze and seize suspicious property, and carry out cooperative investigations with authorities in other countries when necessary.
31. Powers of law enforcement and investigative authorities:
Powers of law enforcement and investigative authorities include access (voluntary or under compulsion) to all relevant information, and through a wide array of investigative techniques.
32. Cash couriers:
Countries must have measures to detect, control, restrain or prevent the cross-border physical movement of currency and bearer negotiable instruments and to enforce sanctions, including confiscations, if there are any violations.
33. Statistics:
Ensure maintenance of statistics to assess effectiveness and efficiency of AML/CTF systems implemented.
34. Guidance and feedback:
Authorities and supervisors should prepare guidelines and provide feedback to help financial institutions and DNFBPs develop and implement AML/CFT programmes, and detect and report suspicious transactions.
35. Sanctions:
Countries should ensure that a range of effective and appropriate sanctions commensurate with offences committed by entities and individuals, are available.
36. International instruments:
Countries should take steps to implement various international conventions relating to money laundering and terrorist financing.
37. Mutual legal assistance (MLA):
Countries should provide mutual legal assistance and cooperation to each other in relation to money laundering and terrorist financing. They should have in place a legal basis for providing cooperation including treaties and other arrangements.
38. Mutual legal assistance (MLA) – freezing and confiscation:
Countries should have in place measures and processes to effectively freeze, seize and confiscate property and proceeds obtained or suspected to be obtained from criminal activities, laundering and terrorist financings, based on requests from foreign countries.
39. Extradition:
Countries should execute extradition requests in a timely manner and not provide safe havens to those charged with these offences.
40. Other forms of international cooperation:
Countries should provide other forms of international cooperation such as having Memorandums of Understanding in place if necessary, clear channels for transmitting information and effective processes for handling requests and protecting information.

AML/ CTF laws & regulations in the United States of America that incorporate these recommendations or contain elements that correspond with them are mentioned below:

  • Bank Secrecy Act (BSA)
  • Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA – PATRIOT Act 2001)
  • Office of Foreign Assets Control and International Sanctions Programs

In this post, we have defined money laundering and briefly reviewed FATF’s 40 recommendations for developing and implementing AML/CTF policies. In our next post, we will review the important elements of an effective AML/ CTF governance framework and risk based compliance program. We also look at some of the primary features of an AML/ CTF monitoring and reporting system.