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The Basics of the International AML Regulatory Framework MAARTEN VAN DIJCK www.moneylaundering.be 2 / TT THE BASICS OF AML REGULATION WHAT IS MONEY LAUNDERING 3 definition types: 1. Functional definitions e.g. `Money laundering is the conceiling of the illicit origin of resources with the intention to replace it with a seemingly licit source ` (Groenhuijsen & Van der Landen, 1995) 2. Generic definitions e.g. `any action in order to prevent, evade or counteract on (legit and valid) claims by third parties concerning (parts of) these assets and which enable unrestricted use of the assets or the economic fruits thereof` (MvD, 2006) [ … and what is required for this, depends on the situation. Money is does not actually need to be laundered, sometimes hiding the stains is enough. ] 3 / TT THE BASICS OF AML REGULATION WHAT IS MONEY LAUNDERING 3. Legal Definitions E.g. UN 1988 / Council of Europe 1990/2005 Definition: 1 Each Party shall adopt such legislative and other measures as may be necessary to establish as offences under its domestic law, when committed intentionally: a the conversion or transfer of property, knowing that such property is proceeds, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in the commission of the predicate offence to evade the legal consequences of his actions; b the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of, property, knowing that such property is proceeds; and, subject to its constitutional principles and the basic concepts of its legal system; c the acquisition, possession or use of property, knowing, at the time of receipt, that such property was proceeds; d participation in, association or conspiracy to commit, attempts to commit and aiding, abetting, facilitating and counselling the commission of any of the offences established in accordance with this article. 4 / TT THE BASICS OF AML REGULATION 3 PHASES OF MONEY LAUNDERING z Placement z Layering z Integration In the ‘early days’ of AML regulation the emphasis was on the placement phase. Nowadays layering has more and more come to the center of attention 5 / TT THE BASICS OF AML REGULATION THE MOTIVES AND OBJECTIVES OF AML z z z To hit (organised) criminals where it hurts the most: in their wallet To contribute to the prevention of (organised) crime by reduction of the incentives To protect the integrity of the financial system by preventing use and abuse by criminals and launderers. 6 / TT THE BASICS OF AML REGULATION THE FIVE STRANDS OF AML REGULATION z z z z z Criminalisation of money laundering (in a broad sense) as a discrete offence category Putting into effect provisions concerning the confiscation or forfeiture of criminal proceeds Putting into effect KYC and CDD regulations for service providers `Privatisation` of money laundering regulations by the creation of a reporting system, obliging private sector service providers to report on unusual or suspicious transactions Enhancing international cooperation and mutual assistance by way treaties and FIU’s 7 / TT THE BASICS OF AML REGULATION 1. THE CRIMINALISATION OF MONEY LAUNDERING What to include: only drug trafficking related offences ‘serious’ crimes All crimes What to include: only activities providing a seemingly legitimate source All activities covering up the criminal origin (does this include the hiding of the money itself?) 8 / TT THE BASICS OF AML REGULATION 2. CUSTOMER IDENTIFICATION (KYC, CDD) KYC = Know Your Customer CDD = Customer Due Dilligence The end of ‘number accounts’ Transactions / durable bank-client relations Beneficiary owner (economic owner, opposed to legal owner) PEP’s Politicallt Exposed Persons 9 / TT THE BASICS OF AML REGULATION 3. FIU’s AND THE EGMONT GROUP FIU = Financial Intelligne Unit 4 types: Police model reporting to law enforcement bodies Judicial model, reporting to public prosecutor Joint police/judicial medel Administrative/intermediairy model Egmont Group: direct cooperation between FIU`s 10 / TT THE BASICS OF AML REGULATION 4. TRANSACTION MONITORING Mandatory reporting requirements for private sector institutions + record keeping Banks Unusual and/or suspicious transactions Reporting to the FIU Financial institutions Credit institutions Insurance Companies Investment firms Exchange offices Objective criteria Subjective criteria Objectifying of subjective criteria Casino`s Sellers of valuable items Accountants Notaries Attorney`s and lawyers 11 / TT THE BASICS OF AML REGULATION 5. SUPERVISING / MONITORING Implementation of the various AML regulatory provisions and policies is orchestrated, countries are evaluated z z worldwide, by the FATF, the UN(ODC) and the Wolfsberg Group Pan-Europan by the Council of Europe, the EC and EP, the Wolfsberg Group Monitoring and other supervising at different levels z `black` lists z Mutual evaluation z Supervising bodies AML regulatory keyword: COMPLIANCE 12 / TT THE BASICS OF AML REGULATION THE BEGINNING: SOME U.S. DEVELOPMENTS 1970 Bank Secrecy Act for the detection and prevention of ML Requires financial Institutions: to keep records of cash purchases of negotiable instruments to file reports of cash transactions exceeding USD 10.000. to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. 1984 Comprehensive Forfeiture Act 1986 Money Laundering Control Act made money laundering a Federal crime 13 / TT THE BASICS OF AML REGULATION THE BEGINNING: THE `OFFICIAL` STORY - 1980s stepping up the fight against drug trafficking - Growing awareness of the key role of `criminal finances` - 1988 UN Single Convention Against Illicit Drug Trafficking - Article 3.1.a: criminalising financing of … - Article 3.1.b: concept of money laundering - Article 3.1.c: criminalising ‘money laundering’ (without using the acual word – for practical reasons) - Article 5: confiscation of the proceeds derived from… 14 / TT THE BASICS OF AML REGULATION THE BEGINNING: THE `UNOFFICAL` STORY The U.S. government to an increasing extent had a problem with the (off-shore) financial centers, which were used by companies to evade US taxes. These off-shore centers were attractive to both criminals and tax evaders because of the low level of taxes levied, the high level of bank secrecy and the possibilities to open anonymous accounts. Like oil to the Gulf States bank secrecy and low tax level to many mini-jurisdictions was a `natural ` commodity (and the main sources of income) 15 / TT THE BASICS OF AML REGULATION THE BEGINNING: THE BIRTH OF THE FATF 1989, Paris, Summit Meeting G7 Establishment of the Financial Action Task Force on Money Laundering (FATF / GAFI) Purpose: `… to consider additional preventive efforts in this field, including the adaptation of the legal and regulatory system so as to enhance multilateral judicial assistance. Initially 16 members, now 33: G7: CA, FR, DE, IT, JP, UK, US other: AS, AT, BE, LU, NL, SP, SE, CH other: Commission of the European Communities 16 / TT THE BASICS OF AML REGULATION FATF: FORTY RECOMMENDATIONS Includes provisions about: z Confiscation forfeiture z CDD z Record keeping z Compliance (by countries) provisions z Measures in case of non-compliance z Measures against NCCTs z Supervision, by countries of their (private sector) institutions z The competent authorities, their powers and resources z Transparancy of legal persons and beneficiairy owners z International cooperaton and mutual assistance z Extradition z International information disclosure and echange NCCTs Bahamas Cayman Islands Cook Islands Dominica Egypt Granada Guatemala Hungary Indonesia Israel Lebanon Lichtenstein Marshall Islands Myanmar Nauru Nigeria Niue Panama Philippines Russia St. Kitts & Nevis St. Vincent & the Grenadines Ukraine 23 2000 2001 2002 2003 2004 + - - - - -/- + - - - - -/- + + + + + -/- + + + - - -/- - + + + - -/- - - + - - -/- - + + + - -/- - + - - - -/- - + + + + -/- + + - - - -/- + + - - - -/- + - - - - -/- + + + - - -/- - + + + + +/+ + + + + + +/- - + + + + +/- - - - - - -/- + - - - - -/- + + + + + -/- + + + - - -/- + + - - - -/- + + + - - -/- - - + + - -/- 15 17 15 9 6 3/1 2005/2006 18 / TT THE BASICS OF AML REGULATION FATF: MONEY LAUNDERING TYPOLOGIES FATF Typology reports: drafted from the very start, issued since 1995 Typologies serves two purposes: z z To describe (observed and potential) money laundering methods and operation schemes To provide `profiles` indicative to potential money laundering activities. 19 / TT THE BASICS OF AML REGULATION FATF: WIDENING ITS SCOPE 2001 October 29: FATF ISSUES 8 SPECIAL RECOMMENDATIONS Since this date AML’s fast growing brother was born: ATF Anti-Terrorism Financing recommendations 1 special recommendation was added (about cash-couriers) Though being a different type of crime, TF often makes use of the same methods as ML, hence the same regulatory provisions can be applied to safeguard the (integrity of) the financial system. 20 / TT THE BASICS OF AML REGULATION UN(ODC): GPML and AMLID 1. UN Conventions 2. Global programme on Money Laundering 3. Model legislation 4. AML International Database 5. The Ten Fundamental Laws of Money Laundering 21 / TT THE BASICS OF AML REGULATION WOLFSBERG GROUP Wolfsberg Principles: initiative of twelve globally operating private financial institutions (banks) 2000 The Wolfsberg Anti Money Laundering Principles for Private Banking (revised in 2003) 2002 the Wolfsberg Anti-Money Laundering Principles for Correspondent Banking and a Statement on Monitoring, Screening and Searching additional diligence: e.g. PEPs (Politically Exposed Persons) No transactions with so called 'Shell Banks' 22 / TT THE BASICS OF AML REGULATION EU: THREE MONEY LAUNDERING DIRECTIVES 1991 - 1st directive (91/308/EEC) Embrasing the FATF Forty Recommendations Focus on drug-trafficking related money laundering 2001 – 2nd directive (2001/97/EC) Extension to all crime types Extension of the number of service providers obliged to report transactions Enhancement of the CDD requirements 2005 – 3rd directive (2005/60/EC) Inclusion of Terrorist Financing Shift to subjective criteria 23 / TT THE BASICS OF AML REGULATION COUNCIL OF EUROPE Legal instruments: Treaties, Resolutions, Recommendations Most important one: Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime (and on the Financing of Terrorism) (ETS 141, 1990 / CETS 198, 2005) Deals mainly with international cooperation and mutual assistance Contains a definition on ML MS can opt out for specific crime categories, e.g. in the Netherlands the provisions are not applicable in case of tax related offences 24 / TT THE BASICS OF AML REGULATION CONCLUSION A tremendous worldwide effort has resulted in a dense network of AML regulatory provisions. On the formal level the net is closing, the meshes in it are being repaired To what extent does this really affect organised crime and its profitability? To what extent does this really have contributed to the integrity of the financial system? What is actually known about money laundering? 25 / TT THE BASICS OF AML REGULATION ML TYPOLOGIES z 3 stages z Turnover manipulation z Loan Back z Invoice manipulation z Underground Banking / Alternative Remittance z Legal Entities in Tax Havens and Offshore Financial Centers