E-book: How to manage Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT)

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E-book: AML/CFT Programs Overview of managing Anti-Money Laundering/Counter Financing of Terrorism (AML/CFT) Programs

December 2015Double Effect

What is money laundering?› Money laundering is the process used to legitimize illegal funds by concealing

the true source and ownership of the funding.

What is terrorist financing?› Terrorist financing involves the solicitation, collection or provision of funds with

the intention that they may be used to support terrorist acts or organizations.

What are the stages in Money Laundering and Terrorist Financing?

1. Placement - Placing the illegal or “dirty” funds or assets into the financial system.

2. Layering - Converting the unlawfully gained assets into other forms and creating complex layers with the intent of breaking the audit trail and hiding the amount of money involved . This stage makes it difficult to trace the true source and ownership of the assets.

3. Integration – Investing the funds into legal businesses or investments, the money can no longer be traced to its criminal origin. Money is now “clean.”

.

Banks continue to face heightened fines and regulatory scrutiny over their AML/CFT Programs

Liberty Reserve bank shut down in US$6 billion AML/CFT case

www.thetelegraph.co.uk May, 2013

BNP Paribas sentenced US $8.9 billion over sanctions violations

The New York Times May, 2015

J.P. Morgan to pay a high price of US2.6 billion for Bernard Madoff's crimes

The Wall Street JournalJanuary 2014

AML/CFT Programs (c) double effect 2015 2

AML/CFT

Overview of Anti-Money Laundering and Counter-Financing of Terrorism

Why are AML/CFT Programs important?

AML/CFT presents significant risks to financial service institutions: 3 Factors

Individual Factors Organizational Factors Economic Factors1 2 3



AML/CFT presents significant risks to financial service institutions: Individual Factors

Individual Factors

› Liabilities extend from front line staff up the board and senior executives including back office and compliance functions. Penalties include fines and imprisonment.

› Penalties can also apply for negligence, “turning a blind eye” or tipping off the customer.

› Individuals can face significant reputation damage being associated with money laundering and terrorist financing.

Risks Mitigated/Benefits

1



Organizational Factors2

› Increased understanding of the customer through know your customer requirements and understanding customers behavior and patterns.

› Significant financial penalties, regulator scrutiny or revocation of banking license.

› Loss of revenue through business partners due to ineffective AML/CFT Programs.


AML/CFT presents significant risks to financial service institutions: Organizational Factors



Economic Factors3

› Increased financial stability and reduced volatility of international capital flows.

› Terrorist attacks are becoming increasingly sophisticated and resulting in increasing number of casualties (CIA and world terrorism index report).

› Economic efficiency – IMF and Worldbank estimate between $590bn and $3.61tr is laundered annually (3-5% of Global GDP).


AML/CFT presents significant risks to financial service institutions: Economic Factors


› Regulations continue to be revamped globally.

› The EU have issued the 4th directive effective June 2015

› Regulators are enforcing more stringent AML/CFT requirements retrospectively for transactions dating back to 2002

› The UN, OFAC and EU expanded their sanctions programs and counter terrorism activities

› FATF expanded their role to govern counter terrorist financing and issued 9 special recommendations

› Basel Committee on Banking Supervision founded in 1974

› Financial Action Task Force (FATF) on Money Laundering was founded in 1989

Regulators are prosecuting Banks for inadequate AML/CFT Programs.

Enforcement actions can include removal of senior management, compensating

victims, financial penalties, retrieval of staff bonuses, mandatory AML/CFT Program

reform and orders to cease criminal activity.

AML/CFT regulations and governance were in

developmental stages. There was limited focus on terrorist financing. AML/CFT was not regarded as a top priority.

9/11/2001

Pre - 9/11/2001 Post- 9/11/2001

The 9/11 commission report revealed that AML/CFT controls were insufficient to prevent and detect money laundering and specifically counter terrorist

financing. Subsequently, the US Patriot Act was created.

AML/CFT became a top priority for banks and regulators.


Anti-Money Laundering & Counter Terrorist Financing

9/11 was the catalyst to revamp AML/CFT legislation and requirements globally

Key Regulatory Requirements

Summary of key requirements (actual requirements differ by country)

SanctionsGovernance Risk-Based Approach Frameworks Customer Due

Diligence

Suspicious Transaction ReportingOngoing Monitoring Record Keeping Independent Review



Governance

Governance

› FIs must ensure adequate roles and responsibilities across the three lines of defence.

› AML/CFT Program must be headed by Senior Management (typically C-suite).

› FIs must have oversight of Group-wide AML/CFT risks and compliance program.

Regulatory Requirements



Risk-Based Approach

Risk-Based Approach

› AML/CFT Program should be commensurate with the size nature and complexity of the business and the corresponding AML/CFT risks.

› Risk assessment should incorporate geographical, product/service, channel, customer, institutional and third party risk.




Frameworks

Frameworks

› Frameworks must meet minimum requirements of local jurisdiction or jurisdiction of Group headquarters, whichever is more stringent.

› The framework should cover all aspects of the value chain and include management of third parties who execute AML/CFT activities on behalf of the Bank.




Customer Due Diligence

Customer Due Diligence

› All customers and connected parties (beneficial owners, controllers, persons acting on behalf), occasional transactors and potential customers must be identified and verified via reliable sources.

› The purpose and nature of the relationship should be understood and verified as appropriate for each customer.

› Each customer and connected parties should be screened to identify any Politically Exposed Persons (PEPs).

› Each customer must be risk rated to identify high risk customers. For high risk and politically exposed persons, enhanced due diligence (EDD) should be performed.

› EDD includes establishing a transaction profile, identification and corroboration of the source of wealth and source of funds, and obtaining approval from senior management to establish the relationship.




Sanctions

Sanctions

› FIs must screen all potential and existing customers (and connected parties) against established sanctions lists (Typically OFAC, UN, EU, HMT and on a per country of operations basis) at onboarding and on a regular basis.

› For any matches, funds must be blocked and suspicions transaction reports should be filed.




Ongoing Monitoring

Ongoing Monitoring

› FIs must monitor business relationships with customers and identify any unusual behavior.

› FIs should also monitor red flags and common AML/CFT typologies.

› FIs must detect suspicious, complex, large or unusual transactions with no apparently economical or lawful purpose.




Suspicious Transaction Reporting

Suspicious Transaction Reporting

› FIs must report suspicious transactions as soon as possible after forming the suspicion (typically 1-3 business days) to the authorities and transactions above a specific cash threshold.

› It is prohibited “tip off” the customer and alert them that they are under suspicion of ML/FT.

› FIs must have processes to enable asset seizing if the authorities issue instructions.




Record Keeping

Record Keeping

› Records must be kept to enable recreation of transactions, all account opening documentation and evidence of AML/CFT Program operation must be kept for at least 5 years.

› Records must be accessible and readily retrievable.




Independent Review

Independent Review

› FIs must have regular independent review of AML/CFT Program.

› Independent review must be performed by experienced and independent personnel (i.e. internal audit or experienced consultant).



1. Strategy & Operating Model

›Alignment to business architecture

›Long range and short range planning

›Links to organizational change

2. Governance

›Decision Making

›Three lines of defence

›Performance Management

3. Risk Management

›Risk based approach

›Risk remediation

›Risk culture

4. People & Culture

›Organizational Structure

›Risk Culture

›Change Management

8. Regulatory Management

›Regulatory Liaison

›Audit Management

›Cross – border regulation

7. Third Party Management

›Service Level Agreements

›Inter-group management

›Use of utility providers

6. Systems and Data

›Financial Crime Solutions

›Risk & Compliance

solutions

›Analytics & intelligent data

5. Polices & Processes

›Research & trends

›Policy Setting

›Integration to BAU

AML/CFTProgram


AML/CFT Program

The key elements of an AML/CFT Program are outlined below

Regulatory Management› Risk-based regulatory remediation› Assurance activities underway to

support regulatory attestation› Creation of new line 1 roles to

address regulatory concerns

Customer Experience Management

› Impact on customer experience e.g. onboarding time

› Can we use data gained to improve the customer experience?

Cross-Border Considerations› Managing cross-border risk and

compliance› Standardization/ centralization of

processes› Reliance on third parties

Risk/Compliance Culture› Measuring risk culture› Balancing risk and reward › Risk appetite› Exiting undesirable clients, products,

channels and markets


Technology & Data› Financial crime systems› Integration of financial crime & core

banking systems› Use of GRC solutions› Data analytics strategies

Three Lines of Defence Management

› First line of defence capability › Procuring specialist resources› Coordination across the 3LOD› Integration of Financial Crime

Client Profitability› Optimizing client value › How to measure client profitability

and cost to serve?› Customer segmentation strategies› Exiting unprofitable segments

KYC/Utilities Vendors› KYC data as a services - public and

private customer data› Benefits and risks of early adoption› Managing third party risks

Trends in AML/CFT

We observe the following trends in AML/CFT Program management

Balancing Risk and Reward

› Find the balance between risk mitigation and cost effectiveness of the AML/CFT Program.

AML/CFT Programs (c) double effect 2015

› Find the right balance between a sales driven versus compliance driven culture.

› Build the right culture so that policies are followed as intended.Compliance Culture

› Approach AML/CFT compliance in a strategic and intelligent manner across the group.

ComplianceTransformation

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2

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Key considerations for AML/CFT Programs

The key challenges in managing your bank’s AML/CFT programs

The NetherlandsHullenbergweg 3611101 CP Amsterdam

phone +31 (0)20 697 19 59

Singapore20 Collyer Quay #23-01Singapore 049319

phone +65 6323 9266

GermanyMainzer Landstraße 4960329 Frankfurt am Main

phone +49 (0)69 3085 5067

United Kingdom99 Bishopgate, Levl 15EC2M 3XD, London

phone +44 (0)20 3693 7815

United Stated212 South Tryon Street, Suite 980Charlotte, NC 28281

phone +1 704 323 7133

Phil SturmerFinancial Crime Practice [email protected]+44 203 397 3700

Jeroen BosFinancial Crime Practice [email protected] +44 20 3693 7816

Miranda RobinsonFinancial Crime Practice [email protected]+65 9232 7349

AML/CFT Programs (c) double effect 2015

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This document has been prepared by Double Effect and is solely intended to provide general information about AML/CFT. The

information in the document is strictly proprietary, unless otherwise stated and is being supplied to you solely for your

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E-book: How to manage Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT)