anti-money - afma · in-house option:in-house training is an economical and efficient way of...

The offshore affrontCold trails in hot climates

PEP BUSINESSWhy you are exposed to reputational risk

12 DECEMBERA compliance date to remember

PATRIOT POLITICSThe US long arm reaches Macau

anti-money launderingCOMBATING MONEY LAUNDERING IN FINANCIAL SERVICES

JUNE / JULY 2007

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EDITOR’S LETTER

ANTI-MONEY LAUNDERING 1JUNE / JULY 2007

T HE POLITICALLY exposed person(PEP) is a relatively new term thathas become prominent in AML

circles in the past few years, and it is worthlooking at. While there is still some debateas to who qualifies as a PEP, I would havethought that a PEP could come from anywhere – ie any publicly accountable official in the executive, legislative,administrative, military, or judicial branchesof a government, whether they are or wereelected officials, could be a PEP.

Accepted wisdom is that banks and institutions should check their significant private banking client relationships and carry out backgroundchecks on these PEPs, including determining sources of wealth. The ultimate goal is to make it harder for persons in public office to abuse their positions of power by taking bribes or engaging in other corrupt activity.

However, the FATF recommendation on which we have based our laws only specifies the foreign ones, so it does notcover all potential PEPs. As yet, to myknowledge, there has been no specific guidance as to whether Australian reportingentities should differentiate between foreign PEPs and local ones.

Some countries have begun to questionthis. I recently read a precis of Canadian lawby Canadian law firm Fasken MartineauDuMoulin. The firm says the FATF stillinsists that reporting institutions “shouldonly treat people as though they are ‘politically exposed’ if they are foreigners”.

“Although the Canadian consultationpaper of 2005 suggested that the new require-ments were to affect domestic politicallyexposed persons, the newly amended law stillonly relates to foreigners,” writes the firm.

The US says much the same. Article 312of the Patriot Act released after 9/11 pertainsto the tracking of foreign PEPs. The USFinancial Crimes Enforcement Network has publicly backed this up, stating thatArticle 312 refers only to “senior foreignpolitical figures”.

A few months ago, a British colleague of mine spoke with Chip Poncey, a seniorofficial in the US State Department’s financial crime and anti-terrorist unit.

Poncey said the Americans “were nottaking any prisoners” in future when it came to dealing with international PEPs. The US will continue to spend money onsupporting emerging countries with financialaid, but they don’t want to see their tax dollars going straight into the depositaccounts of the heads of state or their family and their associates.

So if a foreign PEP (and the definitionof this is structured very widely) is foundrunning an account at a bank, then theAmericans will bring extreme political pressure on that bank to justify their actions,for fear of being prosecuted for facilitatingthe laundering of corrupt money.

Can the US really decide unilaterally to target a legitimate foreign bank and bring charges against it in the US because it has one of these PEPs on its books?

Poncey says it is exactly what it will do if they suspect that the US dollars being moved through a PEP’s account might be the proceeds of corrupt business activity,or state looting or bribes.

They will use their extraterritorial powers under their legislation to bring prosecutions based on the fact that movingthose dollars between banks and accountswill have contravened US law.

So there it is – it’s about foreigners – or foreigners to the US, to be more exact. But one cannot help but think that this is one FATF recommendation with an agenda quite foreign to us. ■■

By Adam CourtenayEDITOR

PEPs remain a very foreign affair

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Sydney: Melbourne:17 July 2007 24 July 200713 August 2007 5 September 200720 September 2007 29 October 200723 October 2007 13 December 200715 November 20076 December 2007

Anti-money Laundering for Professionals —Compliance ConsiderationsModule WorkshopAn additional optional half-day workshop targeted specifically at AML managers or compliance professionals with AML responsibilities. This module considers the compliance-specific considerations of the new AML/CTF regime.

Sydney: Melbourne:18 July 2007 25 July 200714 August 2007 6 September 200721 September 2007 30 October 200724 October 2007 14 December 200716 November 20077 December 2007

In-house Option: In-house training is an economical and efficient way of training your staff. It provides the opportunity for participants to learn alongside their peers,within an organisation's environment and culture. It also provides an opportunity forteams to discuss internal challenges or issues openly and in complete confidence.In-houses can be conducted on an organisa-tion's premises or an external venue.

FOR MORE INFORMATIONContact Diana Zdrilic on Tel: 02 9776 7923 or email:[email protected]

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CONTENTS


REGULARS & CONTRIBUTORS

6 LONDON CALLING BY HELEN O’GORMAN

The UK’S Seriously Organised Crime Agency has very little to yell about

8 IN EUROPINION BY JULIE BEESLEY

There is a chink in the Czech armour and it’s all about gambling

10 INSIDE STORYBY KENNETH RIJOCK

Why financial intelligence units should be part of every big institution’s AML effort

11 OPINION BY JOY GEARY

Austrac’s self-assessment questionnaire is all about helping entities to help themselves

25 LEGAL UPDATEBY STEPHEN CAVANAGH

Explaining the ins and outs of designated business groups and how they can be deployed to improve the compliance effort

30 REGIONAL REVIEW: SOUTH KOREABY BRENT ROBENS AND GARY GILL

The AML landscape of South Korea is changingand the country is keen to be seen to be doing theright thing. But there are likely to be some futurebumps in the road

33 PATRIOT GAMESBY ZOË LESTER

If the US believes a bank is tainted, that’s enoughto guarantee it becoming an international pariah.The Banco Delta Asia affair so clearly illustratesthis despite no evidence of wrongdoing

37 CROOK BUSTERSBY ROWAN BOSWORTH-DAVIES

These days, nobody wants to know how the criminals tick. This, coupled with minimal standards of training in criminology, means the crooks are still going free

38 RISK TRIGGERSBY MICHELLE HANNAN

Why listed managed funds appear to have slipped through the AML radar

GOLD STANDARDJohn Cassara explains why gold remains the most popular form of currency for terrorist financiers

AFMA CONGRESS REVIEW A rundown of the AFMA Congress – wheresome of Australia’s and the world’s AMLexperts explained the latest trends, laws,typologies and thinking

DOING BUSINESS WITH PEPSWorld-Check’s chief executive David Leppanexplains how a few high-profile bad eggs can wreck a business

AS EASY AS IBCAsk tax and fraud investigators what is likely to confuse and obfuscate a money trail and the likely answer is an offshore company, finds Adam Courtenay

A DATE TO REMEMBERJune 12 is meant to be the first trigger point for AML programs but it came and went with little effect

FEATURES

12

14

16

22

18

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NEWS REVIEW

Australia’s AML/CTF laws reached their second trigger point on June 12, ushering innew correspondent banking obligations andbringing in regulation on money launderingand terrorism financing for several so-called“high-risk” industry sectors.

Money lenders, casinos and bullion dealershave now officially become part of the AMLregime from this trigger point, and these newlyregulated entities will have another six monthsto prepare for some of the tougher provisionswhich relate to customer identification andtheir AML programmes.

The Australian Transaction Reports andAnalysis Centre (Austrac) said that the corre-spondent banking provisions would increase thecompliance obligations on domestic financialinstitutions and that from June 12, a reportingentity would need to carry out “a preliminaryassessment of the risk that the relationship mayinvolve money laundering or the financing ofterrorism” before providing banking services toa financial institution located in another country.

“It may then be necessary for the financialinstitution to carry out further investigationsbefore entering into the correspondent banking relationship. Civil penalties apply for breaches of these new correspondent banking provisions,” Austrac stated.

Austrac chief executive Neil Jensen saidthat the implementation of the correspondentbanking obligations was “another importantstep in creating an environment that is hostileto money laundering and terrorism financing”.

Austrac also announced that on June 12that reporting provisions would come intoeffect and confirmed that the initial compliancereporting period will be December 13, 2006 toDecember 31, 2007. The deadline for lodgingthe first compliance report under the AML/CTF Act will be March 31, 2008.

Austrac had originally advised that thecompliance reporting period would coverDecember 13, 2006 to mid-June 2007 and that it would expect reports to be lodged bymid-September 2007.

In a note on its website, Deloitte said thatwhile December 31 was still seven monthsaway “it was very evident that many reportingentities have considerable work to perform toadequately respond to the statutory obligationsof the tiered implementation timetable”.

“Organisations and boards signing off onAML/CTF compliance reports need to act nowand assess the regulatory and operationalimpact of Austrac’s future supervisory and regulatory strategies,” the firm said.

Austrac chief executive Neil Jensen saidthese dates were determined in consultationwith industry to allow industry “sufficient leadtime to make adequate preparations and put inplace systems and structures to assist reportingentities in meeting their new obligations”.

What exactly is to be included in a compli-ance report is still unclear, but the regulatorintends to hold consultative forums later thismonth, during which it would “provide informa-tion and indicative questions on what will needto be included in the first compliance report”. ■■

See pages 22-24

OECD: Asia is theworld’s counterfeiter A report issued in June by the Organisationfor Economic Co-operation and Development says counterfeiting and piracy of goods isoccuring in nearly all economies, but Asia is emerging as the biggest pirating region.

The report says data provided by customsindicates that fake products – ranging fromwatches and designer clothing to pharmaceuti-cal products, food and drink, medical equip-ment, toys, tobacco and automotive parts – hadbeen intercepted from close to 150 economies,including 27 of the OECD’s member countries.

The report says the $US200 billion thatthe goods would have fetched in the market ismore than the gross domestic product of about150 economies.

The figure excludes counterfeit and pirateditems produced and consumed domestically orthose distributed via the internet. If these wereincluded, the cost could be several hundredbillion dollars more, the report says.

The report suggests that the high prof-itability of many counterfeiting and piracyactivities in some cases exceeds the profitabili-ty of illegal drug trades, and even involves theMafia in some countries.

“Low-risk detection and relatively lightpenalties have provided counterfeiters andpirates with an attractive environment for illegal activities.”

“The groups involved in counterfeitingand piracy include mafias in Europe and theAmericas, and Asian triads which are alsoinvolved in heroin trafficking, prostitution,gambling, extortion, money laundering and human trafficking.”

JUNE / JULY 2007 ANTI-MONEY LAUNDERING4

June 12 trigger point ushered in

EDITORIAL

EDITOR: Adam [email protected]

CONTRIBUTING EDITOR: Emily Brayshaw

SUB-EDITORS: Siobhan Brahe, Pauline Buckland,Karen Barrett, Jennifer Strong

REGULAR CONTRIBUTORS: Nick Kochan, John Kavanagh, Alexandra Cain

PRODUCTION AND DESIGN

CREATIVE DIRECTOR: Jo Fuller

PRODUCTION MANAGER: Fiona McLennan

PHOTOGRAPHY: Craig Newell, See4

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NEWS REVIEW


Interpol created the Intellectual PropertyCrime Action Group in July 2002 to helpcombat the problem, and noted a “disturbingrelationship” of counterfeiting and piracy with terrorist financing, with intellectual property crime becoming the preferredmethod of financing some terrorist groups. ■■

North Korea gets its‘dirty’ money backTHE UNITED STATES has resolved a pro-tracted dispute with North Korea by releasing$US20m in funds that it froze in 2005, when officials accused Macau’s Banco Delta Asia of laundering dirty money for Pyongyang.

This brings to an end months of bickeringregarding how the funds would be released; italso puts pressure on North Korea to honour aFebruary agreement to begin powering down itsYongbyon nuclear reactor, the suspected sourceof the country’s atomic bomb-making material.

Banco Delta Asia reportedly has remittedmore than $US20m from dozens of accounts following instructions from scores of NorthKorean account holders. Although US officialshave refused to say how the money was trans-ferred, it is believed that it moved through theNew York branch of the Federal Reserve andRussia’s central bank to a Russian bank wherethe North Korean government holds accounts.

Although the freeze on the funds was first lifted earlier this year, Pyongyang refused toaccept the money as cash. It insisted that thefunds be wired internationally through the US to a bank in a third country. It appears that North Korea’s demands had two principleaims: to demonstrate that the funds were“clean”, despite US accusations, and to allowNorth Korea to reconnect to the internationalbanking system.

US officials, eager to persuade NorthKorea to meet its nuclear disarmament com-mitments, in May tried to persuade WachoviaBank to accept and pass along the funds. TheUS government still has not officially giventhe funds a clean bill of health, however, soWachovia, like all US banks, appears to havechosen to steer clear of the funds. Even theRussian bank that finally agreed to accept thefunds reportedly demanded written assurancesfrom US authorities that it would not facesanctions for its actions.

The long-term implications of the USdecision to allow the movement of ostensiblydirty funds remains to be seen. The authoritywith which US officials blacklist foreign insti-tutions has no doubt been eroded by this affair.

US officials blacklisted Banco Delta Asia– barring US financial institutions from handling its funds – under authority granted by Section 311 of the USA Patriot Act 2001.It is not clear under what legal authority the US government made an exception and permitted allegedly dirty funds to flowthrough the US financial system. ■■

See pages 33-35

Keelty hands over tax fraud proceeds AUSTRALIAN AND LEBANESE police haveshared more than $1 million worth of confis-cated proceeds of crime from tobacco excisefraud, following the successful prosecution ofa Melbourne-based crime syndicate.

Mick Keelty, the Australian FederalPolice commissioner, presented a chequeworth $683,500 ($US576,000) to RiadSalameh, the governor of the Central Bank ofLebanon, in a ceremony in late May.

Between July 1999 and September 2001,a Melbourne-based crime syndicate sold 93 million cigarettes in Australia. The syndicatebought the cigarettes duty free using the internetand claimed that they were for foreign suppliersbefore it diverted them back inland to sell themthrough a number of outlets in Melbourne.

In this way, the syndicate evaded payingtaxes worth approximately $14.9m. The syndi-cate transferred some of these criminal proceedsto Hong Kong, Belize and Lebanon. The AFPinvestigation led to the arrests of eight people.

“The Lebanese authorities played a keyrole in the identification, restraint and forfei-ture of the criminal proceeds. Co-operationbetween countries in criminal investigations isvital and I am pleased that Lebanon was ableto assist in this case,” said Keelty.

In an unrelated case, the AFP werereported last month to have seized documentsin connection with allegations that Taj Din al-Hilali, Australia’s mufti, gave charity funds

to supporters of Al Qaeda and Hezbollah inLebanon last year. The police have impoundedpaperwork from the Lebanese MuslimAssociation, an organisation based in Sydneywhich is connected to Sheik Hilali, and havequestioned Tom Zrieka, its president.

Investigations are apparently also set toinclude LMA-affiliated organisations whichhave raised charity donations. Police alsoreportedly contacted Keysar Trad, a confidantof Sheik Hilali’s, who is in Lebanon. TheLMA, along with other Australian Islamicorganisations, apparently raised $70,000 afterthe Israel-Hezbollah war in Lebanon last year.The organisations told donors that the moneywas for war victims. ■■

Bank of Tokyo rapped over controls BANK OF TOKYO MITSUBISHI, theworld’s largest bank by assets, has been hit byan order to improve its business followingaccusations of lax compliance and internalcontrols in its overseas operations and itsdomestic investment trust sales business.

The Japanese Financial Services Agency,the financial regulator, ordered the bank’s management to state its commitment to com-pliance with laws and regulations in overseasbusinesses following several cases in whichlocal and expatriate managers were found to have violated local laws and regulationsrelating to money laundering in the US.

The JFSA cited cases of bribery inShanghai and embezzlement at other branchesas examples of failures in internal controls.

The regulator also ordered the bank tostrengthen internal controls overseas and inJapan, to clarify the responsibilities of thoseresponsible for the problems that gave rise to the penalties and to submit a business-improvement plan by July 11.

The JFSA’s move against the core bankingunit of Mitsubishi UFJ Financial Group is thesecond such regulatory action in Japan againstit this year. It is a severe embarrassment for thebank and could cut into profitability this yearas it moves to improve compliance measures.

In February, the regulator ordered BTMUto suspend lending to new corporate customersfor seven days, refrain from opening new business locations for six months and strengthen internal controls as punishment fordoing business with a convicted embezzler.

The JFSA’s move follows an order issued to BTMU by US authorities in Januaryto strengthen compliance and internal controls to prevent money-laundering. That move triggered the latest JFSA order. ■■

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Keelty: successful case

Image courtesy AC

WAP

and ID P

hotographics

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NEWS


T HE SERIOUS Organised CrimeAgency (SOCA), the UK's latestaddition to its anti-mafia and anti-

money laundering arsenal, celebrated its first birthday this year by keeping its promise(and concomitant legal obligation) to publishan annual performance report. The carefullymanaged release of the report directed themedia to SOCA’s relative successes and away from the targets it had not met.

Target Actual (£ million) (£ million)

Cash seized 6 3.3 (from 70 cases)

Cash forfeited 3 2.3Restraint orders 40 27.2 Court-enforced orders 8 4.3

(220 orders)

Although the actual figures may not yetlive up to SOCA’s claims of superpower status, the results are expected to align moreclosely with targets over the next few years.Vernon Coaker, the UK undersecretary ofstate for police, security and community safety, assured the awaiting media: “In thefuture you should judge us by whether wemeet our targets.”

SOCA’s annual report certainly sets outits focus for the coming years: to stem theflow of cocaine into Europe and ultimatelyinto the UK. Since April 2006 SOCA hashelped to seize 74 tonnes of cocaine fromEuropean waters en route to Spain, Portugal,the Netherlands and the UK. This haul represents 20 per cent of the cocaine thatwould otherwise have hit European markets

and represents a cost of £125 million ($301 million) to the Columbian cartels. In previous years law enforcers have seizedbetween 40 and 60 tonnes of the “white stuff”before it hit the streets.

Although heroin seizures during SOCA’sfirst year amounted to only 1.5 tonnes, inroadsmade into the secret world of “hawala” tend to support claims that the clandestine moneytransfer network favoured by Asians aroundthe world is exploited by heroin traffickers tolaunder dirty cash. An estimated 90 per cent ofthe world’s heroin comes from Afghanistanand the money is apparently laundered throughthe hawala system. A raid on three “hawal-adars”, carried out in October 2006, has pro-vided investigators with significant intelligenceon suspected trafficking routes in Central Asia.A list of 80 suspects has been compiled byinvestigators in Afghanistan alone.

The report briefly mentions intelligencesupplied by reporting officers preparing

suspicious transaction reports (“STR”) in aseries of typologies which support the jointmoney laundering steering group’s view that due diligence and size do not matter. One apparently insignificant STR led to thearrest of a man suspected of drug trafficking,and the seizure of a property portfolio worth£1.5 million and a quantity of an unspecifieddrug. On the basis of another STR which onlyidentified one person fully, police officers

have arrested nine people for a range ofoffences, including money laundering,the possession of firearms, burglary and immigration offences. SOCA’s proceeds ofcrime unit is preparing a report dedicated tothe suspicious activity reports regime whichwill be published in October.

Although the report alludes to progress in human trafficking and armed robbery,none of the typologies discussed these crimeswhich are equally, if not more damaging, tothe people involved. SOCA’s “we’re goingafter the money” mantra may instil theagency’s aim into the public’s consciousnessin the short term and cartels may close downor shift business interests elsewhere. But aslong as Bolivian, Colombian and Peruvianfarmers keep producing the coca leaf,someone will turn it into cocaine and generate money from crime.

A recent court ruling on SOCA levied a damning indictment of the state’s decision

to form this turbo powered agency: “In setting up the SOCA, the state has set out to create an Alsatia – a region of executiveaction free of judicial oversight. Although the statutory powers can intrude heavily,and sometimes ruinously, into civil rights and obligations, the supervisory role whichthe court would otherwise have is limited by its primary obligation to give effect toParliament's clearly expressed intentions.” ■■

Not so seriously organised

LONDON CALLING

By Helen O’GormanCOMPLINET REPORTER

The Serious Organised Crime Agency wants to tout its achievementsto the world but the figures tend to speak for themselves

ALTHOUGH THE ACTUAL FIGURES MAY NOT YET LIVE UP TO SOCA’SCLAIMS OF SUPERPOWER STATUS, THE RESULTS ARE EXPECTED TO ALIGN MORE CLOSELY WITH TARGETS OVER THE NEXT FEW YEARS

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NEWS


E UROPEAN CASINO INDUSTRIEStoday are not much different thanthey were a quarter of a century ago.

The European legislative models for casinosrange from state-owned monopolies inSweden, Finland, Austria and the Netherlands,to the so-called “invisible” clubs in the UK.

Other EU countries also have highly-taxed private sector or private/publicsector partnerships, as well as regional franchise operations.

Business in most Western European casinos does not even faintly resemble thedynamic growth occurring in Australasia,North America or South Africa. However,their Central and Eastern Europe cousins in the Czech Republic, Estonia, Latvia,Lithuania, Ukraine and Russia appear to be experiencing a boom. Perhaps this isbecause they appear to have more in commonwith the highly competitive (and loosely regulated) casinos of Nevada and theMississippi than their closer cousins inFrance, Spain, Italy, Switzerland or Germany.This may change as parts of Eastern Europeare bringing in new regulation, but it will not be without challenges.

After years of limited regulation, theCzech government’s Finance Ministry is now taking the first steps to crack down on gambling at a time when the industry is booming.

The director of the State Supervision of Gaming and Lotteries (SDSHL), a department of the Finance Ministry in charge of monitoring gaming establishments,maintains that after years of benevolence “a major turning point has come, a true startof the process of state supervision”.

However, while the proposed gamblinglaws will require bigger casino operators to be checked for organised-crime links, thesmaller “hernas” – as they are known – willnot have to face such scrutiny.

Hernas are smaller, stripped-down pubs that carry betting machines, but are not allowed to hold live games. As of 1 September 2006, there were around 3500herna bars, in addition to 5000 other places,such as gas stations and restaurants, withgaming machines. In comparison, there are 178 casinos nationwide, 48 of which are in Prague.

In parts of Prague, many hernas arereportedly empty much of the time. Thisemptiness has naturally raised suspicions thatmoney laundering is their source of success,not gambling.

Plans are under way by the SDSHL tooverhaul regional monitoring by replacing some400 part-time inspectors with 126 full-timeones. SDSHL oversees the country’s casinosand certain types of gaming machines.However, herna bars do not fall under the fulljurisdiction of the SDSHL. Authorities onlylicence certain gaming machines in these estab-lishments, not the establishments themselves.Therefore, in any given herna bar, you can haveelectronic roulette and dice machines underSDSHL regulation, while the slot machines areunder the regulation of local authorities. Local

communities are already petitioning the FinanceMinistry to have more say in the licensing andregulating of slot machines.

On top of this, the Czech gambling industry is taking off, in a new, high-techdirection. Casinos and herna bars are quicklyadopting flashy, eye-catching video gamblingmachines, often referred to in the industry as ‘video lottery terminals’ (VLTs).

Players like them because they are funand offer a quick thrill. Operators like thembecause they are cheap to run and extremelyprofitable. The government likes thembecause their technology (which can monitor

pay outs) reduces the risk of money launder-ing or tax evasion, and because operators mustpay a 10 per cent cut of the machines’ incomeback into government coffers. VLTs are thefastest-growing sector of the gambling industry, the Czech Finance Ministry says.

The growing popularity of these machinesis a trend throughout Europe. “They earn mostof the money,” a local Czech gambling expertsaid. “And money controls an industry.”

Video gambling may help the SDSHLclean up a corrupt business sector, but while herna bars remain largely unregulated,a chink exists in the Czech Republic’s regulatory armour. ■■

Source: The Prague Post

Contact: [email protected]

A chink in theCzech armourWhy is the casino industry booming everywhere except Western Europe? Julie Beesley explores the state of play and latest trends in the Eastern Czech gaming industry in an attempt to find out.

IN EUROPINION

Julie Beesley

“... THE CZECH GAMBLING INDUSTRY IS TAKING OFF, IN A NEW, HIGH-TECH DIRECTION.”

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INSIDE STORY

A DEVELOPMENT gradually gainingglobal acceptance is the introductionof in-house financial intelligence

units (FIUs)in financial institutions. Here weexamine this trend, and discuss whether itconstitutes a possible solution to some ofcompliance’s most important and difficult professional and political problems. Afterlearning just how much an FIU can contributeto the compliance function, you may wonderwhy every bank does not have one in place.

First of all, what is the function of an in-house FIU? Typically, financial intelligenceunits undertake the following duties:

• perform enhanced due diligence investigations of high net-worth prospective clients, whether they be individuals or business entities. GenerallyFIU investigators have extensive researchexperience, and therefore skills exceedingthose of the best compliance staff.

• assist with the preparation of informationfor the multitude of reports requiredunder current laws and regulations byAustrac and other agencies.

• quick and efficient spot research on subjects ranging from the suspiciousactivities of existing customers to unusual foreign documents.

• training junior compliance staff on investigative techniques for customeridentification programs.

• liaise with regulators, law enforcement and government prosecutors, both officially and unofficially, when and as necessary.

In short, an FIU within a bank will greatly increase the efficiency of the

compliance department by assisting compliance staff to accomplish their tasksefficiently and with fewer errors.

The best FIUs are composed of older,retired, law enforcement or regulatory executives who usually have several decadesof hands-on practical experience in the fieldof financial crime. Some FIU directors alsocome from the intelligence services or themilitary. They all have been in the ‘trenches’,and have learned about financial crime operations through both education and on-the-job training. In short, if anything,they are overqualified, an attribute often missing in the financial crime field.

Of critical importance is that the FIUdirector is outside the ordinary chain of command and reports directly to the bank’sboard. Why is this important? Senior bankstaff do not have the ability to “pull rank”on them, or to influence or intimidate rank-and-file compliance staff who lodgevalid objections to prospective clients.

Not that the typical leader of a financialintelligence unit would take verbal abuse from ranking bank officers; most are hard-bitten veterans of difficult tours of dutyin government service, and do not scare easily. The fact that most are receiving substantial government pensions also adds to their independence. They are not frightenedof being fired, which enables them to act correctly and professionally in the face of thepressures often brought to bear on them toapprove prospective high net-worth clientswho represent unacceptable risk to the bank.

In short, one wonders why every financial institution has not taken a cue from the fact that the biggest American banks have built financial intelligence unitsalongside their compliance departments.While budgetary considerations are always a factor, if the FIU identifies and interdicts a major money laundering or other financialcrime at a bank, management will quicklylearn that the cost of its operation is wellworth it. ■■

Kenneth Rijock is a financial crime consultantfor World-Check. Rijock is believed to be the only practising American compliance professional who has previously been both abanking attorney and career money launderer.His financial crime analysis articles can befound daily at http://www.world-check.com.


By Kenneth RijockFINANCIAL CRIME CONSULTANT

WORLD-CHECK

Intelligencefrom withinInternal financial intelligence units can conduct quick and efficientspot research on subjects ranging from suspicious activities of existing customers to examining unusual foreign documents, says Kenneth Rijock

AFTER LEARNING JUST HOW MUCH AN FIU CAN CONTRIBUTE TO THE COMPLIANCE FUNCTION, YOU MAY WONDER WHY EVERY BANK DOES NOT HAVE ONE IN PLACE

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OPINION


A call to action– we hopeJoy Geary explains what the self-assessment questionnairehas been released to do. That is to help reporting entities close gaps, see shortfalls and in short – to help themselves By Joy M Geary

AML/CTF ADVISER

A USTRAC HAS JUST RELEASED its self assessment forreporting entities falling within the reach of the AML/CTFAct. If it is clever enough, this self assessment will be the

“call to action” necessary for many reporting entities that have yet to grasp the scale of effort ahead of them.

Reporting entities are not obliged to complete the self assessment and if they do, they are not required to lodge it with Austrac, although they may do so if they wish. The value of the self assessment forreporting entities is that it should provide them with an understandingof Austrac’s expectations. These expectations will shift over time as we pass through the different implementation phases and then into business as usual

Reporting entities are currently in a difficult position. They finallyhave an act and most of the AML/CTF Rules that they need. However,they know that after the self assessment there are at least three morekey groups of material coming their way during 2007:1. Austrac guidance material (to be released progressively) 2. Industry-prepared guidance material3. Austrac Regulatory Guide (to be released progressively from

September 2007). This additional material would not be necessary if it was self evident

what reporting entities needed to do. The plan to release more materialduring 2007 suggests that both Austrac and the financial services industrybelieve that it is far from clear to most reporting entities what they need to do. If we assume that this material will be relevant to the implementation plans of most reporting entities, then it is disappointingthat it is scheduled to be released almost concurrently with the dates in the implementation obligations schedule.

However, this article is more interested in discussing the benefits of Austrac self assessment rather than the significant practical difficulties reporting entities face fulfilling their obligations under the act and rules at the same time as Austrac publishes more and more information about its expectations.

A self assessment is a common tool in project management andregulatory management, allowing gaps to be identified and then fixed.For reporting entities, the Austrac self assessment is the first realglimpse of what the regulator is actually looking for. To successfully act as a “call to action”, rather than just to broadly repeat the wordingof the act and rules, the self assessment must:• provide missing information about regulatory expectations by

giving reporting entities a clear picture of the activities to beincluded in their implementation planning

• detail project management characteristics in the areas of sponsorship,planning, resourcing and funding that indicate that the AML/CTFactivities are well managed.

On completion of the self assessment, users should feel one of two emotions, either:• comfortable with where they are because they have scored well

on the self assessment, or• concerned because the self assessment has suggested a range of

requirements they have not thought of and which change the scaleof the work to be done.The Austrac self assessment does well in many areas. However,

in some key areas it misses the opportunity to educate by guidance.Examples of gaps include:• details of the many components that would make up a reasonable

Part A of an AML/CTF program• details that would satisfy Austrac that the AML/CTF policy was

designed to identify, manage and mitigate laundering and terrorismfinancing risk

• contents that Austrac expects to see in an AML/CTF proceduresmanual (the manual is not required by the rules but does reflectgood practice internationally)

• information to be provided to the board of a reporting entity toenable them to fulfill their oversight role.It would be helpful for those reporting entities currently struggling

with project implementation if the self assessment offered guidance inthe form of simple questions such as:• do you have an implementation plan that is substantially complete?• is your AML/CTF implementation work fully funded with an

approved budget?• do you have all the people and skills you need to complete your

implementation?• have you completed an inventory by product type, listing the know

your client information you currently collect?• have you completed an inventory of staff roles so that you can plan

and fund the required role-based training?These sorts of simple and direct questions would guide and chal-

lenge reporting entities that have not yet started to consider what theywill do to comply with the act. Obviously the questions in the selfassessment would change as the different dates of the staggered imple-mentation are passed.

There is no doubt that Austrac will use the self assessment in its review meetings with reporting entities, so it is irrelevant whether a reporting entity has put itself on notice of gaps in its AML/CTFimplementation by completing the self assessment. It is the publicationof the self-assessment by Austrac that has the power to put reportingentities on notice; not its completion by a reporting entity. ■■

Joy M Geary is an independent consultant and the developer of the AML Master Templates. Contact: [email protected]

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GOLD AND LAUNDERING

I N MAY 2004, in one of the very few public pronouncements by al-Qaeda inwhich reference was made to finance,

Osama bin Laden offered a reward for anyonekilling coalition force commanders. Thereward offered was an amount of gold.

In 2005 cartoons of the prophetMuhammad were printed in a Danish newspa-per. The resulting publicity caused outrage in the Muslim world. In February 2006 theTaliban offered 100 kilograms of gold for anyone killing the individuals responsible forthe “blasphemous” cartoons.

Why is gold popular with terrorists?• Gold is available to terrorist organisations

as part of their diversified financingarrangements.

• Terrorists are primarily from countrieswhere gold is an intrinsic part of the culture.

• In times of uncertainty and civil strife, goldis often better than national currencies.

• Gold can act as a better insurance policy,hedge against devaluations, bribe curren-cy and source of transportable wealththan currency.

• Zakat (charitable contributions) is one of the five pillars of Islam. The financialreference point which is used to determine Zakat is called Nisaab. Nisaab is often calculated in gold for historic, cultural and religious reasons.

• In the Muslim world, gold plays a largerole in personal and Islamic finance. With the creation of the Islamic goldendinar, gold’s prominence in the Muslimworld will grow further.

• Gold is an informal value transfer systemand plays an important role in otherunderground systems such as hawala.

• Gold is an international medium ofexchange that is generally immune to traditional financial intelligence reportingrequirements, asset freezes, sanctions,and designations. As Osama bin Laden once said, al-Qaeda

has recognised the “cracks in the Westernfinancial system”.

In 1989 Operation Polar Cap, the largest money laundering investigation in history, involved the laundering of over one billion dollars of narcotics proceedsthrough the buying and selling of real and fictitious gold. In January 2007 in one of the largest drug-related money andvalue seizures in history, the Colombiannational police discovered more than $US80 million ($95 million) in cash and gold in private residences and businesses,buried in the ground and stashed in privatesafes. Over the years there has been a myriad of gold-related money launderingcases around the world.

Why is gold popular with launderers? • Gold has been a haven of wealth since

antiquity.• Gold is a readily acceptable medium

of exchange anywhere in the world.• Gold is both a commodity and a

de facto bearer instrument.• Gold’s value is relatively predictable.• The weight and quality of gold

can be assured.• Depending on need, the form of gold

can be altered.• Gold offers easy anonymity.• Gold brokers can “layer” transactions

that further confuse the paper trail.• Gold is easily smuggled.

• Gold is readily susceptible to false invoicing and other fraudulent schemes.

• E-gold can now be used by money launderers.The gold industry is important in both

Australia and the US. When I was assigned tothe US Department of Treasury’s FinancialCrimes Enforcement Network (FinCEN), in theyears surrounding 9/11, I was literally given agag preventing discussion of the misuse of goldby terrorists and money launderers.

In contrast gold dealers in Australia have had a long history supporting Australia’santi-money laundering and counter-terroristfinancing efforts. Under the FinancialTransaction Reports Act 1988, bullion dealers are required to:• verify the identity of customers when

they open an account or enter into a bullion transaction

• keep transaction records• report any suspicious transactions to

the Australian Transaction Reports andAnalysis Centre (Austrac). There are similar requirements in the

recently enacted AML/CTF Act. As part ofthe AML/CTF reform agenda, a further roundof consultations will commence shortly withjewelers and others in the precious metals and stones industry.

I am heartened that Australia recognisesgold’s importance in this area and I applaudthe efforts of both government and industry inworking together to find workable solutionsfor updating reporting requirements for gold “reporting entities.” ■■

John Cassara is a former CIA case officer and treasury special agent and author of Hide & Seek: Intelligence, Law Enforcement and the Stalled War on Terrorist Finance;Potomac Books, 2006. Mr. Cassara can be reached at www.JohnCassara.com


Terrorism’s gold standardGold is still the prefered tool of terrorist financiers and national currencies — no matterhow tradeable — will never be as effective, says John Cassara

Image ©

istockphoto

AML-JUNJUL-12gold.qxd 19/6/07 3:14 PM Page 12

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AML CONFERENCE


S TRANGE BEDFELLOWS alwaysmake for interesting conferences, andAnti-Money Laundering magazine’s

inaugural congress was no exception.Delegates were first treated to an address

from a senator followed by a former US moneylaunderer, who was in turn followed by thehead of the country’s financial intelligence unit.From the outset, delegates appeared to take the change in tempo and style in their stride.

The conference was opened by Senator David Johnston, the Minister forJustice and Customs, who told delegates thatAustralia’s financial industry was enviedthroughout the region for its “high fidelity”.

He said that the system was open to abuseas criminals in the region sought to “leverage”off the confidence people and business had in it.

“If Indonesia could just get its corporategovernance right and its economic systemsheaded in the right direction, it could becomeanother ‘China-type’ evolution,” Johnston said.

“The growth of their economies bring big pluses for us – but they also bring with itnegatives – nefarious criminals in South-EastAsia who want to leverage off a financial system which has a great deal of fidelity.”

Johnston said that after 18 months,reporting entities should have significantlytightened up their risk profiles. “But I do wantto hear if we are too prescriptive – that’s notthe intention. We want a model that interactswith existing security systems and becomespart of the furniture and part of the naturalway of doing business,” he said.

The minister was followed by KennethRijock, a financial crime consultant forWorld-Check and a renowned ex money launderer, who gave a frank account of his life in the 1980s working as a US attorneyduring the week, and an island-hoppingmoney launderer on weekends.

Rijock’s main message to the congresswas that senior compliance personnel had to

think like the launderers, who were constantlylooking for new targets of opportunity.

“In the field of money laundering you’reonly limited by your imagination,” saidRijock. “I can take any legitimate activity,tweak it and you may not recognise it unlessyou’re paying attention.”

Rijock said that despite the huge resourcesbeing put into anti-money laundering andcounter-terrorism financing, it was still possible to evade the long arm of the US law.

“If I was smuggling cash out of US,I’d take it to an East Caribbean tax haven, itwould then go to a place like Panama wherethey have bearer shares and from there itwould then be transferred to Taiwan.

“Then I’d get the money sent to WesternEurope, form a bogus company and therewould be nobody in US law enforcement who could run around the globe and find my trail,” he said.

Rijock pointed to areas where laundererswere now seeking leverage. He mentioned theUS secondary market for life assurance – wherepolicies can be easily switched over to new ben-eficiaries and then sold on – as well as hedgefunds, which were lightly regulated in the US.

“Hedge funds are a grey area and theylike to use offshore jurisdictions,” he said.

“If I want to use hedge funds – I’d getsome professional to form offshore companiesand invest through them as I know that compli-ance in hedge funds is not what it should be.

“Or maybe I’d form my own hedge fund.That will give me an extra level of protectionand I can take out huge fees which will all be clean,” he said.

Austrac chief executive Neil Jensenreminded delegates that the congress was beingheld on an auspicious date, just a day after the correspondent banking and compliancereporting requirements had come into effect.

Jensen reminded delegates that Austrac had tabled a number of AML/CTF rules in parliament as well as producing guidancenotes. “None of the rules we tabled were dis-allowed which is fantastic,” said Jensen. “It’salways a worry that they may be disallowedsomewhere along the line. We seem to haveall of that right.”

The rules and guidance notes were accessible on the regulator’s website, as wasthe self assessment questionnaire, which hadbeen issued in late May. He also mentioned aregulatory guide, which would be available in the fourth quarter of the year.

“This will draw everything together – the legal issues, the rules, the guidance notesand some of the aspects of the self assessmentquestionnaire and will put it all in one place,”he said.

��

Beating the laundersat their own gameLaunderers exist to leverage off the good intentions and bona fides of an industry, and you need to think like them to beat them. These were some of the messages coming from AML’s inaugural congress in June

AML-JUNJUL-14-15.qxd 19/6/07 2:31 PM Page 14

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ANTI-MONEY LAUNDERING 15

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Jensen said the self assessment questionnaire had within it nearly 200 questions, which would cover many of the issues report-ing entities would be concerned with relative to the legislation.

“You can then evaluate yourself – are you compliant, largelycompliant, partially compliant or non compliant? It’s ongoing – you can put in a range of information, you can refer it to your board,the chief executive or the head of compliance. You can use it toguide yourself.”

Questioned by one delegate as to whether there was an obligation to fill in the questionnaire, Jensen replied that there was no compulsion, although when Austrac conducts compliance visits it will ask if it had been completed.

“We didn’t want to make it obligatory but to provide a resourcethat will assist you to understand what the requirements are and getyou compliant at the earliest possible time.

“We would like to know that you have gone through the processand that you will have the answers that we’d like to hear,” Jensen said.

The subject of correspondent banking also featured strongly at the congress and delegates were treated to a detailed speech oncurrent best practice from KPMG senior manager, Nigel Gerryn.

Gerryn reminded delegates that in any international wire transfer the client of a correspondent bank was almost certainlyunknown to the originating bank. All the originator bank could do was rely on the correspondent bank’s credibility, he said.

“You don’t get to logistically conduct due diligence on the otherparty, so you’re totally reliant on the correspondent bank to ensurethat those risks are being mitigated.

“All those questions that you ask your customers, how do youget those answers, if not through the correspondent?” asked Gerryn.

In evidence of this, the congress heard from Serena Moe, adirector of Deloitte Financial Advisory Services in the US, whodetailed the problems that occurred in what is now termed theABN Amro Order. In 2004 it was discovered that the bank wasillegitimately sending through wire transfers from Iran, therebyviolating the US’s Iranian Transactions Regulations and the Libyan Sanctions Regulations.

“ABN Amro’s overseas branches modified payment instructionson wire transfers so that all references to the originating bank –Bank Melli Iran – were removed,” said Moe.

Asked to speak about the UK compliance experience, DavidLeppan, the chief executive of World-Check, told delegates that oneof the most difficult aspects for institutions was “retro KYC”.

“You may not know that HSBC has 120 million customers,”said Leppan. “Can you imagine the task of going back and doingKYC checks on 120 million people?”

“It’s the skeletons in the catacombs that are waiting to comeout, not just the skeletons in the closet.”

Leppan said the solution to knowing your customer “did notstart today”.

“You must go back and look at all the clients you’ve had onyour books for years and that’s a massive task – and you’ll needmoney, resources and people to do it.”

Leppan said banks, law firms and insurance companies stilltended to have disorganised databases with clients spread withoutstructure throughout the company.

“How will you know the customers if you don’t know wherethey are,” he asked. ■■

Anti-Money Laundering magazine’s Inaugural Congress and Dinnerwas held at the Westin Hotel in Martin Place, Sydney, on 13-14 June.

��


CORRUPTION

A POLITICALLY EXPOSED PERSON(‘PEP’) appears to have become the “two headed monster” of the

financial and trust community. There really is nothing wrong in doing business with a PEP but that all depends on who the PEP is.Knowing what risk lies in store for your entityis key to doing business with such influentialand often wealthy individuals. As the practi-tioner, you certainly want to survive the PEPexperience and live to tell the tale!

“Politically exposed person” – threewords that send a shudder down the spine of the most hardened private banker or trust adviser. But why? What is so dreadfullysinister about a PEP? The answer may benothing … or everything.

A PEP can be and often is, a highlyprized client with whom your entity will gladly do business for many years. A “clean”PEP is transparent about their wealth, theirposition (or exposure to someone in a highposition) and their requirements. A “dirty”PEP will go out of their way to conceal notonly their identity but also the source of theirwealth. A problem may arise simply due to the position that person holds, the countrythey hold the position in and/or their relationship to the ruling government.

The most common forms of PEP concealment include the use of family members or associates to gain access to thebanking system and the use of companies,trusts, charities or any other like vehicles.

As the financial community becomes better at identifying PEPs and keeping thedirty PEPs out of their entities, the trust community will face an increased risk thatPEPs will seek to conceal their identities andill-gotten gains using trust structures.

At the heart of the PEP issue lies risk; not necessarily compliance or regulatory riskbut rather, I would argue, reputation risk. And reputation risk not just for the entity you represent but indeed for you personally.

In the last few years we have witnessedthe damage a badly managed PEP relationshipor policy (or indeed lack thereof) can cause.Consider the high profile case involving Riggs Bank. Riggs acted as banker for bothGeneral Pinochet (and tried to conceal thisrelationship) and Equatorial Guinea’s president since 1979, brigadier-general

Teodoro Obiang Nguema Mbasogo. Aftermore than 160 years as the most prestigiousprivate bank in the United States of America,Riggs’ fall from grace took only a few tumultuous years. The financial cost of non-compliance at Riggs is estimated ataround $US200 million ($244 million) plus which included fines and shareholder settlements of around $US59 million and legaland consulting fees of $US35 million.

The clearest indicator of the bank’s lostreputation though is seen in the decline in thevalue of Riggs’ shares. On June 15, 2004,Riggs’ shareholders (as part of a merger deal)accepted an offer by PNC of $US24.25 pershare. Then on 10 February 2005 they accepteda renegotiated price of $US20 per share;


Doing business with PEPSAt the heart of the PEP issue is risk — reputational risk. And it only takes a few high profile bad eggs to bring a bank to its knees, as Riggs Bank found out, says World-Check’s David Leppan.

AFTER MORE THAN160 YEARS AS THEMOST PRESTIGIOUSPRIVATE BANK INTHE UNITED STATESOF AMERICA, RIGGS’FALL FROM GRACETOOK ONLY A FEWTUMULTUOUS YEARS.

AML-JUNJUL-16-17peps.qxd 19/6/07 2:40 PM Page 16

CORRUPTION

representing a fall of approximately 20 per centin Riggs’ share price in just eight months.Instead of achieving the $US779 million sale price, the shareholders finally acceptedapproximately $US643 million.

The reputational damage did not stopthere. Consider now the consequences to management of exposure to career or personalreputation risk.

During a two year period the bank’s:• chief executive officer Robert Allbritton

resigned (March 2005)• chief legal officer Joseph Cahill was

replaced (December 2004)• chief operating officer and executive vice

president (and former managing directorof Riggs Europe) Robert Roane was suspended (September 2004)

• former chief bank examiner and executivevice president R. Ashley Lee was put onpaid leave (August 2004).

• In addition the manager of Riggs’ Africanand Caribbean division Simon Kareri was fired and ultimately charged with 27 counts, ranging from money launder-ing to fraud (June 2005).

Indeed this disastrous end to what was a highly respected bank cannot solely be putdown to a dirty PEP or two, but is ratherattributable to a lack of compliance culture. At all times the bank was aware of who theywere acting as banker for and paid the pricefor how they chose to deal with them.

As far as trusts are concerned, we have an array of examples of well known PEPs registering and indeed using such vehicles to manage their wealth.

Pakistan’s former prime minister BenazirBhutto has more than 20 such offshore vehicles. Her husband Asif Ali Zadari and/orher lawyer Jens Schlegelmilch, a Germannational (reportedly based in Switzerland) act as directors of many of these.

A handful of trusts and corporations can also be linked to payments made to theEuropean bank accounts of Vladimiro IllichLenin Montesinos Torres (known to most of us as Vladimir Montesinos), former presidential advisor and chief of the PeruvianNational Intelligence Service under AlbertoFujimori, who himself currently awaits extradition to Peru from Chile.

It is important to stress that offshore vehicles are not the only vehicles used to conceal the identities and questionable wealthof PEPs. Industry is prone to a false sense ofsecurity when carrying out due diligence on or dealing with an onshore company, trust,foundation or charity in comparison to theequivalent offshore vehicles. The registration ofa company in most onshore jurisdictions carrieslittle or no know your client (‘KYC’) require-ments on the beneficial owners or even thecompany directors. The knowledge a companyis registered in the United Kingdom, the UnitedStates or in the EU as opposed to some smalltax haven island nation, for some reason,would appear to make us think it must beabove board. Think again and be forewarned.

So, with all the pitfalls how does one stilldo business with PEPs? The answer is quitesimply – with great care!

Some tips• Having identified a PEP, determine

your risk – consider the country and its government, the person’s position and their potential exposure to corruptionand bribery.

• Understand that it might be an “exposedperson” you are looking for and not an actual “office holder”.

• Understand the PEP’s business requirements of your entity.

• Carry out regular reviews of all customers and even more regular reviewsof all PEPs.

• Have a well thought-out and even betterexecuted KYC and PEP policy and culture throughout your organisation.

• Carry out KYC and enhanced due diligence on trusts, companies, charitiesand foundations in the way you do sowith individuals.

• Treat onshore and offshore vehicles in the same manner.

• Ensure you are fully aware of and havecarried out KYC on all signatories on allaccounts but especially PEP accounts.

• Ensure you have carried out KYC on all credit card and additional credit cardholders.

• No single person in your organisationshould have total control over PEP customers or PEP matters. Ensure counter-signatories on everything PEP-related.

• And finally, plan ahead for the end of a PEP relationship. Realise that PEPshave a hidden “expiration date” that will not be evident to you or even tothemselves. A PEP can go from good guy to bad guy in a day and you don’twant to be the last one standing behindthe throne of a deposed leader! ■■

David Leppan is the chief executive and founderof World-Check. www.world-check.com


Riggs tried to conceal its links with General

Augusto Pinochet

© AP Image

AML-JUNJUL-16-17peps.qxd 19/6/07 2:41 PM Page 17

TAX EVASION

I F THERE IS a single business entity thathas come to signify the problem ofmoney laundering around the world, it is

the offshore front company, also known as theinternational business company (IBC).

It is an entity that looks, feels and soundslegal, yet its activities may be otherwise.These entities number well into the millionsand are offered, in some form or another, bythousands of professional service providersaround the world, primarily from offshore,low-tax locations.

They are companies, in the way most people understand them, in name only – they

can often be formed within 24 hours after amere telephone call. The beneficiaries of theentity are often unknown (or unknowable),the shareholders elusive and the directors oftenlawyers living in the place of registration andappointed by the clients’ lawyers. The client,the director and the shareholders can exist atone remove from each other and never knowthe other existed.

Many Caribbean and South Pacific taxhavens offer cut-price IBCs. Individuals tendto prefer the confidentiality, minimal reportingrequirements and cost-effectiveness offered inthe Caribbean; it has also been popular to

weave together IBCs and trusts in complextax-minimising structures. Such structures areprevalent in the common law jurisdictions ofthe Bahamas, the BVI, the Cayman Islandsand the Turks & Caicos Islands. But justabout every offshore centre offers them.

The IBC abuses have several commondenominators. A series of multiple financialtransactions through an offshore centre, useof nominees or other middlemen to managethese transactions, and an international net-work of shell companies – even a specialised


The offshore affrontAsk fraud and tax investigators what obscures the money trail and the chances are it’s a companyor trust structure from a low-tax jurisdiction. Adam Courtenay looks at why these vehicles can so easily be abused.

��

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TAX EVASION

“off-the-shelf” variety that have been knownto become dormant as soon as the series oftransactions are completed.

Obtaining information from some offshore jurisdictions on the true owners orbeneficiaries of foreign registered businessentities appears to be the primary obstacle in investigating transnational laundering andtax evasion activity.

It is not surprising that the Australiangovernment has earmarked over $300 million– and the combined might of five differentcriminal agencies – in its attempt to source the assets and secure convictions againstalleged tax evaders. But it knows it will be an uphill battle.

Offshore jurisdictions, most notablySwitzerland, refuse foreign tax requestsbecause tax evasion is not a crime in theirstatutes. Often the information requested is not maintained in any official registry. In some cases, information on legal entitiesmay be protected by strict banking secrecy and unavailable even to domestic regulatory authorities.

Chris Dickson, a former director of theUK’s Serious Fraud Office, says that he hadbeen forced to drop possible prosecutionsbecause Caribbean islands have failed to enact laws to allow company documents to be viewed before a criminal hearing.

“It’s a chicken and egg situation,” he says.“We can’t charge the person until we have the information from the island; but the islandwon’t give us the information until he ischarged. We can’t charge anybody unless we have the evidence.”

Requests for mutual assistance can take up to two years, only for the police to find that they will simply be handed an “opaque” company account, with untraceable directors of a company or trust.What happens? The crooks go free.

In the internet age, it has never been easierfor even moderately wealthy people to havetheir own offshore account or their own taxhaven-based “walking” trust – one that “spirits”assets away to other jurisdictions if enquiriesare made of it. These can be easily opened atthe touch of a keyboard.

The “benefits” of offshore companiesThe usual reason for creating an offshorecompany has been to provide certain “fiscaladvantages”. Since tax evasion schemes andmoney laundering operations often appear touse similar techniques, many money launder-ing experts believe that the quest for optimal

fiscal advantages is frequently a cover usedfor moving criminally derived funds.

There are some generally agreed benefitsof offshore companies. These are related to:• Taxation: business may be structured

so that profits are realised in ways thatminimise their overall tax liability.

• Simplicity: unless it is a regulated business such as a bank or other financial institution, some jurisdictionsmake it relatively simple to set up and maintain companies.

• Reporting: the level of informationrequired by the registrar of companiesvaries from jurisdiction to jurisdiction,but is, in many places, extremely light.

• Asset protection: it is possible to organ-ise assets and transactions in such a waythat assets are shielded from future liabili-ties, but offshore companies aren’t alwaysthe preferred instruments. The Swiss andGermans commonly use trust-like struc-tures known as “stiftungs” and “anstalts”,and many offshore jurisdictions specialisein asset protection trusts. These are far more expensive to set up and arrange thanoffshore companies but considerablyharder to crack.

• Anonymity: by carrying out transactionsin the name of a private company, thename of the underlying principal may be kept out of documentation.

• Capitalisation: offshore jurisdictions tendnot to impose “thin-capitalisation” rules oncompanies (except for regulated entitiessuch as banks and insurance companies),allowing them to be formed with a purelynominal equity investment.

What to look out forIn fairness, IBCs are supposed to abide by thelaw of their jurisdiction, some of which nowhave AML laws in place. However, what isconsidered a predicate crime may differ – egtax evasion may not be included.

How can bankers dealing with interna-tional corporations check the integrity of an offshore-based corporation and the sourceof its funds?

One of the common differences betweenpure tax avoidance and laundering is that in

tax avoidance cases, the funds usually moveto a single offshore location where they aresheltered from the home country’s tax authorities. In cases involving criminally generated funds, the tendency is for the fundsto move rapidly through a number of offshorelocations in an attempt to layer the funds.However, there are exceptions, and tax evasion cases have been known to movethrough multiple offshore vehicles.

What are the red alerts? Anthony Travers,a senior partner at Caymans-based law firmMaples & Calder, says the real problem is whether offshore companies issue an unlimited power of attorney. If they do,be even more wary.

“This necessarily means that the nomineedirectors have no idea whatsoever of what’shappening within the company,” he says. “Anunlimited power of attorney is an absoluteflag which should place you on red alert.”

Tax avoidance investigators often say theweak point among banks has been their failureto scrutinise wire transfers. In one recentinvestigation, tens of millions of dollars werewired around the US using a store front inCalifornia. Only one bank thought the wiretransfers were suspicious and filed a report.

Most banks did not check where thetransfers came from – often there were hugesums sent by tiny, unlisted companies, yet few banks found this suspicious.

“Internal auditors and compliance officersmust look at wire transfers, check the patternof transfers and look for unusual amounts andrequests from customers who you wouldn’tnormally expect to be sending and receivingthem,” says Nigel Morris-Cotterill, an AMLexpert and adviser based in Malaysia.

If a bank is willing to do loans businesswith entities from low tax jurisdictions, thebank is unlikely to know the identity of thepeople behind the corporation moving moneyfrom the bank’s accounts and replacing it witha different asset – the laundered money.Simple due diligence is required, he says.

Martin Kenney, head of Dublin-basedasset recovery firm, Interclaim, says that whena “corporate secrecy jurisdiction” is used tocreate a corporate entity to borrow money,


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IN ONE RECENT INVESTIGATION, TENS OF MILLIONS OF DOLLARS WERE WIRED AROUND THE US USING A STORE FRONT IN CALIFORNIA.ONLY ONE BANK THOUGHT THE WIRE TRANSFERS WERE SUSPICIOUS AND FILED A REPORT.


TAX EVASION

you need to ask why. Kenny says it’s the firstsign of impending fraud.

“What are they hiding? Who are thesepeople? How do I know they are who theysay they are? Why do they choose to gosomewhere that conceals their identity? A man will come in and say: ‘Look, I ownthis company’.”

But Kenney asks how we can know if heis the beneficial owner or the nominal owner?Is he a lawyer acting for somebody else? “You are dealing in secret information andsomeone tells you: ‘This is the truth – take myword for it’. If you want to lend money onthat, go ahead. If you think it’s prudent to dothat with someone else’s money, go ahead.”

As Kenney says, if you believe that youshould know more about your borrowers –and if the deal is structured so that you are not allowed to get that additional information,then do not bother transacting.

“I suggest to you that you don’t have todo that deal,” he says.

“You have to look at these vehicles interms of enhanced customer due diligence and

ongoing due diligence,” says Gary Gill,a forensic partner at KPMG in Sydney.

“If a high net-worth individual comesalong to your bank and wants to open anaccount and they have corporations in offshore banking havens, the Channel Islands etc, a red flag immediately goes up. There may be legitimate things there,but there will be other stuff as well.”

“Under those circumstances youshould immediately – under any risk-rating model you construct – put those people in the higher risk category. That goes for offshore bank accounts as well.”

The level of sophistication of these entities can go from the sublime to the ridiculous. At its most simple a person wishing to evade tax can obtain a nominee director of a corporation for about $1000 in a dial-up company.

Another person pretends to be the ownerof this corporation for a $500 service fee. Theyopen a bank account for that company and thesecond person becomes the “so-called owner”.

According to Kenney, in some of thelarge fraud cases he has come across, there

may be four or five separate self-containedentities, each perhaps with 250 corporations,all owning parts of each other and then ownedby a trust with secret beneficiaries.

The name of those beneficiaries is lockedin a safe somewhere in a lawyer’s office in the Bahamas.

“It becomes an enormous task to unravelit. It’s a multi-veiled hydra.” ■■


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Offshore Oz

S INCE THE ADVENT of the Wickenbytax investigation, there have been anumber of so-called tax avoidance

schemes which have come to light. The mostrecent, according to the Australian Securitiesand Investments Commission, is the case ofthe tax haven company Leominister, whichhas allegedly been “warehousing” shares inthe biotech firm, Novogen.

Leominister, which is Novogen’s sixth-largest shareholder, has failed to respond totracing notices issued by ASIC in an attemptto find the owner of a parcel of Novogenshares. ASIC last month obtained a freeze onthe shares and has applied to the NSWSupreme Court for the holding to be vested inthe regulator. Leominister, which is registeredin the British Virgin Islands, was not repre-sented at the hearing despite notices to appear.

In the ongoing case involving Paul Hoganand the receipts from his two CrocodileDundee movies, there are also allegations of atortuous money trail being used. The profitsare said to be have flowed from Hollywood tocompanies in the Netherlands, where Hoganand his business partner John Cornell hadassigned the copyright to their films. Thosecompanies allegedly acted as conduits to bank accounts in the Netherlands Antilles and so-called “secret trusts” in Hong Kong.

According to a report in The Age, thestructure was allegedly used as a legal meansto avoid US withholding tax on copyright royalties. It is known in celebrity circles as a “Dutch sandwich”.

The money is alleged to have been movedto Hong Kong, where it was held in variouscurrencies by a chain of Hong Kong trustswhich, in turn, were controlled by what aretermed “straw men”, so-called secretive fig-ures with links to advisers in Australia.

“Hogan and Cornell were not documentedas trustees or trust beneficiaries but arethought to have retained power to interveneand appoint new trustees if necessary (andthereby assume control of the trust’s bankaccounts),” The Age says. Both Hogan and Cornell maintain they are innocent of any wrongdoing.

Not dissimilar structures were used by anumber of Australian rock stars, including thelate lead singer of INXS, Michael Hutchenceand members of the 1980s rock band Men at Work. In July 2005 it was reported that thefortune of dead rock star Michael Hutchence,was estimated to be between $1.5 million and $3 million ($HK10-20 million). The money, it seems, has disappeared.

Hutchence’s financial advisers have saidprofits from rock bank INXS were squirreledaway through a web of companies across theglobe to keep his fortune away from “thievingrelatives” and “girlfriends”. ■■


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COMPLIANCE

A USTRALIAN REPORTING entitiesare in the midst of constructingcompliance programs that will

effectively put into practice the new anti-money laundering and counter-terrorism(AML/CTF) laws, which received royal assent on December 12, 2006.

The timeline for implementation has been staggered by Australian TransactionsReporting and Analysis Centre (Austrac) tohelp the industry ease into compliance in bite-size stages. This month it reaches its firsttrigger point since the AML/CTF Act receivedroyal assent in December – that is, June 12.

But does this date have any real meaning?Ostensibly it covers only record keeping, knowyour customer (KYC) and some customer pro-visions for correspondent banking. And it joinsother obligations that were “due” as soon asroyal assent was received last December and

that include monitoring of designated remit-tance services, electronic and cross-border currency movements and some record keepingobligations. To most practitioners, June 12hardly seems to be an auspicious date. There isconfusion not only about its relevance but as tohow pressing the requirements are for many ofthose caught by the act. The obligations coverall the different entities that come under theact, including gaming institutions, financialservices providers and bullion dealers.

Peter Jones, a partner at law firm AllensArthur Robinson, says that the main compo-nent of the compliance program is due inDecember 2007. He does not see the point ofobligations placed on reporting entities at suchan early stage.

“When you think of compliance reportsyou think compliance with what? Those firmswhich logically have to report obligations

have had to do so from the moment the actcommenced on December 12, 2006, throughto June 12 this year. But they are only complying with the first stage of four and I’m not really sure why Austrac thinks that isworth doing,” he says.

Chris Cass, a partner at accounting firmDeloitte, says that evidence from speaking to his clients suggests Austrac will face considerable problems in gaining full compliance from reporting entities.

“We are now in the first year of imple-mentation and given the expected demands inthe remainder of 2007, it’s going to be chal-lenging to meet the statutory deliverables.”

In essence, the program required to beimplemented by June 12 is the record keepingand KYC requirements associated with correspondent banking and only applies tobanks with offshore banking requirements.


Remember, rememberthe 12th of DecemberIs the so-called deadline of June 12 of any importance? This deadline relates to the record keeping and know your customer provisions for correspondent banking, but as many AML practitioners observe, it is the totality of what is needed by December 12 that really counts, says Richard Hemming

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COMPLIANCE

The requirement is for banks to keep detailedforeign exchange records and records of dealings with overseas banks.

Some experts say that banks shouldalready know the overseas financial institutionswith which they interact and be keeping up-to-date files on them that meet the requirements of the draft rules issued by Austrac in 2006.

But Cass says many banks are strugglingto come up with programs for these rules,let alone implement them, which is indicativeof the problems Austrac faces across the staggered process as a whole.

“The honest reality is that hardly anyonehas done anything in respect of this formaltimeline. Even with correspondent banking,the big banks are struggling to implement afull correspondent banking review, let aloneby the statutory deadline in June,” Cass says.

He points out that most banks have not gota handle on the requirements of standard duediligence that involves an account openingform and collecting the minimum of informa-tion required for knowing your customer.

This is substantially below the require-ments under the enhanced due diligence, wherebanks must assess existing customers’ changingrisk profiles and obtain additional information.

“If you have thousands of relationshipsyou have to comply with the act on each oneof those, it takes a lot of time and resourcesand costs money,” says Jones.

But he says that the 15-month moratoriumthat kicks in after the compliance date – dur-ing which organisations will not be prosecutedfor a breach of the new law – is a good thing.

“In this case it will give the banks 15 months to ensure they have systems inplace to properly consider before they enterinto a new relationship and have the systemsfor their existing relationships.”

Cass’s colleague at Deloitte, Julie Beesley,adds that there is a question mark about whatAustrac will do with the information once itcomes in. Prior to last December, Austrac waslauded as one of the world’s best financialintelligence units. But now it is the regulator,which involves both the education and enforce-ment of the law on which entities depend.

Austrac recently issued its self-assess-ment questionnaire but Beesley wonders whatwill occur when they start receiving the forms,and what they propose to do with them. DoesAustrac have the resources to collate all thematerial that is being sent back, she asks.

Experts agree that the KYC requirementsthat come into force on December 12 are themost important obligation to be placed onentities and will require the greatest changesto information technology systems as well aschanges to what employees do.

Because the KYC requirements are themost onerous on firms, Jones says it isabsolutely essential that Austrac runs an exten-sive public education campaign “pretty soon”.

“It takes people a while to realise thatthings are changing. If you know the government told you that you have to do it,customers accept it,” he says.

At the lowest level, entities need toobtain data from potential new customersacross all product lines. This job should not be underestimated, according to industry experts, and they stress that organisations need to start complying with this requirement.

Those caught by the new laws need to becogniscent that by this December complianceprograms run by reporting entities must beapproved by their board of directors. There is also a 15-month moratorium on Austracprosecutions for non-compliance. Ros Grady,a partner at law firm Mallesons StephenJaques says that the 15-month moratorium

doesn’t apply to criminal offences. She addsthat the board of directors [of the reportingentity] can “still be investigated by Austrac”.

Underlying this whole process is a risk based approach that places a great respon-sibility upon reporting entities to assesswhether or not a potential customer or existingcustomer could be involved in money laundering or counter terrorism financing.

“The law says you must have a broad com-pliance program that manages how you handleyour obligations, then it goes on to say that youhave to understand and assess the risk of yourproducts and services being used to laundermoney or finance terrorism,” says independentAML specialist, Joy Geary.


“There is a question mark about what Austrac will do with the information once it comes in.”

Julie Beesley

“If you have thousands of relationshipsyou have to comply with the act oneach one of those, it takes a lot of time and resources and costs money.”

Peter Jones

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“The 15-month moratorium doesn’tapply to criminaloffences. The boardof directors [of the

reporting entity] canstill be investigatedby Austrac.”

Ros Grady


COMPLIANCE

There are some mandatory requirements, butthe bulk of the reporting entity’s obligations areup to themselves, on a risk-based approach. Thepoint of the current approach is to allow Austracthe ability to place together all the pieces of thejigsaw puzzle provided to them from the reportingentities. In this way Austrac can obtain an overallpicture of the transfer or movement of monies by individuals and companies.

Reporting entities must work out the individual levels of risk and concentrate on doing more work on those they consider to behigh risk. Some of the elements involved in this process are probity checks, police checksand whether a potential or existing customer is a politically exposed person such as a senior politician in New Zealand.

The overall idea is simple, says Geary.“[W]ork around the customer and know

enough to do a risk rating. Are they high risk or low risk? Then once you have done that youmust monitor what they do. This means havingsystems that look at their activities to see if anything unusual is happening.

“If your staff think a customer is behavingstrangely, that is something you should be inves-tigating. If it is suspicious, report it to Austrac.That is usually the end of your involvement.” ■■

A USTRAC’S chief executive Neil Jensen sounds a note ofwarning to reporting entities:

“Don’t wait until December 2008 [foryour AML and CTF programs to be up todate]. The information has been published for some time now. I expect most entities are well on their way.”

If entities are having difficulty theyshould contact Austrac directly and/orspeak to their industry association, saysJensen, who adds that Austrac is providing phone line assistance.

Austrac, he says, aims to provide guidance notes relating to compliance obligations “in the next month to twomonths, in a draft form”.

Later this year Austrac aims to produce a regulatory guide. In additionAustrac is working on an education campaign. In the meantime entities cancontact the regulator for information.

A key point of reference for entities is their industry bodies. Austrac is con-ducting consultative committees with thefinancial services and gaming industries in

late June which will enable members toraise issues and ask questions, he says.

Further, Jensen says that Austrac ishiring a lot more people and is lookingextensively offshore as well as domesti-cally. His organisation has the resources to fund the employment program, he says with a total appropriation up to $59 million for each financial year.

He admits that Austrac and reporting entities face “challenges” but says that hewill not easily grant the 15-month morato-rium on civil penalties to just anyone.

“We are working hard to help businessto meet the deadlines and the challengesand have in place a range of programs.Industry has sought legislation that is non prescriptive and want the ability todetermine the amount of risk they face.”

Lastly, Jensen says that one only has to look at the programs already in place in the United Kingdom and in the US to seewhere our anti-money laundering cam-paigns are headed. But he says Austrac is conscious of putting in place “what will work for Australia”. ■■


So what is the regulator sayingabout all this?

Jensen: Civil penalties ‘not granted to just anyone’

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Joy Geary

“If your staff think a customeris behaving strangely, that is something you should be investigating. If it is suspicious, report it toAustrac. That is usually theend of your involvement.”


LEGAL

A DESIGNATED BUSINESS GROUP(DBG) is a concept created by the Anti-Money Laundering and

Counter-Terrorism Financing Act 2006, withthe broad objective of allowing its members to share responsibility for compliance with the act's requirements. But not everyone is eligible to join a DBG.

This article comments on the eligibilitycriteria for membership, the membershipprocess and the nature and value of theadministrative and compliance benefits which attach to membership of a DBG.

What is a designated business group?A designated business group is defined in section 5 of the act as a group of two ormore persons, where:

“(a) each member of the group has elected,in writing, to be a member of the group,and the election is in force; and

(b) each election was made in accordancewith the AML/CTF rules; and

(c) no member of the group is a member ofanother designated business group; and

(d) each member of the group satisfies suchconditions (if any) as are specified in theAML/CTF rules; and

(e) the group is not of a kind that, under the AML/CTF rules, is ineligible to be adesignated business group.”The above definition relies heavily on the

AML/CTF Rules. Significantly, it is the ruleswhich determine whether a person may be a member of a DBG. The relevant rules did not take effect, however, until 12 June 2007 (of particular relevance to ss106 and 107described below).

Eligibility for membership of a designated business group

The rules require each member of a DBG tosatisfy one of the following two conditions:• each member must be related to each other

member of the group (within the meaningof s50 Corporations Act 2001) and eachmember must be either (a) a reporting entity or (b) a company in a foreign country which, if it were resident inAustralia, would be a reporting entity; or

• each member must be providing a designated service pursuant to a joint venture agreement to which each memberof the group is a party.As a result, unless the joint venture

condition described in paragraph (ii) above


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A guide to designatedbusiness groupsStephen Cavanagh explains the ins and outs of designated business groups and the potential administrative and compliance benefits they offer to group members.

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LEGAL

is met, membership is only available to relatedcompanies; it is not available to companieswhich are not related nor is it available tonon-corporate entities. Further, under paragraph (i), except where one of the related companies is a foreign company,all members must be reporting entities.

Although the condition described in paragraph (ii) does not expressly refer to eachmember being a reporting entity, the require-ment that each member must be providing a designated service necessarily means that eachmember must be a reporting entity. The partiesto the joint venture agreement need not be relat-ed companies (and need not be companies at all)but they cannot be members of other DBGs (s5).

The need for a joint venture agreement (as described in paragraph (ii)) means that anumber of other similar arrangements will not be able to benefit from categorisation as aDBG. Arrangements that may not be coveredinclude “white branding” arrangements,origination arrangements, and broking arrange-ments. This is so, even if the party excludedfrom membership of a DBG is taken to provide a designated service only because it is “arranging” for the customer to receive a designated service from a third party.

The process of establishing a designated business groupFor the purpose of paragraph (b) of the abovedefinition of DBG, the rules require that a person’s election to membership must be madeby way of an “approved election form” (ieForm 1 of Chapter 2 of the rules) and that formmust be provided to Austrac by the “nominatedcontact officer”. The nominated contact officeris the person appointed by the DBG to holdthat position. To be eligible, the person must bean “officer”, under the Corporations Act 2001,of a member of the DBG, or the AML/CTFcompliance officer of a member of the DBG.Form 1 requires confirmation of the groundsupon which the member claims to be entitled to be a member of a DBG.

The rules stipulate further that a DBG is“established” only when a second approvalform (Form 2 of Chapter 2 of the rules) is pro-vided to the Austrac CEO giving notice of theestablishment of the DBG and its membership.

The nominated contact officer must also notify the Austrac CEO (using Form 3 ofChapter 2 of the rules) of the withdrawal of a member, the election of a new member,the termination of the DBG or of other change in the details previously notified to the Austrac CEO regarding the group or the nominated contact officer.

What are the benefits of membership of a designated business group?In summary, members of a DBG can:• have a joint AML/CTF program;• undertake customer identification

and ongoing customer due diligence for each other;

• lodge group compliance reports;• discharge various record keeping

obligations for each other; and• share information in certain

circumstances.

Customer identificationFrom 12 December 2007, in certain circum-stances, members of a DBG will be able torely on the customer identification procedureundertaken by another member.

The combined effect of s38 of the act and rule 7.3 is that if A and B are members ofthe same DBG, and:(i) A has carried out the applicable customer

identification procedure in respect of customer X to whom A provided (or pro-poses to provide) a designated service;

(ii) X is, or becomes, a customer of B in relation to whom a designated service isprovided (or is proposed to be provided)by B;

(iii) B has obtained a copy of the record madeby A in accordance with s114(2) of the act(NB I believe that this reference to s114(2)in Rule 7.3 should read s112(2)) in respectof X or under an agreement in place for themanagement of identification or otherrecords, B has access to the record made byA in accordance with s112(2); and

(iv) B has determined that it is appropriate for B to rely upon the customer identifica-tion procedure which was carried out byA, having regard to the money laundering/terrorism financing risk faced by B relevant to the provision of B’s designatedservice to X, then the act (except Part 10)is to have the same effect as if B had

also carried out the applicable customeridentification procedure in respect of X. The two requirements set out in para-

graphs (iii) and (iv) are the requirements,respectively, of rules 7.3.2(2) and 7.3.2(3).There is an inconsistency between the first of those requirements (rule 7.3.2(2)) and s114of the act which is discussed further below.

The exemption which this affords B fromthe requirement to undertake its own customeridentification procedure is dependent upon Ahaving undertaken the applicable customeridentification procedure and accordingly the

benefit of the exception is not available whereA itself is excused from undertaking the applicable customer identification procedure –that is, in the case of pre-commencement customers or low risk services (ss28 and 30).

Joint AML/CTF programFrom 12 December 2007, members of a DBG will be able to adopt and maintain ajoint AML/CTF program applicable to each of them, instead of adopting and maintainingseparate programs.

Part B of the program must address, in con-formity with the requirements of Chapter 4 ofthe rules, the applicable customer identificationprocedures to be undertaken by each member.Although this may, in principle, present anopportunity for members of the DBG to havecommon identification procedures, Part B of the program must take into account the fact that different group members may provide different types of designated services involvingdifferent types of laundering risk.

In other words, Part B must addressappropriately the risks associated with the provision of all designated services by allgroup members. In doing so, the program may prescribe different procedures in respectof different members (s85(4)). Part B couldalso take account of the benefits afforded tomembers by s38 and rule 7.3 (see above)


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FROM 12 DECEMBER 2007, MEMBERS OF A DBGWILL BE ABLE TO ADOPT AND MAINTAIN A JOINT AML/CTF PROGRAM APPLICABLE TO EACH OF THEM, INSTEAD OF ADOPTING ANDMAINTAINING SEPARATE PROGRAMS.


LEGAL

but with due regard, in particular, to rule 7.3.2(3) (see above).

Part A of the joint AML/CTF programmust address the requirements of Chapter 9 of the rules. As with Part B of the program,although a single program is involved, it muststill address the laundering risk faced by each member of the DBG in relation to theprovision of designated services. For instance,the settlement of a single risk awareness training program and/or employee due diligence program, as part of the AML/CTFprogram, must involve appropriate training for each employee of each member and appro-priate risk-based systems and controls beingput in place for each member to determinewhether, and in what manner, to screen anyprospective employee. Similarly, a DBG needonly have one AML/CTF compliance officer.

Although Part A of the program must beapproved by, and be subject to the ongoingoversight of, each member’s board and seniormanagement, in circumstances where eachmember of a DBG is related to the others,the approval and ongoing oversight can begiven by the governing board and senior management of the main holding company of the group (rule 9.4).

A record must be made of the adoptionof the program and that record as well as theprogram (or copies of them) must be retainedfor seven years. These obligations may bemet by any member of a DBG (s116(6)).

Making and retaining records of identification proceduresFrom 12 December 2007, a reporting entitywhich carries out an applicable customer identification procedure must make a recordof the procedure and of any informationobtained in the course of carrying out the procedure (s112). That record (or a copy ofit), must be retained for seven years after thelast designated service has been provided bythat reporting entity to the customer (s113).

If that reporting entity is a member of aDBG, the obligation to make the record maybe discharged by any other member of theDBG (s112(5)) and/or the obligation to retainthe record may be discharged by any othermember of the DBG (s113(4)).

Section 114 of the act is more controver-sial. It operates specifically in connection with the circumstance where, by applicationof s38 (discussed above), the applicable customer identification procedure which iscarried out by one member of a DBG isdeemed to have been carried out by anothermember. Returning to the example used

above to illustrate the operation of s38, if Amade a record of the customer identificationprocedure it carried out in respect of X and/orof the information collected from X in thecourse of that procedure, s114 requires B,by notice given to A within five days of Xbecoming a customer of B, to request a copyof the record made by A. A must complywithin five business days of B’s request. B must retain a copy of that record for seven years after the last designated service is provided by B to X (s114(5)).

It is arguably odd that B, in the aboveexample, is required to obtain a copy of the identification records. As noted above,pursuant to s38 and rule 7.3, B is deemed tohave carried out the applicable identificationprocedure in respect of X should B merelyhave access to the record made by A (rule7.3.2(2)). Why does B need to require andretain a copy of the record?

If B, in our example, had in fact carriedout its own customer identification procedurein respect of X, s112(5) and s113(4) wouldoperate respectively to allow A to make arecord of what B did and to retain that record (ie. without B itself having to do so).Yet, in contrast, where B is deemed, by s38, to have carried out the applicable identification procedure in respect of X,it is, by s114, not sufficient for A to havemade a record of the identification procedureand to have retained it. That record must be provided by A to B and must be retainedby B. It is difficult to understand the policybasis for this difference.

Other records and their retentionIf a reporting entity makes a record of the provision of a designated service to a customer, it must retain that record, or a copyof it, for seven years (s107). If a document,relating to the provision, or prospective provision, of a designated service by a reporting entity, is given to the reporting entity by or on behalf of a customer, thereporting entity must also retain that docu-ment or a copy of it for seven years (s108).

If that reporting entity is a member of aDBG, the obligations to retain those recordsmay, after 12 June 2007 (the date after whicha DBG may be established under the Rules),be discharged by any other member of theDBG (ss107(4), 108(4)).

The obligations under ss107 and 108 commenced on 13 December 2006. Oddly,they overlap (until 12 December 2007) with thecomparable obligations imposed on financialinstitutions by Part VIA of the FinancialTransaction Reports Act 1988 in respect offinancial transaction documents. This overlap is

presumably an error, however, it is important tonote that a failure to comply with the require-ments of Part VIA of the FTRA constitutes anoffence and, relevantly, those obligations cannotbe discharged by a member of the DBG.

Compliance reportsSection 47 of the Act requires a reporting entity to give the Austrac CEO a report as to the entity's compliance with the act andrules. The report is to be in the approved form and is to relate to a period prescribed by the rules. There is as yet no approved form but draft rules, made 15 May 2007,propose a reporting period of 13 December2006 to 31 December 2007 and a report lodgement date of 31 March 2008. If thereporting entity is a member of a DBG,the obligation to provide the report may be discharged by any other member of the groupand the report relating to each member may beset out in the one document (ss48(6) and (7)).

Ongoing customer due diligenceSection 36 of the act requires that reporting entities after 12 December 2008 monitor their customers in relation to the provision of designated services with a view to identi-fying, mitigating and managing launderingand terrorism risk and to do so in accordancewith rules which are yet to be made. Whenthis obligation takes effect, it may be under-taken by any member of a DBG (s36(4)).

Sharing information and tipping offA necessary consequence of the operation of a number of the act’s provisions discussedabove is that members of DBGs will be entitled to share information about their customers. To the extent that this is authorisedby the act, the sharing of customer informa-tion will not contravene the Privacy Act 1988or duties of confidentiality.

More particularly, the s123(2) offence of tipping off in circumstances where a suspicious matter reporting obligation arisesunder s41 (after 12 December 2008), is notcommitted should the reporting entity’s suspicion be disclosed to another member of a DBG where both have adopted a jointAML/CTF program. The disclosure may only be made for the purpose of informinganother member of the group about the risks involved in dealing with the particular customer in respect of whom the suspicionhas arisen (s123(7)). ■■

Stephen Cavanagh is a partner at BlakeDawson Waldron. Contact (02) 9258 6070.


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Financial Institutions Need to Strengthen Know Your Customer (KYC) and Customer Due Diligence (CDD) Procedures

Monitoring CustomerTransactions: an EssentialComponent of an Effective Risk-based Approach toCustomer Due Diligence (CDD)

G RATIFYING anti-money launder-ing (AML) regulators’ appetite forCustomer Due Diligence (CDD)

has never been easy because good datais not always abundant. But financial institutions are entering a new arena now,where due diligence levels must be determined, applied and adjustedthroughout each customer relationship.Financial institutions need to have a risk-sensitive approach for CDD, andmonitoring is a crucial part of it.

CDD has always been a key compo-nent of an effective money launderingcontrol program. CDD also makes goodbusiness sense as it allows firms to tailortheir products and services to the needsof their customers, and in some cases toprevent fraud. In Europe the Third EUDirective repeats the main CDD require-ments of the first and second Directives,but adds more detail to the requirementsby, among others, including a specificrequirement of ongoing monitoring, on a risk sensitive basis, of the business relationship. This move toward a risk-based approach started in the UK and isnow making its way across the globe, asdriven by the FATF Recommendations.

On the 25th of May in 2007, AUSTRAC issued five new regulatory policies to support compliance with thenew AML/CTF regulations: supervisoryframework, education, exemptions, monitoring and enforcement. Each policyprovides guidance reflecting a risk-basedapproach. What does that mean?

The risk-based approach is principallyabout performing a thorough risk assess-ment and then allocating resources andattention to areas of higher money launder-ing (but not necessarily terrorist financing)risk, and reducing AML investment in areas of lower risk. This allows financialinstitutions to minimize the adverse impactof anti-money laundering procedures ontheir legitimate customers. Firms must however be able to demonstrate to thesupervising authorities that the extent of the measures is appropriate to the risks of

money laundering and terrorist financing,which is not always easy.

Monitoring of customers and transac-tions should be done in a manner consis-tent with a “reasoned” risk assessment.

NetEconomy can help in many ways toachieve this. Not all risks can be seen at theaccount opening moment. Specific moneylaundering risks may only become evidentonce the customer has begun transactingeither through an account or otherwise inthe relationship with the financial institution.For example, an international wire transfermight be normal for a business customer,but unusual for a retail customer. That iswhy appropriate and reasonable back endmonitoring of customer transactions is anessential component of an effectivelydesigned risk-based approach to CDD.

Some examples of howNetEconomy provides an effective approach for the risk-based monitoring part of CDD:

■ Risk-based Alert Generation:NetEconomy enables the financialinstitution to store a lot of customerand account characteristics, to beused in a risk-based approach fortransaction monitoring. “Static” riskfactors captured at the account opening process such as PEP status,High/Medium/Low risk classification,country of nationality, account type,missing identification information,etc., can all be used in combinationwith transaction characteristics todecide whether or not to generate analert, and prioritize the alerts basedon risk. This directs investigativeresources towards the highest risks –whether it’s a very large or veryunusual transaction by a low-risk

AML/CTF Legislation• Risk-based approach to combat

money laundering and terror-financing

• Ongoing customer due diligence(CDD)

• Re-verification and ongoing customer identification (CID)

• Monitoring of suspicious activities or transactions

• Record keeping

• Reporting suspicious transactions

• Employee training

• Independent audit and compliance review

• EDD on cross-boarder correspondent banking

• Sanction lists screening

Taking a Risk-based Approach• Nature, size and complexity

of the business

• Customer types, including politically exposed persons

• Types of designated services

• Delivery methods

• Foreign jurisdictions

• Identify significant changes


SPONSORED FEATURE


customer, or one with a lower threshold for a high-risk customer.

■ Advanced Peer Group Analysis:The Advanced Peer Group module isanother important component of CDDand KYC, as it enables the bank todetermine what is normal behavior for certain types of customers andbusinesses. The bank can define peergroups based on its own assessmentof relevant customer/account charac-teristics (such as industry code oraccount type), and the system startscalculating average behavior for eachpeer group so that significant devia-tion by a member can be alerted.

■ Dynamic Risk Scoring: NetEconomyalso provides the Dynamic Risk Scoringmodule, consisting of two importantcomponents: it allows the bank toimport expected behavior of the customer as obtained during accountopening, so that actual behavior can be compared to it. Second, it canimport a risk score defined by the bank,and subsequently start calculating itsown risk score for comparison andongoing monitoring. The bank can configure its own risk scoring rules (criteria, score, weight) based on itsassessment of money laundering risks.

Expanding Your Capabilities for Enhanced Customer Due DiligenceWith NetEconomy’s capabilities for riskscoring and enhanced due diligence onhigh risk customers, financial institutionswill improve their ability to mitigate riskacross their organization. NetEconomy’ssolution monitors customers and transactions, and alerts its users to the appearance of suspicious activity.Once alerts have been generated, a step-by-step customizable workflow with built-in case management drivesusers through investigation, case trackingand reporting within one fully-integratedend-to-end environment.

These capabilities are all integralcomponents of the risk-based monitoringrequirement under the Australia’s new AML/CTF Act, EU Directive and other regulations.

The risk-based approach is an opportunity as much as it is a require-ment. For customer onboarding, it meansthat the bank can quickly sign up low-riskclients to low-risk products, while placingmore stringent KYC demands on high-riskrelationships. Using NetEconomy’s AML Compliance Manager solution and itsadd-on modules for ongoing transactionmonitoring, the compliance department is

automatically alerted to the highest risksacross all products, customers and geographies. This enables investigators to focus their resources where they areneeded most, in order to make the rightdecisions about filing Suspicious MatterReports to AUSTRAC.

About NetEconomy

NetEconomy is the leading provider of financial crime management and compliance solutions. With over 130 implementations across 58 countries,NetEconomy has an exceptional trackrecord for developing and delivering highlyeffective and easily deployable solutionsfor anti-money laundering, fraud preventionand market surveillance. NetEconomybrings business value to its worldwideclient base through its personalized customer approach for minimizing regula-tory risk, delivering measurable results, and protecting corporate brand/reputation.NetEconomy is a business unit ofMilwaukee-based Fiserv, Inc, (NASDAQ:FISV) a Fortune 500 company that providesinformation technology services to thefinancial industry worldwide. NetEconomyis headquartered in The Hague, with offices in Boston, London, New York, Paris, Kuala Lumpur, Shanghai and Sydney. More information visit www.neteconomy.com. ■

“Regulations such as the Third EU Money

Laundering Directive, Sections 312

and 326 of the USA PATRIOT Act, and

Australia’s new AML/CTF Act continue

to put pressure on financial institutions

to take a risk-based approach to their

customer due diligence process, and

to ensure Know Your Customer (KYC)

requirements are effectively addressed,

NetEconomy’s expanded capabilities

take CDD to the next level – providing

our customers with new and innovative

capabilities to identify and monitor

customers with high-risk profiles and

high-risk behavior in a dynamic way.”

Sebastian Kuntz, CEO of NetEconomy

For more information on NetEconomy/Fiserv please contact Roger Manu at + 61 (0)2 9409 2026 or [email protected]

www.neteconomy.com

NetEconomy provides dynamic risk scoring at account opening and for ongoing customer due diligence.


REGIONAL REVIEW

Transaction reporting and KoFIU – round won

T HE REPUBLIC OF KOREA’Santi-money laundering (AML) effortskicked off seriously in 2001 with

the enactment of its Financial TransactionReports Act (FTRA). The Korean FinancialIntelligence Unit (KoFIU), South Korea’sequivalent of Austrac, was created under the FTRA, as was the country’s suspicioustransaction reporting (STR) regime.

Under to the STR requirements of theFTRA, South Korean reporting entities arerequired to report to KoFIU transactions ofmore than 20m won (A$26,000), or the foreign currency equivalent of US$10,000,but only if those transactions involve suspected money laundering or tax evasion.Reporting entities may, however, also reportsuspicious transactions of lesser amounts ifthere are reasonable grounds for suspicion.

The FTRA also sets out the penaltiesthat financial institutions face – a fine of

5m won for failure to report a suspicioustransaction. Making a false report may result in imprisonment of up to a year and/or a fine of 5m won. Reporting entitiesunder the FTRA include banks, securitiesfirms, insurance companies, asset manage-ment companies and futures companies,as well as venture capital companies andcorporate restructuring companies.

South Korean authorities also targetmoney laundering via the Proceeds of Crime


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South Korea has made significant progress in the eyes of the world in combating money laundering over the last six years, but the country has yet to commit to criminalising terroristfinancing. Brent Robens and Gary Gill from KPMG discuss the changing anti-money launderinglandscape of the Republic of Korea to shed light on its improvements and reveal some bumps in the road towards a more robust AML environment.

Keen to be seen to be clean

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Act (POCA) 2001, which was designed toeliminate economic motives for crime by confiscating illegal proceeds. The POCA alsocriminalises the acts of concealment, disguiseand receipt of criminal proceeds. Money launderers can be imprisoned for up to five years and face fines up to 30m won.

Information sharing and information to shareThe FTRA stipulates that KoFIU mayexchange information on suspicious transactions with overseas FIUs. This legislative provision is one that KoFIU is keen to use, as witnessed by its prolific signing of memoranda of understanding(MOUs) – including an MOU with Austracsigned in 2003. Similar MOUs have beensigned between South Korea and about 30 other nations.

The KoFIU’s information-sharing responsibilities also extend to providing STR information to the Public Prosecutor'sOffice, the National Police Agency, theNational Tax Service, the Korea CustomsService, the Financial SupervisoryCommission and the National ElectionCommission. Information is provided to the

National Election Commission when there is a suspicion that the transactions relate to political funding.

The KoFIU released its Annual Report for 2005 in September last year, which creditsthe setting up of “an advanced AML system”for raising public awareness of financial institutions and the public. STR filings haveincreased from 20 to 1500 per month duringthe previous four years.

KoFIU also reported that banks representabout 95 per cent of STR filings. Sixty-sevenpercent of filings involve domestic currencytransactions. Of the STRs filed with KoFIU,17 per cent were referred to law enforcementagencies and 44 per cent of these were found to be engaged in money laundering and were prosecuted.

South Korea in the international arena and the fight against terrorismOn the international front, South Korea hasapplied to join the Financial Action TaskForce on Money Laundering (FATF) and wasinvited by FATF in August 2006 to join as anobserver – the first step to full membership.South Korea is already a member of the Asia Pacific Group on Money Laundering and KoFIU is a member of the Egmont Groupof financial intelligence units.

Looking ahead, however, South Koreastill needs to resolve international concernsover its lack of specific legislation targetingthe financing of terrorism. South Korea has signed and ratified the United NationsInternational Convention for the Suppressionof the Financing of Terrorism, but has not yet passed a relevant law. It has also committed to ratifying UN Security CouncilCommittee Resolutions 1173, 1127, 1267and 1373, which means that South Koreanentities must freeze any assets in their possession that belong to the Taliban,al-Qaeda, the Angolan rebel group UNITA,and related parties.

However, South Korea does not currentlyhave specific legislation combating terroristfinancing. There is a new anti-terrorism billstill pending in the country’s parliament (the National Assembly), but previousattempts to pass similar bills in Korea have not succeeded, based on fear of givingthe National Intelligence Service (NIS) toomuch power. The reason South Koreans are treading carefully is because formeradministrations oversaw civil rights abusesand corruption. Amnesty International alsoweighed into the debate, describing the NISin a 2003 public statement as “a secretiveagency about which Amnesty International


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A South Korean soldier stands on guard on the DMZ; North Korea is in the background.

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REGIONAL REVIEW

has expressed concern because of its respon-sibility for some of the most serious humanrights violations”.

One of the key powers that South Koreanauthorities will have if the anti-terrorism billis passed is the ability to seize legitimate businesses from which profits have been usedto finance terrorist activity. This power is alsocurrently available in cases where the businesshas been used to launder drug money.

Supernotes, hawala networks — the usual risksSouth Korean authorities occasionally discover operations involving the “hawala”system of transferring money, which is illegal in South Korea. This system,operated by way of a network of brokers,is common in Middle Eastern and Asiancountries. In May 2005, two Iranians werearrested for arranging 60 billion won in illegal hawala transactions for a number of their compatriots in South Korea. In November 2005, officers from fiveMongolian banks were charged with runninga similar system and operating in Korea without a financial services licence.

Another money laundering threat to South Korea is the trade in counterfeit notes.A South Korean was charged with movingUS$140,000 in fake US$100 “supernotes”from China in April 2005. With the fingerpointed at North Korea for producing these notes, South Korea is badly placed geographically to keep clear of the US fakes.South Korean efforts to target the flow ofcounterfeit international currency are having a positive effect, with the Bureau forInternational Narcotics and Law EnforcementAffairs reporting a two-thirds drop in thenumber of counterfeit notes discovered in2006 compared with the previous year.

Improvements in relations with itsNorthern neighbour could also increase therisk of supernotes flowing into the South,as well as opening up new money launderingrisks. The two countries are planning to re-open rail crossings over the border for thefirst time in 50 years. This link will open up the potential for physical flows of bothcounterfeit notes and the proceeds of crime.Additionally, the increased trade between the north and the south means there will be a greater flow of money from legitimate business. With increased business comes agreater opportunity to disguise dirty money.

As its relationship strengthens with North Korea, South Korea is still careful todifferentiate itself from its neighbour. With

the north using the shutdown of nuclear facilities as a bargaining chip in demandingthe return of US$25m from Macau-basedBanco Delta Asia, South Korea has offered to extend its support to international efforts by offering to organise and facilitate the repatriation of the funds. The money wasfrozen as a result of US allegations of money laundering and counterfeiting by the North Korean government.

Combating corruptionSouth Korea has made significant progress in reducing corruption, since the election of Kim Young-sam as president in 1992. One of his first acts upon election was to start an anti-corruption campaign, requiringgovernment and military officials to publishtheir financial records. This resulted in theresignation of several high-ranking officersand cabinet members, and in two of his predecessors being charged with corruptionand treason. The anti-corruption campaignwas also part of an attempt to reform the chaebol, the large South Korean conglomerates that dominated the economy.

Part of the anti-corruption reforms saw theAnti-Public Corruption Forfeiture Act passed in1994, under which the proceeds of corruptionare forfeited, and there is a solid system in placeto identify, trace and seize assets related tocrime. South Korea also signed the UnitedNations Convention Against Corruption in2003, which requires countries to criminalisesuch acts as bribery, embezzlement and moneylaundering. However, while the NationalAssembly signed the convention in 2003,it has not yet ratified it.

The relative success of South Korea’santi-corruption drive has been illustrated byits scores in the Transparency InternationalCorruption Perceptions Index, which ratescountries on a scale of one to 10, where one is perceived to be extremely corrupt and 10 as low-level corruption. The countryscored 5.1 out of 10 in 2006, placing it 42nd in a ranking of 163 jurisdictions – a clear improvement over its 1995 score of 4.29 out of ten.

The road aheadBy its own admission, KoFIU faces the threatof not responding well to a rapidly changingenvironment due to the “one-way manage-ment of information and static nature” of itssystem of analysing suspicious transactions.In recognising the issue, KoFIU is well placed to improve its system and is doing soby developing and refining its data analysisand mining capabilities.

In addition, a major flaw in the AML legislation is that there are no obligations on casinos unless they exchange foreign currency. The growth of casinos in the region,as well as the vulnerability of this industry tomoney laundering, means that this is a hole in the legislation that needs to be filled.Additionally, the need for specific legislationto target terrorist financing is recognised andfurther debate regarding the contents of thislegislation is expected in the short term.

South Korea has clearly made consider-able inroads to joining the fight against money laundering and corruption. With FATF recognising these efforts, labelling the AML system as “well developed”,South Korea is tipped to become a full member of FATF in the near future.

However, a savvy AML/CTF complianceofficer will recognise that FATF membershipis not a guarantee of an environment free ofmoney laundering and terrorist financingrisks, although it will help to improve SouthKorea’s jurisdictional risk profile. As with anyjurisdiction, regardless of the sophistication of its AML/CTF regime, money launderersand terrorist financiers will continue theirefforts to exploit any systems and controls thatmay be in place, and some measure of duediligence towards transactions involving South Korea will still be required. ■■

The views and opinions expressed herein arethose of the author and do not necessarilyrepresent the views and opinions of KPMG,an Australian partnership, which is part of the KPMG International network.


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Since the election of Kim Young-samas president in 1992, South Korea

has made significant progress inreducing corruption. © AP Image


NEWS FEATURE

I N TODAY’S politically charged economicenvironment, institutions accused of laun-dering dirty money or financing terrorism

may suffer extensive financial and reputationalharm. As demonstrated by the recent actionstaken by the United States Department of theTreasury against Banco Delta Asia (BDA),institutions may suffer incalculable damageeven where there is no hard evidence to sub-stantiate their involvement in such activities.

Traditionally a small, family-owned financial institution operating in Macau’sSpecial Administrative Region, BDA hasbeen at the centre of an international money

laundering scandal since September 2005;when it was designated a “primary moneylaundering concern” under Section 311 of the USA Patriot Act of 2001. That sectionempowers the US Secretary of the Treasuryto identify foreign money laundering threats,and to order US financial institutions to takeone or more “special measures” against those designated threats.

According to the US Treasury, BDA wasconsidered a threat to the US financial systembecause it had previously assisted NorthKorean government agencies and front companies to place counterfeit currency in

the international financial system, make surreptitious cash deposits and withdrawals,and launder funds derived from various criminal enterprises. Although BDA publiclydenied those accusations, the US Treasury’sFinancial Crimes Enforcement Network(FinCEN) nevertheless issued a proposed ruleon 20 September 2005 that, if adopted, wouldeffectively lock BDA out of the US financialsystem by prohibiting US financial institutionsfrom opening, maintaining or managing anycorrespondent or payable-through account in the US on behalf of BDA.


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Caught in the wheel of Patriot Act politicsIf the US believes a bank is tainted, that’s enough to have the bank boycotted by the international banking community. That’s what has happened in the BDA-Macau affair when it was allegedly linked to North Korean funds, even though there’s never been any proof of laundering, writes Zoë Lester.

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The fallout from the designationBy the time the proposed rule was finalised in March 2007, BDA had already suffered significant financial and reputational damage. The effect of the notice which was posted in September 2005 was both tangible andimmediate for BDA.

Within 48 hours of the US Treasury’sdeclaration that BDA was of “primary moneylaundering concern” depositors withdrewmore than $US37.5 million ($45.6 million)from the bank; about 10 per cent of the bank’stotal deposits. This run on the bank continueduntil it had lost about one-third of its deposits,and was forced to take out a $US62.5 millionloan from the Macau government.

The hardship caused to BDA by thisextensive run on its deposits, was merelycompounded when the Macau authoritiesfroze about 50 accounts, reportedly containing$US25 million, held by the bank’s NorthKorean customers. However, it should benoted that the significant financial damageincurred by the bank was not simply a productof the run on the bank’s deposits. It was alsoattributable to the freezing of about 50 NorthKorean accounts, reportedly containing about$US25 million, by the Macau authorities.

All for one and one for all: unilateral sanctionsWhilst the rules made under Section 311 of thePatriot Act only apply to US banks and bankslocated in the US, foreign financial institutionshave been increasingly incorporating suchrules into their own due diligence processessince 11 September 2001.

In effect this has given the US an unparal-leled ability to enact municipal orders that ultimately and informally translate into multi-jurisdictional sanctions. This is particularly evident with regards to the international standingattributed to the proposed rule concerning BDA.

Although the rule did not initially compelUS financial institutions to cut all ties to BDA,many US and foreign organisations treated itas a stringent sanction and, fearing their ownexclusion from the US banking system,began placing de facto restrictions upon their dealings with it. Further, several foreign finan-cial intelligence units (FIUs) also willingly attributed legal status to the US Treasury’s proposed rulemaking regarding BDA.

Shortly after the release of the proposedrule in September 2005, some authorities(including the Hong Kong Monetary Authority)requested that institutions operating in theirjurisdiction formally report any relationships

they had with the bank. The combined actionsof these FIUs and foreign financial institutionsalmost elevated the proposed rule to the statusof a binding, international law.

Patriot Act politicsWhilst Section 311 of the Patriot Act may havebeen initially devised to act as an economicshield, the circumstances surrounding BDA’sdesignation seemingly demonstrate its abilityto also be wielded by the US as a politicalsword. The bank’s designation as a “primarymoney laundering concern” occurred in themidst of delicate, nuclear-related multilateralnegotiations (the six-party talks involving the US) relating to North Korea’s nuclearweapons development program.

Rowan Bosworth-Davies, a UK-basedanti-money laundering expert who has longstudied the issue of US extraterritoriality inmoney laundering cases, says these talks wouldultimately provide “a lovely opportunity for[the US to engage in] some hard sabre-rattling”designed to bring some heavy pressure to bear on North Korea and give the country “adiplomatic poke in the gut to let [it] know justhow far the US could reach, if it wanted to”.

BDA’s designation and the consequentfreezing of its profitable North Koreanaccounts, dealt a severe and immediate blowto North Korea’s moribund economy at a timewhen economic strength would have given the traditionally intransigent country greaterbargaining power during the six-party talks.

It tied up $US25 million in North Koreanfunds, cut off one of the impoverished country’s few remaining lifelines to the international financial system, and placed so much financial pressure upon North Koreathat it refused to participate in the negotiationsuntil its frozen funds were returned to it. For this to occur however, the US needed

to make a final determination about whetherto finalise the proposed rule placing constraints upon dealings with BDA.

In order to facilitate the return of NorthKorea’s $US25 million and thus progress thenuclear-related negotiations, the US Treasuryfinalised the proposed rule against BDA on 14 March 2007 and has subsequently takensteps to have the funds returned to NorthKorea. This is particularly ironic given that thefinal rule formally confirmed the bank’s statusas a “primary money laundering concern” andthe very funds the US has tried to release hadpreviously declared to be tainted due to theiralleged connection with illicit activities.

Once the final rule was made, the decisionto unfreeze the North Korean funds tied up atBDA technically rested with the Macau authori-ties. However, given the eagerness of the US to continue the six-party talks and the potentialramifications attached to refusing to releasesuch funds, Macau authorities have recentlydecided to unfreeze the suspect accounts.

The Macau government has been holdingthe funds since they were unfrozen earlier thisyear, but it will be interesting to now seewhether – and how – such funds are returnedto North Korea. The country has recentlydemanded that its funds be returned via aninter-bank transfer through the US to a bank in a third country, most likely Russia. The US,seemingly desperate to get the nuclear talksback on track, has been making efforts to facil-itate this exchange by approached WachoviaBank to aid in the transfer of these funds.

However, it remains unclear exactlywhich authority the US government will tryto use to actually permit the flow of allegedlydirty North Korean funds flowing through anAmerican institution such as Wachovia Bank.Whilst the Office of Foreign Assets Controlcan issue special licences that allow the


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Macau: The authorities froze 50 accounts totaling $US25m

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NEWS FEATURE

evasion of its sanctions, no such mechanismexists in relation to the sidestepping of Section311 designations. However, given the reportedwillingness of the US to do almost anything to resolve the issue of these frozen funds, it isprobable that its government will find a way.

A trial with a jury — but no evidenceGiven the relative timing of BDA’s designa-tion, the finalisation of the proposed rule andthe six-party talks, some concern has arisenregarding the validity of the US Treasury’sclaims that BDA posed a money launderingthreat to US financial institutions. A number ofjournalists have suggested that the allegationsmade against the bank were simply created orexaggerated in order to give the US greaterbargaining power during the nuclear negotia-tions with North Korea. Such speculation can perhaps be attributed to the lack of hardevidence verifying the US Treasury’s claims.

Embarrassingly for the US government,two investigations carried out into BDA’sactivities have found no proof that the banklaundered money for North Korean entities.

The first of these investigations was carried out by international accounting firmErnst & Young shortly after the public releaseof the bank’s designation and accompanyingproposed rule.

While Ernst & Young found that BDAhad poor internal record keeping, outdatedinformation technology systems, and a lack of written AML policies, it could identify no evidence which showed that the bank hadengaged in the activities alleged by the USTreasury. A similar investigation carried outby the Macau government also failed to findanything validating the US Treasury’s claims.

Given the inability of two separate investigations to find any evidence of BDA’salleged money laundering activities, there has seemingly been a growing push for theUS Treasury to publicly release evidence justifying the bank’s designation.

However, it is under absolutely no legalobligation to release any evidence pertainingto an institution’s designation as a “primarymoney laundering concern” under Section311. Even if the Treasury now released suchevidence and this evidence was held by theinternational community to be fabricated or flawed, it is uncertain what would beaccomplished. While BDA may perhaps salvage some of its shredded credibility, thedamage has already been done – and most ofit occurred more than 18 months ago.

As perception is reality in today’s commercial environment, so the lack of evi-dence provided by the US Treasury at the timeof BDA’s designation in September 2005, wasinconsequential. The mere suggestion that the bank had laundered money for its NorthKorean clients was enough to blacken its corporate reputation and empty its accounts.

Lessons to be learntBDA provides a perfect example of the financial and reputational damage that can occur once an institution is alleged tohave laundered the proceeds of criminalenterprises. Even before the proposed rulewas finalised in March 2007, the Treasury’sclaims that BDA had engaged in money laundering activities were sufficient to cause an extensive run on the bank. This isdespite the fact that no factual evidence tying the institution to such activities has ever been released.

Although BDA was a well-known andwell-respected financial institution, its commercial standing and reputation have effectively been obliterated by accusations,innuendos and the administrative procedureenshrined in Section 311 of the Patriot Act.However, it is unclear what the bank couldhave done to avert, or better control, the fallout arising from its commercial dealingswith North Korean clients. It apparently tooksteps to limit its money laundering risk byretaining HSBC New York to screen all thelarge cash deposits it received from its North Korean customers.

While BDA may have further minimisedits exposure by implementing a more robustAML program, implementing stronger AMLcontrols may have made little difference to the detriment suffered by the bank, given thepolitical context within which its designationoccurred. If, as a number of commentatorsbelieve, the bank was simply a puppet in alarger political game of cat-and-mouse beingplayed by the US and North Korea, no AMLprogram could have spared it from a Section311 designation.

ConclusionBDA’s designation as a “primary money laundering concern” under the Patriot Actdemonstrates how business, politics, state-sponsored crime and extraterritorial AML/CTFlegislation may intersect on the global stage.Arguably, the bank was convicted of moneylaundering by a US-run “kangaroo court”which justified its verdict retrospectively“through a drip feed of innuendo and specula-tion that would be considered scandalous anddefamatory were it directed against a biggerbank in a more powerful jurisdiction”.1

Whilst the Treasury has held that themeasures taken against BDA were institutedto protect the US financial system, the political context surrounding their impositionindicates otherwise. The timing of the six-party talks and the finalisation of the proposed rule strongly suggest that thesemeasures were directly related to NorthKorea’s nuclear program, and the desire of the US to have it decommissioned.

The circumstances surrounding BDA’sdownfall has also led some commentators toconclude that the bank was simply a victim ofthe US strategy to fight the ‘War on Terror’and nuclear proliferation via organisations’balance sheets and account ledgers.

If that is true, then the bank may havebeen the subject of a Section 311 designationeven if it had employed more robust transaction screening technology and a more comprehensive AML program. Whileinstitutions can implement AML controls tomanage their risk, the BDA affair highlightsthat such controls will generally be powerlessto manage or mitigate strong external forces,such as foreign political agendas, internationalrelations, or the willingness of the globalcommunity to believe in something for which they have no real proof. ■■

Zoë Lester is a senior executive analyst atKordaMentha Forensic, and is currently writing a PHD thesis at Sydney University on money laundering/terrorism financing riskand risk-based approaches to AML. Contact: [email protected]


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AS PERCEPTION IS REALITY IN TODAY’S COMMERCIAL ENVIRONMENT, THE LACK OF EVIDENCE PROVIDED BY THE US TREASURY ... WAS

INCONSEQUENTIAL. THE MERE SUGGESTION THAT THE BANK HAD LAUNDERED MONEY FOR ITS NORTH KOREAN CLIENTS WAS ENOUGH

TO BLACKEN ITS CORPORATE REPUTATION AND EMPTY ITS ACCOUNTS.

1 Anonymous, No Sign of Thaw for Delta Asia, Macau Business, 1 January 2006. Accessed at http://www.Macaubusiness.com/index.php?id=367 on 3 January 2007.


FEATURE

A S SOMEONE who has spent all his adult life dealing with the phenomenon of white collar crime,

I never cease to be amazed at just how little willingness is shown by the financialservices industry to encourage strategically-positioned practitioners to gain higher academic qualifications in this area.

Financial crime costs the world’s finan-cial sector billions of dollars annually, moneywhich is deducted directly from the bottomline of the balance sheet. The problem is soacute that international regulators now requireall regulated institutions to adopt a risk-based


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No substitute for criminal intelligenceWhat happened to the real professional white collar crook-busters? Is there adesire to know what makes the criminals tick? Rowan Bosworth-Davies explainswhy the basics of criminal understanding are being progressively forgotten.

“…One of the reasons we fail to understand business crime is because we put crime into a categorythat is separate from normal business. Much crime does not fit into a separate category.

It is primarily a business activity . . .”

William Chambliss, sociologist

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approach towards the prevention and interdiction of financial crime as part of their compliance strategies.

The responsibility for ensuring the successful implementation of this policy liesat senior board level. However when boardmembers are questioned as to their knowledgeof the causes, the practices, and the phenome-nology of the problem they are required toprevent, the level of practical expertise is aresounding zero.

Work down the food-chain within the corporation and try to find anyone who hasany understanding of the way in which thecriminal mind works, and you will find analmost complete void. Occasionally you maybe lucky and discover a former detective orseasoned former police officer on staff insome dark corner of a financial institution,but they rarely hold a senior position and havevery limited input into policy decisions.

But why stop with the regulated sector?Why not examine the regulatory agencies?How many experienced former detectives with the knowledge or expertise to be able tounderstand the criminal mentality are holdingdown senior policy-informing roles within the regulatory agencies?

Who in their various financial crimeteams has really worked in the arena of financial crime and who has had any experience of really dealing with professionalfinancial criminals? This is not to belittle anyof the efforts made by these good people, it ismerely asking the question: “What experienceor knowledge befits them for this role?”

I recall meeting a woman at a conferencenot so long ago who asked me a series ofquestions on my presentation about criminaltrends and criminological tendencies. It turnedout that she had been seconded to one of the UK financial regulators and was responsible for determining a financial crimepolicy initiative. When asked what experienceshe possessed, the answer was that she had absolutely none at all, but she did have a PhD in finance.

Her employer, a bank, had no work forher at that time so she had been sent on a sabbatical to the regulatory agency to fill inthe time until the market conditions improved.The regulator obviously had no room for her in any of the financial policy divisions,so they tucked her away in the financial crimeoffice and told her to find something to do.She was reduced to doing the rounds of theconferences, trying to dredge up enough background information to enable her to make a contribution to the internal debate for which she had been employed.

It is instances like this that make thewider white collar crime debate risible,and illustrate just how little anyone in government or industry really cares aboutdomain knowledge and expertise in the fieldof white collar crime.

Perhaps this goes some way to explainboth why the volume of financial crime is rising exponentially, and why governmentsaround the world are repeatedly demonstratingtheir powerlessness to deal with the phenomenon.

Recent UK government initiatives have either just dwindled away to nothing; or have been forced to close down because of their incredible inefficiency, like the AssetRecovery Agency (ARA).

When she was appointed to the role ofhead of the ARA, Jane Earl was interviewedby reporter Nick Kochan for The Observer.

He wrote: “…a new crime fighter is gearing up to take on the heaviest of Britain’sorganised criminals gangs. But the new sheriffin town is not a gun-toting cop or even a hot-shot lawyer.

“Jane Earl is a cool administrator fromthe Home Counties whose experience in lawenforcement goes no further than managing

committees in local councils – she has justquit as chief executive of Wokingham Council– and keeping order in the parent-teacher association of her children’s school.

“Now this sober lady from Reading willbe fighting the most vicious type of organisedcriminal, including Colombian, Irish andIslamic terrorists and the Russian mafia.

“But she is determined not to change her life as efficient mother and school governor. Despite security concerns expressedby her staff, she continues to cycle to her local station . . .”

Jane Earl came to her role with no qualifi-cations, domain knowledge or life experience ofdealing with the very people whom she wasgoing to be expected to confront on a dailybasis. It’s not her fault that she was appointedby some apparatchik who almost inevitablyshared her complete lack of criminologicalexperience, but who believed her when shedeclared her “passion” for finding new ways ofdealing with crime. This was “Blair-speak” withknobs on, and people who talk the language ofNew Labour get the jobs under New Labour.

Some of the applicants for the position of head of the ARA were very experiencedpractitioners who had already proved theirmettle in asset recovery operations againstmajor criminals and Irish terrorists, and whowould have brought significant experience tothe role. However, skills, knowledge, expertiseand a few hardened battle scars – none ofthese count for anything as long as you can talk the talk of the new regime of major-generals appointed by Lord ProtectorBlair to rule the UK’s public policies.

Jane Earl herself expresses disappoint-ment at the failure of her agency to deliverresults. She talks in a surprised voice of the tactics adopted by her targets and theirlawyers in using the civil court procedure to fight back against ARA actions.

She appears puzzled by the fact that those with the most to lose financially did notappear to have any qualm about arguing every point to obfuscate the issue, to deflectthe court’s direction and to make the ARAprove its case to the ultimate degree.

What did she expect? It was not her faultthat she had no experience of dealing withprofessional law breakers, who should beexpected to fight back with every last resource

against having their assets confiscated. The fault should lie with the bureaucrat who failed to understand the problem andwho, instead, unblinkingly followed TonyBlair’s line that taking the profits of crimefrom criminals would teach them not to do it again, and would prove to be a majordisincentive to crime.

Let me let you into a little secret knownonly to former detectives: all you do whenyou take assets from a thief is to guaranteeanother series of thefts.

My concern is that there is no agenda,either within government or within the industry it seeks to regulate, to provide any level of real academic expertise on the nature of the criminal mentality and criminogenic behaviour.

Why should this be? Is it that those whoadminister these environments have merelyoverlooked the importance of these subjects?Or is it more sinister, reflecting a deeply submerged realisation, as the quotation at the


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LET ME LET YOU INTO A LITTLE SECRET KNOWN ONLY TO FORMER DETECTIVES: ALL YOU DO WHEN YOU TAKE ASSETS FROM A THIEF IS TO GUARANTEE ANOTHER SERIES OF THEFTS.


FEATURE

start of this article points out, that many of the practices which are commonplace in thefinancial sector and openly encouraged bythose with money to make, are little more thanthinly-disguised criminal activities, and thatthose who engage in them are indeed nothingmore than financial criminals in nice suits?

Could it be that those with the most tolose from a truly transparent evaluation of the business customs and practices prevalentin the market, deliberately discourage anyserious study of white collar crime, for fearthat this knowledge might become antitheticalto the continued ambitions of those with themost to gain from an unfettered continuationof the status-quo.

Now before someone from a trainingcompany suffers a sudden rush of blood to thehead, let me stress that I am not talking abouttraining. There are more training companiesout there than you can shake a stick at – some are very good, some are not quite so good, and some are downright useless.

Training is vital for a well-regulatedindustry, and is legally mandatory but, withrespect, a training course is designed forentirely different purposes.

The purpose of training is to ensure staffunderstand their roles and responsibilitieswithin the regulated sector, and to give them a very basic but workmanlike knowledge ofthe jobs they have to perform.

It simply does not and can not provide the level of academic insight, nor demand the depth of intellectual rigour that a higherdegree requires, and it is this level of academic excellence of which I speak.Training merely looks at the status quo andprovides responses in suitable circumstances.

Education looks at the status quo and asks“Why?”, “How?”, “What if?”, “How does thisinform me?”, “What if this were to happenagain in other circumstances?” and “Howwould I react if I saw this conduct but in very different circumstances?” Training givespeople a series of possible answers. Educationteaches people to ask further questions.

All too often I have addressed theseissues with practitioners, only to be told, andwith apologies to Pink Floyd, “We don’t needno education”. Academic study, so it seems,is not required, merely a minimal level oftraining to satisfy the regulators.

Universities have serious difficulty inattracting students to study for higher degrees in white collar criminology or financial crime management.

I approached a major business school and suggested that as part of their MBA,they should include a series of lectures on

financial criminology. The proposal wasturned down out of hand.

What lies behind the adamant refusal toadmit the need for more academic knowledge,research and study in financial crime? Thestudy of white collar criminology teaches us asignificant amount about the human conditionand helps interpretation of the attitudes whichare so often expressed by practitioners.

Conflict and Criminality, by Americancriminologist, Austin Turk, provides an illuminating insight into the work attitudes offinancial services compliance officers. It alsoexplains a great deal about their discomfitureabout being perceived as performing a “polic-ing” function within a financial environment.

The fact that the original research dealtwith township kids in South Africa and theirrelationships with the white Afrikaners policewho patrolled their squatter camps is irrelevant.The parallels with the financial sector regulators are exact and very informing.

White collar criminology also assists inour understanding of why City people behavein the way they do and why they so often gettheir institutions into difficulty. Nick Leesonwas an accident waiting to happen. Had one of his managers read and understoodChristopher Stanley’s research on the legitimatisation of deviancy and the anomie of affluence, they would have identified the risk Leeson posed.

In an article Mavericks at the Casino:Legal and Ethical Indeterminacy in theFinancial Markets, Stanley identified thedevelopment of a new phenomenon within the previously ordered environment of theCity of London. He observed:

“…The New City reflected the ideological aspirations of a system of political administrations which disrupted the post-warconsensus of relations between polity and economy.

“It also reflected the casino or disorganisation of capitalism: an internationalfinancial system in which gamblers in thecasino have got out of hand … thus settlednorms of conduct were open to disruption.”

I suspect that deep at the root of the problem of the institutionalised refusal toaccept that criminology can help understandthe white collar fraud and financial crime phenomenon, lie attitudes and preconceptionsabout class.

It is almost as if recognising that thewrong-doing of the middle and educatedclasses can be identified in exactly the same way as the behaviour of more easilyrecognisable members of the criminal under-class is something which those who engage in this kind of conduct do not wish to do. The professional and chattering classes do not want to be confronted by the fact that theirbehaviour is no different from the class theyprofess to despise, and with whom they wouldnever, ever admit any degree of similarity.

Senior management needs to completelyreconsider its attitudes towards employingthose with the education necessary to understand white collar crime.

Young ambitious graduates, looking tofurther their careers in business, finance andmanagement, think nothing of signing up for expensive MBA courses. The MBA hasalmost become the sine qua non for entry to the highest levels of management.

If business provides such recognition ofthe MBA, then why does it refuse to recognisethe benefits offered by the provision of thehighest level of crime preventative and lossforestalling expertise offered by a master’sdegree in white collar criminology?

Such degrees do exist, but unless they are recognised for being the sources ofinspired business awareness and best practicefacilitators, which they are, the courses will be closed down and the costs of fraud and losses to business will continue to follow an exponential growth curve. ■■

Rowan Bosworth-Davies is a UK-based consultant on anti-money laundering and counter-terrorism financing. Contact: [email protected]


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THERE ARE MORE TRAININGCOMPANIES OUT THERE THAN YOU CAN SHAKE ASTICK AT – SOME ARE VERYGOOD, SOME ARE NOT QUITESO GOOD, AND SOME ARE DOWNRIGHT USELESS.

Image © istockphoto


RISK TRIGGERS


T HE NEW AML/CTF legislation has a number of issues that arewidely known; the majority expected to be clarified through theAML/CTF rules and guidelines. However, one issue that has not

had a great deal of attention to date is the likely treatment of listedinvestments, in particular, listed managed funds.

While the legislation captures managed funds in general, it doesnot differentiate between retail and wholesale or listed and unlistedmanaged funds. Each of these funds has key characteristics that differ-entiate them. For instance, investor type and investment size are keydifferences between retail and wholesale funds. For listed and unlistedfunds, the key differences include investor type, investment methodsand more importantly, the degree of contact and control over investors.

The dilemma for listed managed fundsUnlisted funds have direct control over whether to accept or rejectapplications to invest through the take up of units and the redemptionsof those units. By comparison, listed managed funds have no controlover who invests and how much is invested, as transactions take place on-market via an exchange.

This means that one of the main ways in which potential money laundering and terrorist financing activity are identified – know your client(“KYC”) and customer identification and verification – is not available tolisted funds. It also means that the KYC obligations set out in the legisla-tion and rules cannot be undertaken by listed funds. The best a listed fundcan do is to monitor the share registry for PEPs, but this is unlikely to pickup the majority of laundering and terrorist financing activity.

A listed fund is able to undertake transaction monitoring to identifypotential laundering and terrorist financing activity, but given the natureof trading in stocks of listed funds, it is likely that a high number offalse positives will be generated, and only a low number of likely laundering or terrorist financing events will be identified. Trading ofshares in listed funds is determined by a number of factors, includingperceived value, market price relative to similar investments, economicfactors, market movements and overall market investor sentiment. This means that the investor base and transactions in the listed fund’sunits will be more volatile, which makes transaction tracking and pattern matching more difficult, although not impossible.

Unintended consequences for exchange-traded marketsThe problems of investor identification and meaningful transactionmonitoring are practical difficulties facing listed funds, and these difficulties that may well be exacerbated with the passing of time. As the financial sector tightens its monitoring and preventative measuresfor potential money laundering and terrorist financing, these activitieswill be displaced1 to other financial activities and markets where detection is less likely and transactions are more easily undertaken.

In other words, as banks and fund managers implement theirAML/CTF programs and risk assessment processes, the risk of detectionof laundering and terrorist financing activity through these institutionswill increase. This will prompt launderers and financiers to look forother ways in which to move money by exploiting perceived weaknessesin sections of the financial market where oversight is less rigorous.

This will inevitably shift more of their attention to exchange-tradedmarkets. Exchange-traded markets provides a degree of anonymity for the customer, high volume of transactions, and the ability to movelarge amounts of money quickly and globally with minimal traceability– just the factors launders and financiers look for.

This prompts the question: how should exchange-traded markets be monitored for laundering and terrorist financing activity in thefuture, and who is responsible for doing this monitoring and oversight –the exchange, the companies themselves by monitoring their share registers and stock holder activity, or Austrac?

When Austrac is considering how it should treat listed managedfunds, these future implications and practical difficulties will need to be taken into account. While it may be sufficient to exclude listed vehicles from designated services at the moment, consideration shouldbe given to just how listed managed funds and other exchange-tradedproducts can now be used to launder or finance terrorist activities andhow they may be used for this purpose in the future.

It will be critically important to focus on any unintended conse-quences of tightening AML/CTF measures within the OTC contextwhile not applying similar measures to exchange-traded markets. ■■

Through thesmoke and hazeListed managed funds, as well as various other exchange-tradedinstruments, appear to be exempt from any real oversight likelyto weed out corrupt investors, says Michelle Hannan By Michelle Hannan

FINANCIAL CRIME CONSULTANT

1 Displacement is a criminological term which relates to how criminal activity moves elsewhere when a particular area is targeted, rather than being reduced or prevented from occurring overall in the future.Drugs provide a good example, where police may target drug dealing in a particular area, but all that happens is that the dealers move to the suburb next door and continue business from there.

AML-JUNJUL-40risktrig.qxd 19/6/07 3:09 PM Page 40

In-depth knowledge working for you

AML/CTF legislation

© 2007 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMGInternational, a Swiss cooperative. June 2007. VIC11135FAS.

The Government’s new anti-money laundering and counter-terrorism financing (AML/CTF) legislation is upon us.At KPMG, we can help you assess clearly and pragmaticallythe impacts for your business.

Our team of AML/CTF professionals offer deep knowledgeand practical experience in helping financial servicesorganisations, just like yours.

We can help you assess the money laundering and terroristfinancing risks faced by your business – and moreimportantly how to address them.

Our team can assist in the design and implementation of newpolicies and processes, systems selection and integrationadvice and staff training.

We have worked with leading financial institutions, globally andin Australia, in areas such as money laundering and terroristfinancing risk reviews and developing AML/CTF processes,policies, training and technology. It all translates into morefocused, up-to-date and relevant advice for your business.

When it comes to understanding the new AML/CTFlegislation, contact the professionals in the know – KPMG Forensic.

For more information please contact Gary Gill on +61 2 9335 7312 or [email protected]

kpmg.com.au

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