ADB’s AML/CFT POLICY OGC Staff Continuing Education

Rita O’Sullivan, Snr CounselCheong-Ann Png, Counsel

17 February 2010The views expressed in this paper are theviews of the author(s) and do not necessarilyreflect the views or policies of the AsianDevelopment Bank (ADB), or its Board ofDirectors or the governments they represent.ADB does not guarantee the source,originality, accuracy, completeness orreliability of any statement, information, data,finding, interpretation, advice, opinion, or viewpresented, nor does it make anyrepresentation concerning the same.

Topics

I. Why is AML/CFT of interest?

II. ADB’s AML/CFT Policy

III. Counsel’s role in ADB Projects andthe AML/CFT Toolkit

IV. ADB’s Internal Compliance Procedures

Background on Money Laundering (ML) and Terrorist Financing (TF)

ML & TFcause major concerns in regulation and overallefficiency of financial systems

have potentially serious negative impacts– divert funds to crime & corruption;– distort international trade and capital flows;– exposes banking sector to risk.

How to launder funds

TF - usually involves funds already within the formal system

ML occurs in 3 stages to enter ‘formal’ system

Placement stage – cash enters financial systems and is converted into monetary instruments

Layering stage – funds are transferred/moved into other accounts/financial institutions to separate money from its origin.

Integration stage – funds are reintroduced into the economy and used to purchase legitimate assets or fund other criminal activities or legitimate businesses.

Taken from Rolling Stone magazine, 21 August 1997, p. 81

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Players & TerminologyFATF - Financial Action Force on Money Laundering- (ADB has

observer status)

inter-governmental body purpose to develop and promote national and international policies to combat money laundering and terrorist financing 40 plus 9 Recommendations – 40 AML and 9 special CFT ‘guidelines’

FATF style regional bodiesAPG- Asia/Pacific Group on Money Laundering (observer status)EAG - Eurasian Group on combating money laundering and financing of terrorism (observer status)Moneyval, Council of Europe Groups in Eastern and South Africa, South America, Africa, Middle East & North Africa, Caribbean OGBS, Offshore Group of Banking Supervisors

TerminologyFATF and FATF SRBs:

– monitor members' progress in implementing necessary measures through mutual evaluations,

– review ML/TF techniques and counter-measures, – promote the adoption and implementation of appropriate measures

globally,– collaborate with each other.

High-risk and non-cooperative jurisdictions - considered to have detrimental rules and practices in place which constitute weaknesses and impede international co-operation in the fight against ML/TF – Uzbek, Pakistan currently on ‘enhanced due diligence’.

Tax Havens/financial heavens – structuring deals through such jurisdictions. Must check OECD list

ADB’s AML/CT POLICY‘Enhancing the Asian Development Bank’s Role inCombating Money Laundering and the Financing ofTerrorism - adopted 1 April 2003.

A. Assist DMCs to establish and implement effective AMLRegimes4 Implementation principles:

1. AML/CFT activities within context of existing goals,policies, and strategies for assisting DMCs;

HOW - Assist DMCs – policy dialogue + design RETAs, TAs/financialsector reforms - example – PRC TA and phase 2 proposal

ADB’s AML/CT POLICY (2)

2. not duplicate ongoing efforts /programs of IMF, WorldBank, FATF, & APG;

HOW - Collaborate with Others Organizations

– network of donors to exchange views/ coordinate support

ADB’s AML/CT POLICY (3)

3. Identify additional measures throughlending operations, training government officials and other technical assistance.

3. Take into account the special problems and circumstances faced by DMCs

Keep Updated attend international & regional meetings, participate in policy making Working Groups

Issues for Dialogue with Governments -Impact of AML/CFT on Financial Systems

Part of global financial systemAML/CFT system to meet international standardsProtect global system viability

Legislative Framework –is it sufficient?Clarify regulatory responsibilities

Reflect international norms but local responses

Based on nature of financial sectorAnalysis of risks – i.e. risk -based approachExtended functions for central banks, securities commissions, pension, insurance, and other financial sector supervisors

AML Toolkit ADB’s AML Fund/Projects

Major resource OGC’s AML TOOLKIT www.adb.org/Documents/Others/OGC-Toolkits/Anti-Money-Laundering/aml0500.asp

Google - ADB, AML

“Idiot’s Guide to AML/CFT”ProjectsLinks

Checklist– where is your DMC up to?

http://www.adb.org/Documents/Others/OGC-Toolkits/Anti-Money-Laundering/aml0600.asp

High level committee - policy decisions & commitment Legislative Frameworkslative Frameworkegis

Criminalization of ML + TFpredicate offencesfinancial institutions coveredwhistleblower protection + information

financial intelligence unit (“FIU”) – what model?

non-bank financial institution prudential statements(soft law)

Mutual assistance arrangements

Examine if Elements of An Efficient AML System in Place

Identifying the ML/TF risks – riskbased approach Regulatory arbitrage?Capacity of Judiciary/enforcementInternational co-operation on intelligence, investigation and regulation –mutual legal assistance, recovery of stolen assests, MOUs

Necessary Judicial PowersFor Domestic/foreign investigations need powers to:

locate, freeze and confiscatesearch and seizecompel witnesses/prisonerstransfer proceedingsjoint investigationenforce foreign ordersshare assets/proceeds of crimes

Financial Institution AML PROGRAM -Requirements and Obligations

Customer ID – Awareness Program

Suspicious transactions + cash threshold reporting

Record keeping

Privacy laws and reporting disclosures

Internal controls, compliance program and audit

wire transfers/cash couriers/ARS

PEP-politically/particularly exposed persons.Secrecy requirements overridden.

Training and Skills Development across many sectors

Financial Intelligence UnitAML/CFT related agenciesBankers-internal AML proceduresOther industry sectorsInvestigators/police/ProsecutorsJudgesForeign Affairs Customs, border security agencies

TA Support by OGC

Extensive coverage (OGC RETA for Pacific DMCs, numerous TAs) – but often rely on Project officers to implementWorking Smarter – Bank Negara staff undertook training in Laos - internal AML/CFT guidelines for SOCBsMeeting requests e.g– PAK $1.5M TA to Pakistan Central Bank, PRC TA for legislative amendmentsFunding sources – AML Fund, bi-lateral

ADB’s AML/CT POLICY (cont)

B. Strengthen internal controlsADB’s Internal AML/Due Diligence controls

C. Enhance ADB staff capacity– purple

bags, departmental training – and develop knowledge based products

ADB’s Approach to Integrity Due Diligence and AML/CFT checks

All employees of ADB are expected to exercise due diligence in respect of their work. The policies, operational procedures and the Articles of the Charter of ADB provide for a number of forms of due diligence to be undertaken in addition to the general due diligence.

OM D10 deal team is responsible to evaluate key risk aspects,including … market, financial, economic, legal, corporate governance, compliance (e.g., … know-your-client, anti-money laundering, and market checking) … aspects of the proposed transaction.

ADB’s INTERNAL AML PROGRAM“ADB’s Standard”

Prove that all precautions, reasonable under the circumstances, were taken to protect the funds and reputation of the bank, to comply with prudent banking practice and the policy directives of the ADB Board and the procedures of ADB.

Optimal Approach –recognize ADB’s ‘particular’ circumstances and harmonize with other MDBs’ procedures.

How Does Risk Impact ADB?

ADB not a deposit-taking institution –’less’ exposure than commercial bank, but limited risk from capital raisings

ADB’s operations might (inadvertently or otherwise) involve or facilitate ML/TF,corruption, fraud or other crimes.– ADB can be the victim or

instrument of ML/TF

Risk Based Approach

ACTUAL RISK – to ADB, its funds and those under administration

Reputational risks– Failure to implement reasonable and prudent DD

and/or AML/CFT procedures —Hint of ML/TF puts ‘client’ (and member) trust at risk—trust essential to ADB’s operations. Note recent requests for clarification of AML/ CFT procedures from US Senate, UK House of Lords and approach to tax havens from G8.

– Allow or facilitate activities permissive of ML crimes, such as tax avoidance, transfer pricing, illegal cross border currency transfers, in its operations.

Risk Based Approach (2)

– Operational risks—business, fraud, theft, corruption, etc

– Business risk. Example -underbidding to ensure award of ADB contract for supply of goods (e.g.computers, hardware). Contract implemented at loss in order to receive ‘clean’ payment from ADB.

Effect –(i) launders funds and (ii) gives business credibility to laundererMinimize risk through Due Diligence checks

“Customer” of ADB

• Sovereign states – no direct KYC concern• Sub- Sovereign entities - check deal parameters• Non- Sovereign entities – need DD checks• Recipients of ADB funds – different risks/ID

issues– Contractors, consultants, suppliers – Executing Agencies dealing with funds– End Beneficiaries from onlending

arrangements e.g financial leasing company receiving funds from state owned commercial bank borrowed from ADB

– Private sector entities – loans and equity investments

– NGOs – grants – difficult to identify usage

PROCESS Know your customer (KYC) Rule – install and maintain

a system to identify and verify the true identity and relevant history of customer.

Calibrate specific measures in KYC procedures to meet relevant risk exposure.

– System involves:• Step I Check Sanctions list - what are these?

ADB’s Key DD Obligations

ADB’s Sanctions List(AML/CFT + Anti-corruption Issues)

MUST-CHECK LISTS – Red Light Indicator (i.e. no go)OAI Anti-corruption Sanctions ListUN Security Council Committee consolidated sanctions list - The consolidated list concerning individuals and entities belonging to or associated with the Taliban, Usama Bin Laden, and the Al-Qaida organization.

HOW? OAI SiteOther sites – see handout.WORLD CHECK, International

Chamber of Commerce, Lexis Nexis

ADB’s Sanctions List (AML/CFT + Anti-corruption Issues)

PRUDENT-TO-CHECK LISTS - Red Flag (i.e. need for further assessment)

If red flag is indicated, the relevant Department / project officer, etc – STEP 1 review the reason for the red flag indicator, – Step 2 determine if additional investigation should be undertaken– Step 3 continue steps 1 and 2 until in a position to make a decision;– Step 4 recommends to relevant authority, e.g. Director, DG, MRM, etc to

continue (or cease) with processing.COSO List of Non-performers (blue list)World Bank Debarment ListUS Office of Foreign Assets Control (OFAC) LIST (A US Treasury Department list of persons engaged in terrorism, international narcotics trafficking, and activities related to the proliferation of weapons of mass destruction. FBI Most Wanted Terrorists List of alleged terrorists indicted by US sitting Federal Grand Juries.Need to clarify importance of undertaking initial

checks using a broader range of lists (evolving list)

Procedures – Develop Integrity file

1. Red flag checklist 2. Add AML/CFT checklist if Financial

Institution2. check sanctions list @ every stage of

processing and disbursements

Procedures – Develop Integrity file (2)

3. External investigations – who and what TORs (International Chamber of Commerce - £30/search)

4. Advise DER – bring in early if ‘sensitive issues’

Portfolio Management – periodic review, including check of sanctions listAudit checks – any notes?

ADB’s INTERNAL AML PROGRAM (2) -Integrity Oversight:

Integrity Division of OAI and Audit (OAG)

Sovereign Operations – Management review

PSOD Management Review (non-sovereign):Private Sector Credit Committee (PSCC)/Credit and Management Review Committee Integrity Due Diligence Procedures:– Project Team must complete Red Flags Checklist at

various stages – internal/external reviews

ADB’s AML INTERNAL OPERATIONS’ PROCEDURES

OGC chairs Working Group on AML/CFT ProceduresInternal Procedures based on staff instructions and OMs–– Issues for OAS, COSO, BPHR (Procurement of

Goods, Consultants, Staff) – Treasury, CTL (correspondent banks, SWIFT, UN

sanctions list)– PSOD– Process mapping and flow charts

Link with Office of Risk Management

Non-Sovereign Operations - INTEGRITY DUE DILIGENCE GUIDELINES - Checklist for IFIs

Adequate “know-your-customer” procedures to ensure identification of beneficial ownership;Close scrutiny of – parties that have been convicted of or under investigation for serious

crimes, investigated or sanctioned by a regulatory body or appearing on a sanctions list recognized by a member institution;

– parties involved in civil litigation involving allegations of financial misconduct;

– Politically/particularly Exposed Persons consistent with the recommendations of the Financial Action Task Force;

Identify mitigation factors and enforce covenants that address integrity risks; andOngoing monitoring of integrity risks through portfolio management.

Websites and Focal PointsAML Toolkit website

See http://www.adb.org/Documents/Others/OGC-Toolkits/Anti-Money-Laundering/default.asp

ADB/OECD Anti-Corruption Initiative for Asia-Pacific

See http://www1.oecd.org/daf/ASIAcom/

FOCAL POINTSRita O’Sullivan and Cheong-Ann Pngrosullivan@adb.org cpng@adb.org