anti-money - AFMA · Why a Thai takeaway restaurant with strange banking transactions may not have only food on the menu. COVER STORY: ... but it’s really time to roll up the sleeves,”

The game’s upCasino compliance becomes a priority

VIRTUAL COMMUNITIES Policing people in cyberspace

RED FLAGSFinding signs of illicit activity

PATH TO ENLIGHTENMENT What the regulator expects

anti-money launderingCOMBATING MONEY LAUNDERING IN FINANCIAL SERVICES

DECEMBER 2006 / JANUARY 2007

EDITOR’S LETTER

ANTI-MONEY LAUNDERING 1DECEMBER 2006 / JANUARY 2007

T HOSE WHO CAN REMEMBER farenough back to the advent of the CashTransactions Reporting Act of 1988

might remember the tiny booklet which accompa-nied the law. It was about 12 pages long and within it was a list of 14 entities considered to beunder threat from money laundering. In those daysterrorism financing would have been laughed at by Australian institutions. Indeed most of thedetail of the bill concerned itself with big institu-tions accepting large amounts of cash, and theissues of the day were drugs money laundering,washing the proceeds of fraud and possibly an eye on tax evasion.

Step forward to the end of 2006 and we now see the mother of all bills presented to theAustralian parliament, running at around 360pages – which does not include the rules. Thereare now over 50 designated entities which willhave to comply.

It must seem amazing to AML practitionersthat a bill described as risk-based and ‘regulationlite’ by some could run so long and – as manyhave complained – have the potential to cut sodeep. And that’s not just related to the civil finesattached if you are deemed culpable, but the general cost of complying.

While there are grace periods built into the compliance timelines, eventually companies could face civil penalties of up to $11m per incident if they fail to run appropriate checks on their customers’ identities, an amount whichsome experts believe is well in line with some ofthe bigger fines levied overseas – and at leastcomparable with breaches of compliance in otherareas of financial services legislation in Australia.

That means such things as an entity not identifying a customer properly, not having theright anti-money laundering program in place and not undertaking ongoing customer due diligence when required could spell the $11m fine.

Sydney University’s Dr David Chaikin, one ofAustralia’s top experts on financial crime who hasjust been appointed as a lead researcher for theFATF/Asia-Pacific Group, says companies need to remember that the redrafted bill actually makesrisk management a legal requirement.

In other words, any entity that engages infinancial transactions without having a program tomitigate risk “is committing a criminal offence”.

When did it all become so serious?Somewhere along the line it stopped being a lawenforcement issue and became part of the nationalsecurity agenda. “It’s not merely the rhetoric of public servants and politicians who talk in one breath about nuclear proliferation, moneylaundering and terrorist financing,” says Chaikin.“The expectations of government on financialinstitutions are far greater than ever envisaged.”

What we’re hoping to do in this magazine is to explain how to get from the situation whichprevailed in 1988 to the situation which prevailsnow, in all its complexity and seriousness.

Suddenly Australia’s financial community isbeing asked to be incredibly mature about things,come out of 18 years of a prescriptive reportingregime and adopt a risk-based approach to anti-money laundering compliance.

As an editor, it’s my duty to try to project theobvious difficulties in change management for all those entities which have to comply. It was a task started brilliantly by Will Sanders, who nowmoves on to other publishing projects. Sandershas corralled together in one magazine some ofAustralia’s foremost experts on AML to give compliance personnel an edge in this importantyet difficult sector of Australian financial law,an edge we intend to maintain. ■■

Nobody said it would be easy

By Adam CourtenayEDITOR

Upcoming AFMA anti-money laundering events

■ AFMA/AUSTRAC lunchtime briefing series: Risk-based AML/CTF program, risk-based identification and verification12 February 2007, Sydney

■ AFMA/AUSTRAC lunchtime briefing series: Section 43B AML/CTF compliance reports27 February 2007, Sydney

■ AFMA/AUSTRAC lunchtime briefing series: Detecting and managing terrorist financing risk9 March 2007, Sydney

■ AFMA/AUSTRAC lunchtime briefing series: AUSTRAC’s audit and feedback process20 March 2007, Sydney

■ AFMA’s annual anti-money laundering and counter-terrorist financing congress5th June 2007, Sydney

For more information or to register contact Diana Zdrilic on 02 9776 7923

CONTENTS


REGULARS

5 LONDON CALLING BY CHRIS HAMBLIN

The new bills on British statute books are designed tokeep criminals on a leash forever.

6 IN EUROPINION BY JULIE BEESLEY

The tale of a money launderer who came clean and isnow a leading money laundering expert.

8 STATE OF THE NATIONBY BRETT WOLF

Identity theft and identity fraud are two of the easiestways US-based terrorists could fund their activities.

10 INSIDE STORYBY KENNETH RIJOCK

There are some sure-fire checks compliance officerscan do to ensure they’re not missing some of thecommon laundering methods.

12 OPINION BY JOY GEARY

Why aren’t vendors providing pertinent and up-to-dateinformation on trends and events for specific sectors?

30 REGIONAL REVIEW: JAPANBY CARL FREDRIKSEN AND GARY GILL

Japan’s attempts to build modern and practical AML legislation was always going to be hard, given the influence and prevalence of traditional criminality.

33 INSIGHTBY JOE GARBUTT

A few tried and tested methods to plug the compliance gaps and escape the regulator’s wrath.

36 OUTSIDE THE SYSTEMBY MICHELLE HANNAN

Task Force Gordian is the latest example proving just how useful cash remittance systems can be to the launderers.

42 CASE NOTESBY MICHELLE HANNAN

Why a Thai takeaway restaurant with strange bankingtransactions may not have only food on the menu.

COVER STORY:THE GAME’S UPBY NICK KOCHAN

Online casinos are the spanner in the regulatory works and regulators and policeinvestigators will have their work cut out to keep them clean.

RED FLAGS TO A BULLBY EMILY BRAYSHAW AND JULIE BEESLEY

What are the red flags that practitioners needto look out for? Setting up a list has its pros and cons, but mostly pros.

VIRTUALLY UNRECOGNISABLEBY CHARIS PALMER

How do you keep tabs on virtual wonderlands,communities where virtual money takes precedence over real dollars? Here is a challenge of cyberspatial proportions.

AML UPDATEBlake Dawson Waldron’s legal eagles on the big changes to the AML/CTF bill as it awaitsroyal assent.

FEATURES

16

20

25

28

NEWS

A USTRALIA’S financial servicesindustry has reacted favourably tothe Anti-Money Laundering and

Counter-Terrorism Financial Bill 2006,which passed through the Senate and becamelaw on December 7.

The chief reaction of AML practitionershas been one of relief that more than 14 months after the Financial Action Task Force labelled the country’s anti-money laundering laws as sub-standard, the government has produced highly-acclaimedrisk-based legislation that the industry can work with.

PricewaterhouseCoopers forensic partner Steve Ingram said companies wereoften reluctant to admit such benefits, giventhe substantial cost of compliance and

system upgrades, but the time for crime-proofing had come.

“Typically, people will roll their eyes,but it’s really time to roll up the sleeves,”Ingram said.

KPMG partner Gary Gill said businessesought to see the legislation as an opportunityto instill protective measures against broadcriminal threats.

“Industry can either regard this as another compliance burden – and it is going tocost money, obviously – or they can see thepotential opportunities,” Gill said.

All the same, the bill did not have a totally smooth passage through parliament anda Senate Committee report on the legislationgave voice to some ongoing concerns withinthe industry.

The report recommended longer imple-mentation periods, as well as some temperingof the powers of the Australian TransactionReports and Analysis Centre, whose powerswill be significantly stronger now that the legislation has passed.

While the government has proposed a 24-month implementation period for the new regime, there were concerns about some obligations commencing from the date of royal assent (January 1) and the committee recommended an extra three-monthimplementation period.

This was effectively quashed by the government but there is an understanding that subsequent directions might allow three months to be tacked on to the end ofeach staggered time period. ■■

A N AUSTRALIAN police taskforce has uncovered andsplit up a major South-East

Asian crime syndicate suspected oflaundering more than $93 million. The taskforce says it has disrupted theactivities of over six separate syndicatesas part of an operation it has been running since March 2005. Over a period of three weeks in October,57 people were arrested and chargedwith a range of money laundering anddrug-related offences. Task ForceGordian follows an earlier Australian

Crime Commission investigation intoAsian crime syndicates in 2003, whichrevealed the involvement of account-ants, financial advisers, money remit-ters, electronic transfers and humancouriers in laundering the proceeds ofcrime. Vietnam Airlines was implicatedin the current crackdown, after theMelbourne Magistrates Court was toldone of the airline’s pilots had beenarrested for his role in the allegedscheme. The court heard the airline had carried more than $10 million inlaundered funds since July 2005. ■■

DECEMBER 2006 / JANUARY 2007 ANTI-MONEY LAUNDERING4

Parliament passes AML/CTF Bill

Task Force Gordian breaksup Asian crime syndicates

Chaikin, Sharmanappointed to Asia-Pacific Group

S YDNEY UNIVERSITY’S Dr David Chaikinand Dr Jason Sharman have been appointed aslead researchers for the Financial Action

Task Force/APG Anti Corruption Project Group. Dr Chaikin, a senior lecturer in business law – and DrSharman, a senior lecturer in government and interna-tional relations – will jointly produce a research paperon the links between corruption and money laundering.The APG is a regional anti-money laundering bodywhich is part of the global network which governmentsand international agencies established in 1997 in orderto combat money laundering and the financing of terrorism. Contact: [email protected] ■■

EDITORIAL

EDITOR: Adam [email protected]

CONTRIBUTING EDITOR: Emily Brayshaw

SUB-EDITORS: Siobhan Brahe, Leah Ingram

CONTRIBUTORS: Charis Palmer, Nick Kochan, John Kavanagh

PRODUCTION AND DESIGN

CREATIVE DIRECTOR: Jo Fuller

PRODUCTION MANAGER: Fiona McLennan

PHOTOGRAPHY: Craig Newell, See4

PUBLISHINGREGIONAL SALES MANAGER: Diana Zdrilic – Tel: + 61 2 9776 [email protected]

ANTI-MONEY LAUNDERING MAGAZINE IS PUBLISHED SIX TIMES A YEAR BY

AFMA Services – Level 3, 95 Pitt Street, Sydney NSW 2000.GO Box 3655, Sydney NSW 2001 Tel: + 61 2 9776 4411 Fax: + 61 2 9776 4488

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Disclaimer: This publication is designed to provide accurate and authoritative information in regard to the subjects covered. It is distributed with the understandingthat the AFMA Services is not engaged in rendering legal, accounting or other professional service. If legal advice or other expert assistance is required, the services of competent professional persons should be sought.

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NEWS


The end of justiceQueen Elizabeth II's speech at the recentopening of the British parliament heralded thedeath-knell of the Englishman's age-old auto-matic right to a trial by jury. Although thisdoes not as yet extend to money launderingcases, it surely will. Her Majesty made it plainthat her government was keen to keep crimi-nalising things and stripping defendants oftheir ancient rights at the same breakneckpace as ever. A good half-dozen bills areexpected to affect various facets of the crimeof money laundering in the coming year.

The upcoming Fraud Bill is the law thatseeks to abolish trial by jury in complex fraudcases. We mention it here because this is theway of the future for criminal cases in the UKin general, money laundering cases included,no matter what the kingdom's Europeanhuman rights laws say. Fraud, especially identity fraud and carousel fraud, is inciden-tally one of the major predicate crimes formoney laundering in the UK.

Once a criminal...Under the government's new plans, once criminals large or small become enmeshed in the penal system they never truly leave itagain. This bill seeks to extend the use ofelectronic monitoring in respect of offenderson bail, among them money launderers.

Evidence suggests that the electronicmonitoring system is so flawed that parliamentmay as well not bother with this legislation,but in framing legislation British ministers find“Dr Evil” clauses irresistible. When the ideawas first mooted some policemen spoke of their desire to manage the criminal's expectations “throughout his life”.

Money launderers could soon find them-selves being tried by people who have neverbeen lawyers. Part two of this bill proposes torevise the minimum eligibility requirementsfor appointment to judicial office. The billalso strives to reform compulsory purchaseorders and the law of civil debt recovery.

...always a criminalThis milestone in UK legislation contains provision for a new “prevention order” toimpose conditions on the movements andtransactions of those suspected of moneylaundering and other organised crimes. Even today, criminals can only be found to be criminal by courts, being sentenced toimprisonment and later released when theyhave paid their debts to society.

This bill, however, strives to make a misery of the lives of people whom the policeallege to be criminals. The day is dawningwhen, as the man in Bladerunner says:“You're either police or you're little people.”

The bill proposes to introduce a newoffence of assisting a criminal act in the beliefthat an offence may be committed. In otherwords, it plans to stop private citizens fromhelping financial criminals even if they do not know the nature of the intended crime. It is to be hoped that parliament will break the habit of 20 years and be careful about the parts of this bill that refer to bank staffunwittingly smoothing the path of fraudstersand money launderers.

To be truly draconian this part of the billwould have to use the phrase “believes” ratherthan simply “reasonably believes”. It also contains provisions for more powers to helpstate functionaries impound criminal assets.

No more technicalitiesThe Queen told parliamentarians that a LegalServices Bill was shortly to appear, aiming toallow commercial companies to own lawfirms for the first time. The effect on launder-ing trials could be to make them harder toprosecute, as their interests will be defendedby far more wealth than before.

In July, home secretary John Reidannounced his intention to stop offenders who were “plainly guilty” from avoiding pun-ishment “on technicalities”. The Anglo Saxonworld's most effective answer to this problemso far has been the lynch mob but this is aboutto change, according to Her Majesty when shereferred to the new Police and Justice Bill that was already before Parliament.

Legal delugeThis is one piece of legislation that HerMajesty did not have to announce, because ithas already become law. Originally designedas an “enabling Act” that Adolf Hitler wouldhave been proud of, it has been whittled awayby opposition forces. It is now only an Actthat allows ministers to make up their ownlaws without consulting parliament in certaincircumstances. Ministers cannot use it tomake up new crimes – eg new adjuncts tomoney laundering offences – but they can create crimes whose punishments are less than two years in prison. “Thinking about tipping-off” could be one for the future.

The present government has deluged the UK with new criminal offences since its inception in 1997. Some commentatorsbelieve that it has created a new crime for every day that it has been in power. The trend is accelerating. ■■

Crimes for all seasons There are new bills on the British statute books, mostly designed to prosecute the launderers without a jury and keeping them on a very firm leash once they have been sentenced.

LONDON CALLING

By Chris HamblinEDITOR-IN-CHIEF

COMPLINET

NEWS


WHEN PARENTS TALK abouttheir children becoming high-flying lawyers, they’ll be hoping

they don’t follow the example set byHumberto Aguilar.

By the time he was in his mid-20s the law graduate was running his own criminaldefence practice and representing some of the world’s biggest drug smuggling organisa-tions. Not only that, he devised a system oflaundering millions of dollars and was paid a king's ransom for doing so.

His career in criminality lasted nearly a decade before the US government finallycaught up with him in 1990, indicting himwith conspiracy to defraud the InternalRevenue Service, importing drugs and money laundering. After fleeing to Europe he was arrested in Spain and sentenced to 15 years in jail.

Since being released seven years ago, hehas reinvented himself and now dedicates histime to travelling the world giving lectures onhow to fight financial crime.

Born in Havana, he spent his formativeyears in Cuba before his parents sent him andhis sister to live with relatives in New York.He graduated in law from the University ofFlorida in 1978 and from the outset, he wanted to be a criminal defence lawyer.

As the practice grew so did his clientbase which began to include drug smugglerswho wanted to move their “dirty money”in and out of the country. “They would askme if I could do this and being in my 20s and stupid I said yes, but it got way out ofhand and I ended up doing it on a full-timebasis,” he says.

“I started getting money out of the country and shipped it to different countries

and moved it around different banking systems in Colombia and Venezuela beforemoving it to Europe and then back into the United States. Once you had it in thebanking system you had it beat, because you could move it around as stock or business ventures.”

Most of his clients were Cubans who shipped cocaine into the US where the Colombian drug barons had organiseddistribution networks. With money pouring in and the authorities yet to unravel his operations, he seemed untouchable.

It was the birth of his two children in1987 that acted as a wake-up call. “Thatchanged my whole outlook,” he says.

But when you’re one of the mastermindsbehind a money-laundering scam involvingmillions of dollars and your clients includefeared international drug smugglers, youdon’t simply hand your notice in.

“Their thinking would have been nobodywho works for millions of dollars suddenlywalks out. They thought I must be workingfor the government and they got nervous andone group tried to kill me three times.”

With the help of another client he says a truce was called and he moved to New Yorkwhere he set up a new law practice with the intention of going straight. But by nowthe US authorities were hot on his trail andthe net closed after one of his former clientswas arrested and, facing a life sentence,spilled the beans.

Because he had masterminded the moneylaundering side of operations, Aguilarbelieves they wanted to use him to smash the drug-smuggling rings.

“They said they would give me fullimmunity and I wouldn’t go to prison.

All I had to do was co-operate and give thema complete debriefing.

They had the papers right in front of mebut I thought these people [his clients] mademe money and I wouldn’t rat on them.”

He was indicted by the US federal government in 1990 but after posting a personal bond of $US3m, fled to Spain wherehe was arrested by Interpol. After spendingtime in prison in Madrid, he was extradited tothe US where he pleaded guilty to the chargesbrought against him. He was released onparole in December 1999, having servednearly eight years in jail.

“When I came out I wanted some way of redeeming myself, there was no doubtwhat I did was immoral and wrong. But whenyou’re 25 you don't realise this. You have allthis money and you can buy anything. Youdon’t think what you’re doing is wrong.”

After leaving prison he got a job as a houseman in a hotel where he quicklyworked his way up to become general manager. While working there he met an anti-money laundering lecturer who invitedhim to give a free talk to students whichproved the inspiration to forge a new careeras a respected lecturer.

Sophisticated money laundering opera-tions, he says, are still going on today but tend to be more prevalent in South andCentral America than in Europe. But this is a world he has left behind as he now spendshis time advising the same people he onceused to try and outwit. ■■

Source: Yorkshire Post Today, UK

Through the wash

In recent headlines from Europe, Julie Beesley explores the tale of a money launderer who came clean and is now a leading money laundering expert.

IN EUROPINION

By Julie BeesleyASSOCIATE DIRECTOR,

KPMG FORENSIC

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Our dedicated anti-money laundering team can adviseyou on all aspects of the AML legislation and equip yourbusiness to deal with its impact.

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NEWS


ACCORDING TO THE bipartisan9/11 commission, the attacks onSeptember 11 2001, which claimed

nearly 3000 lives, cost Al Qaeda between$US400,000 and $US500,000. And traditionalbomb attacks are much cheaper. The UKHome Office has estimated that the bombattacks in London on July 7 2005, whichkilled 52 people, cost a home-grown terroristcell “less than £8000 ($US15,000).”

With that in mind, consider that FadiKourani, 37, a Lebanese national who enteredthe United States illegally through Mexico, tookcash advances on fraudulently obtained creditcards and spent $US12,000 on hair implants.He pleaded guilty recently to aggravated identity theft and conspiracy to commit credit card fraud.

Federal Bureau of Investigation agents who raided Kourani’s residence found dozensof credit cards and identity profiles, a thief’s arsenal made more troubling by the fact that he is no criminal mastermind. By all accounts,Kourani is an average man with a juvenile senseof humour – he used stolen social security numbers to obtain credit cards under made-upnames such as “Shag Zamour” and “GeorgeArmani”. Thankfully, Kourani is not a terrorist,because had he been, authorities might becounting bodies rather than trying to figure out how to forfeit a set of top-dollar hair plugs.

In total, the identity-theft ring thatKourani “worked” with bilked more than$1.7m from credit card companies, usingnothing more than filched social securitynumbers. Such data is readily available toanyone willing to pick through garbage to gather carelessly discarded financial documents from dumpsters.

The perfect crimeIf terror cells are in fact operating – or sleep-ing – in the US, and it's a good bet they are,

the threat posed by identity theft and creditcard fraud can hardly be overstated. Identitythieves can quickly gain access to thousands ofdollars by misrepresenting themselves tolenders and they can safely assume they willhave months or even years before overbur-dened investigators catch up with them.

Many identity thieves probably believethere’s a good chance they will never becaught, and they are probably right. With mil-lions of victims being targeted each year in theUS, the odds of any particular offender beingcaught and prosecuted are minute. In a veryreal sense, it's the perfect crime for terrorists.

Threat of longer prison sentences no threat to terroristsCounterterrorism officials have long recognisedthe potential threat of identity theft coupledwith credit card fraud, but have not been shout-ing from the rooftops, probably because theyrealize there is no quick, easy fix. In fact, inJuly 2002, career Federal Bureau ofInvestigation special agent Dennis Lormelissued a warning to a Senate terrorism subcom-mittee; the ominous statement was not widelypublicised. Lormel said that the “threat posedby identity theft and the potential nexus to terrorism” was “alarming”. He was voicing hissupport for new laws to stiffen penalties forthose convicted of identity theft.

In July 2004, President Bush signed intolaw the Identity Theft Penalty EnhancementAct, which created the crime “aggravated iden-tity theft”. Those convicted of this crime face amandatory two-year prison sentence, unless itcan be proven that their actions were tied to terrorist activities, in which case a minimumfive-year sentence applies. While this lawmight have a slight chance of deterring run-of-the-mill criminals, it will not rattle terrorists.

Terrorists who are committing identity theftand credit fraud to finance bomb attacks in an

effort to murder as many people as possible arehardly going to back down out of fear of crimi-nal charges. The only way to minimise the ter-ror finance threat is to make successful identitytheft and credit fraud more difficult to pull off.

Fed and FTC getting warmerIn July, the Federal Reserve and the FederalTrade Commission issued a “Notice ofProposed Rulemaking” that would forcefinancial institutions and creditors to developand implement risk-based identity theft prevention programs.

The NPRM was issued under the authorityof sections 114 and 315 of the Fair and AccurateCredit Transactions Act 2003. The goal is toensure that financial institutions enact policiesand procedures for “detecting, preventing andmitigating identity theft in connection with bothaccount openings and existing accounts”. Theproposed rules are designed to be consistentwith section 326 of the US Patriot Act.

They would also require credit and debitcard issuers to develop procedures to assess thevalidity of any request for a change of addressfollowed by a request for a replacement card.Additionally, users of consumer reports wouldhave to develop “reasonable policies and proce-dures” to apply when they receive a notice ofaddress discrepancy from a reporting agency.

Threat will remainEven if these proposed rules are finalised,identity theft will continue to pose a serioussecurity threat. It’s up to financial institutionsto develop meaningful best practices that willplug the holes in the credit application andidentity verification process. Such measuresno doubt would be considered a cost centre bysome; those people must be reminded of theprice an institution would pay if it were foundto have unwittingly financed a terrorist cellthat had taken American lives. ■■

Identity theft poses serious terrorist-financing threatAs US officials pat themselves on the backs for having used the Patriot Act to “disrupt terrorist-financing networks” Al Qaeda cells may well be laughing — all the way to the bank. As a recent federal plea bargaindemonstrates, terrorists could easily fund an operation within the US by relying solely on identity theft and credit card fraud.

STATE OF THE NATION

By Brett WolfMIAMI CORRESPONDENT,

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INSIDE STORY

C OMPLIANCE OFFICERS andmoney laundering reporting officersshould be familiar with the actual

investigative techniques employed by lawenforcement, as they may wish to utilise them to determine whether an existing bankclient is running a laundering operationthrough their institution.

Here are the most commonly encounteredglobal schemes, together with the proven andeffective methods of investigation of each category that the law enforcement professionuses to uncover the truth:• Transfer pricing – The target opens animport-export business, often in a high-techmanufacturing or distribution industry wherethe market prices of goods are not commonlyknown to bankers and non-industry business-men, or are too technical to be generallyunderstood by laymen.

For example: A shipment of computerchips worth 50c will be sold for $50,000 each,thereby allowing money to be sent into thecountry without generating suspicion orenquiries. Conversely, items worth $400,000each will be sold for 10c, which thus movesitems of high value overseas without the riskof transfering funds.

After manipulating the import or exportprices of goods, he wire transfers fundsinbound or outbound purportedly as sales orpurchases for goods and services. In truth andin fact, the goods are worth very much moreor less than the sale/purchase price.

Meanwhile, bank staff with no expertiseor knowledge of the field, have no idea this constitutes a money laundering scheme.

Investigative technique – check prices of goods against the average of competitors’prices. If the prices are more than 5 per cent different than the normal market prices, inves-tigate for possible transfer pricing. For details,see the work of Professors John Zdanowicz and Simon Pak, of Florida InternationalUniversity, who conducted groundbreakingresearch into the subject or contact me direct

for internet references to their work at:[email protected].• Commission salesman method – The launderer enlists the assistance of a co-operat-ing company with a large inventory used forwholesale or retail sales. Subjects becomesalesmen on straight commission, run up largeamounts of contrived fictitious sales, forwhich they are paid big commissions.

What is happening is the company inflatesthe volume of existing clients, or creates phan-tom sales customers in other countries. Illicitfunds are delivered in cash to the company bythe money launderer, a fee is deducted, and thebalance returned by cheque as commission.The target pays taxes on their “commission”income, and may later leave criminal activityaltogether and purchase a legitimate business.

Investigative technique – you will probablynot find records of the purchase of sufficientinventory to cover the reported high volume ofsales. Also, the listed “customers” do not exist,or did not actually purchase the goods in theamount and volume reported. • Cash-intensive businesses – Owners inflatethe lawful cash receipts with their own criminalprofits from their real activity, often addingbetween 10 per cent and 80 per cent to the pro-ceeds. They then sell the business for a majorprofit, because the sales price is based upon thelarge recent sales history. After purchase, thebuyer sees sales drop off dramatically.

Investigative method – Again, comparewholesale vendors’ purchase receipts forgoods with sales reported by subject. Theywill not match. • Lottery Winner Scheme – Subjects withcriminal proceeds purchase large winning lot-tery tickets at a premium from the actual ticketholders, then report themselves as the winners.They often opt to take the smaller lump sumpayments, instead of the long-term payout.

Investigative technique – Has the “winner”ever won a lottery or possibly sweepstakes inother states? The odds of winning big twice aremicroscopic. Also, does the winner have a law-

ful occupation that requires him to be present atwork every day? Many narcotics traffickers pur-chasing winning tickets cannot show a lawfuloccupation. The telephone records of “winner”may provide a link to the real winner, whoserecords of a financial windfall will confirm hewas the original holder of the ticket. The origi-nal winner, when confronted with money laun-dering charges, should implicate the subject.• Loan method – The subject borrows moneyfrom a commercial bank overseas, secured byhis own illicit cash collateral held by the bankand purchases or builds a business or realproperty. That business is later sold by thesubject for a substantial profit. The overseasbank, never having received payment on theloan, liquidates the collateral, but the subjecthas effectively laundered his funds in the tax havens of the world.

Investigative technique – Make enquiriesat the overseas banks as to the collateral post-ed to obtain the loan, especially the source offunds and where it originated.

We trust that this trade craft assists you in identifying and preventing money laundering activity. ■■

Kenneth Rijock is believed to be the only formerbanking attorney-turned career money laundererwho actively consults with law enforcement and the financial community. He has more than 25 years’ experience in the field of moneylaundering, as a practicing ‘laundryman’, financial institution compliance consultant, and trainer/lecturer to law enforcement and theintelligence services of both the United Statesand Canada. After serving as a banking lawyerin an international law firm, he spent thedecade of the 1980s as a money launderer andadvisor to narcotics trafficking organisationsoperating in North and South America. Whilstserving a federal prison sentence for racketeeringand money laundering, he assisted with the first joint Swiss-American money launderinginvestigation of bankers and lawyers, whichresulted in a major seizure of the proceeds ofcrime. Kenneth writes a daily AML column. Formore information visit www.world-check.com


By Kenneth RijockFINANCIAL CRIME CONSULTANT

WORLD-CHECK

Tools of the tradeIn this month’s Inside Story, Kenneth Rijock details some ofthe more common laundry methods, and the quick checkscompliance officers can do to satisfy any growing suspicions

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I T IS A PUZZLE to this writer why one of the best opportunitiesavailable in the anti-money laundering and counter-terroristfinancing industry is not being addressed by the existing vendors

who already have offerings in this area. There are vendors providingtransaction monitoring systems, scanning tools, list providers, knowyour customer (KYC) utility tools and KYC research services.

But across the globe no vendor is comprehensively addressing whatis a huge gap in the information needs of financial institutions subjectto the latest round of AML/CTF laws. The gap in question is providingcurrent information about the way money is laundered, packaged in a way that is useful to financial institutions and others who are regulated under AML/CTF laws.

The absence of any worthwhile service provision in this space has caused this writer to question whether such information is neededat all in the management of AML/CTF since people have an uncannyability to spot opportunity and exploit it wherever it occurs. The conclusion reached, supported by discussion with people working on AML/CTF implementations, is that the opportunity has not yet been seen probably because the movement to risk-based AML/CTFframeworks is new and leading edge.

Under previous AML/CTF regimes such as in the UnitedKingdom, the focus until recent times was more towards prescriptiverequirements designed by law makers and regulators to reduce money laundering and terrorist financing. Entities regulated by theserequirements were not expected to be responsible for assessing theirrisks and managing those risks. Instead they were required to have inplace a series of actions. Such entities could rely on the informationmade available by international bodies including the Financial ActionTask Force (FATF) and disregard its shortcomings.

A risk-based AML/CTF regime operates off a wholly differentbase, because it is not a matter of putting in place actions decided bythe regulator or by the law makers. The old checklist or cookie cutterapproach won't suffice under this new risk-based regime. A reportingentity under the new AML/CTF laws about to be passed by theAustralian parliament has to assess the risk of its own products andservices being used for money laundering and terrorist financing pur-poses. It is the criminal data needed to perform that risk assessmentthat gives rise to this as yet unrecognised commercial opportunity.

Using a simplistic example, if you want to protect your home fromall forms of criminal attack your first step is to determine what isknown about how homes are attacked in your area. Your second step

is to know how these types of criminal attack (graffiti, arson, burglary,window breaking etc) manifest themselves. For example, graffiti generally appears on surfaces that are on the street boundary, not onexternal walls inside perimeter fences. Your third step is to identifythe generic points of vulnerability relevant to each type of criminalattack, for example, roller doors on garages, perimeter fences or perimeter walls in the case of graffiti. Your fourth step is to then introduce protective measures to reduce the vulnerability you haveidentified existing in your home. This might involve spotlights andsirens activated by motion detectors on all perimeter walls. It mightinvolve protective coatings on perimeter walls that allow graffiti to be removed easily without the need for re-painting. If you are on the20th floor of an apartment block you don't even worry about graffitibecause you have no points of vulnerability on the 20th floor.

The processing of assessing ML and TF risk is no different. There is no point in starting at the third step, determining what are the points of vulnerability in your products, distribution channels and what might indicate your customer has the potential to laundermoney, unless you have completed the first step (what sort of moneylaundering take place which affects your industry segment) and thesecond step (how has this money laundering manifested itself in theuse of specific financial products and services).

The dilemma facing Australian financial institutions (and dare I suggest it, institutions overseas confronted with newly introducedrisk based AML/CTF regimes) is that there is very little high qualitymaterial available about the first and second steps. Which probablyexplains why so many people have started at the third step.

Agreed, there are some information sources 1 but they are usuallypresented in the format of a case study and they suffer from at leastone of the following major disadvantages:• Incomplete;• Out of date (anything that is issued on an annual basis lacks utility

against a fast moving and fluid crime such as money laundering);• Simplistic; • Often lack information about how a particular financial product

was used; or• Not relevant to the jurisdiction or business segment in which the

financial institution operates.

Vendors are missingthe main eventsA risk-based regime doesn’t lay down the laws, it expects youto find what risks are specific to your industry and adapt yourprogram accordingly. But each industry still needs accessible,pertinent and up-to-date data on events and trends to helpthem – so why aren’t vendors providing it?

By Joy M GearyAML/CTF ADVISER

OPINION


1 FATF-GAFI typologies and Egmont Case Studies are two examples.

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OPINION


There are a range of vendors and consultants intent on succeedingin the AML/CTF arena, yet this opportunity does not appear to be on their radar.

Vendors of transaction monitoring systems promote the fact that theyprovide rules for their systems. Presumably these rules are based on current information possessed by such vendors about the way criminalsare known to use financial products and services to launder moneybecause that is part of their sales message. This information usuallycomes to such vendors from their customers in the form of requests forrules or functionality. So we can conclude that vendors of transactionmonitoring systems apparently have some current and quite detailedinformation, they just need to develop a new distribution mechanism topackage it, plus expand their information capture mechanisms.

List providers have established customer bases that already see them as providers of information. List providers have recognisedbusiness processes in gathering and handling information and in distributing it via the internet. They have the infrastructure, just need to expand to capture the required information and capitalise on the opportunity.

Consulting firms promote their expertise, particularly in the area of assessing a reporting entity's risk of money laundering and terrorist financing. To provide these services they must have access tothis type of information, otherwise how robust is their methodology?So it is fair to conclude that consulting firms should have current and quite detailed information, they just need to develop a new distribution mechanism to package it, plus expand their informationcapture mechanisms.

The optimal service that financial institutions need to manage theirAML/CTF responsibilities is one that provides information organisedas follows:• Money laundering events organised by industry segment. Current

information in relation to the current money laundering trendswithin funds management, organised by country, is available.

• Money laundering events organised by product type. Current information in relation to the current use of credit cardsfor money laundering, organised by country, is available.

• Detected money laundering events.• Money laundering trends by jurisdiction.• Money laundering events by crime type and criminal type.

Money for jam, one might say. One approach might be for national governments to mandate

that the numerous financial intelligence units must make available the necessary information that they possess, suitably cleansed, toapproved information providers. Approved information providers then design their delivery mechanism and organisation of informationto suit their market targets.

The more FIUs serviced by one provider, the broader the informa-tion that becomes available for subscribers, many of whom operate in international markets and require a perspective broader than theirown country.

Financial institutions in Australia should be pressing theAustralian government on this issue, requiring provisions in the newlegislation which oblige the Australian Transaction Reports and

Analysis Centre (Austrac) to gather information and make it availablein a timely and effective medium. Undoubtedly, this will lead Austracto the conclusion that this is a service ripe for outsourcing, providingthe necessary controls are in place within Austrac to cleanse data priorto its provision to the information provider(s). The imposition of thisobligation on Austrac might be the catalyst for vendors seizing thisopportunity, to the benefit of all.

Provision is also needed in the new laws to allow financial institutions to pass information between themselves regarding eventsof money laundering that they experience, in order to protect the overall integrity of the financial system. Competitive interests will act as natural controls ensuring that financial institutions will only passon information in limited circumstances.

Realistically, neither the Australian government nor Austrac can seriously expect Australian financial institutions to discharge their obligations under the proposed new laws in an effective mannerunless they are given enough information to complete the first and second steps of their money laundering and terrorist financing riskassessment and they are permitted to communicate directly with each other. This challenge is being reflected in conferences and discussions throughout Australia on the difficulties of the risk-basedapproach under the new laws. ■■

Joy M Geary is an AML & CTF adviser based in Australia. Joy can be contacted on: [email protected]

IF YOU ARE ON THE 20TH FLOOR OF AN APARTMENT BLOCK YOU DON'T EVEN WORRY

ABOUT GRAFFITI BECAUSE YOU HAVE NO POINTS OF VULNERABILITY ON THE 20TH FLOOR.

SPONSORED FEATURE


T HE FINANCIAL SERVICES organi-sations that will struggle mostwith the introduction of anti-

money laundering programs are thosethat may otherwise be least affected by it – the life companies and invest-ment managers in the wealth management sector.

British banking technology consult-ant Steve Lock says that when AML regu-lations were introduced in the UK in themid-1990s wealth managers adopted theattitude that because they were low risk,AML was not really an issue for them.

Lock is the AML, fraud and compli-ance domain expert at the software andconsulting group Fortent and was inSydney in November talking to local lifecompanies and investment managers.

He says: “When you look at a product like superannuation it is fair tosay there is a low risk that it will beexploited by a money launderer. Anyproduct that is a long term investment,with long-term benefits and very activeinvolvement from external agencies such as the tax office and the industryregulator is not going to be attractive to a criminal.

“Wealth management companiesfigure that if 80 or 90 per cent of theirbusiness is in superannuation they arenot going to be troubled by moneylaunderers. But there are products, suchas immediate annuities and at call non-superannuation funds, where you canput money in and take it out soon after.That is where the risk lies.

“Compared to banks, where there isa history of risk management being

taken seriously by senior management,wealth managers have no history andno culture of this type of risk manage-ment. They have no existing controls.They actually need to work harder toget it right.”

Banks have been covered by theFinancial Transaction Reports Act andhad reasonably robust identification pro-cedures in place. Compliance with theproposed KYC requirements is likely torequire minimal changes to policies andprocedures under FTRA. Wealth manage-ment firms face the prospect of revisingand updating existing procedures toensure they are robust enough to meetthe new legislative requirements.

This point was underlined in thesubmission made by the Investment &Financial Services Association, whichrepresents superannuation fund man-agers and investment managers, to theSenate Legal and Constitutional AffairsCommittee earlier this year, arguing foran extended amnesty period whenAML/CTF becomes law. IFSA’s submissionwas based on the argument that thekind of risk assessment that underpinsan anti-money laundering program isnew to fund managers.

IFSA Deputy CEO, JohnO'Shaughnessy says: “Where IFSA willstand firm is the need for a three-yeartransition period to the new regime. We have previously stressed that not all industry sectors have been subject to AML obligations in the past andtherefore more time will be needed to implement the necessary AML/CTFsystems and controls.”

The wealth management industry in Australia has a history of arguingthat its products should be left outsidethe scope of legislation such as theFinancial Transaction Reports Act. In2001 the Australian government solici-tor was asked to rule on the question of whether cash management trusts(CMTs) were covered by FTRA.

The initial response of the AGS wasthat CMTs were covered but after takingsubmissions from the industry it changedits mind. It distinguished between a“basic” CMT, which had no cash depositor withdrawal facilities, and moresophisticated version of the productsthat were more like bank accounts.

Lock says one of the big problems inthe UK was that a standoff developedbetween the wealth management companies and the intermediaries who sell their products. The wealthmanagers argued that the financialplanners should be responsible for running the AML programs becausethey dealt with the customers.

One of the core elements of an AML program is to “know your customer”, which involves having information systems in place that allowa financial institutions to identify thetype of customer that is likely to pose a risk and the type of transaction thatneeds to be investigated.

“That thinking caused a lot of problems,” says Lock. “There are plentyof situations where the investor canhave a direct relationship with thesuper fund or investment manager aswell as with the planner. If the wealthmanager and the intermediary are notcooperating a money launderer can play them off very easily.

“In the worst cases we saw in theUK we saw financial planners turning ablind eye to what they should haverecognised as high-risk situations

Change of culture required

Wealth managers have long believed that money laundererswill never target them, but true or not, they will have to comply. The change management exercise will be tough.

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SPONSORED FEATURE


because they assumed the fund manager would look after it. In othercases there were life companies engaging in a bit of corporate bullying,demanding that the planners take onthe bulk of the workload. The reality isthat both parties need to have “knowyour customer” programs.”

IFSA’s Senate submission called for greater clarity in the rules as theyaffected the different parties involved in a financial relationship when aninvestment product was sold through anintermediary. It cites inconsistencies inthe way the AML/CTF Bill aligns the cus-tomer identification obligations betweenthe intermediary and the fund manager.For example, the fund manager is specifically exempted from the identifi-cation obligations where the designatedservice arranged is the acceptance ofpayments to superannuation, annuitiesor retirement savings accounts.

The submission says: “However,there are other circumstances in whichthe second reporting entity will, or may, not be required to identify thecustomer. These include pre-commence-ment customers of the second reportingentity, low-risk designated servicesexempt under the rules, where otherexemptions allowed by Austrac apply,customers that have already been iden-tified by the second reporting entity.

“In principle, it should not be necessary for the licensee to identifythe customer in these cases. On currentdrafting, however, the identificationrequirement nevertheless applies. IFSAaccepts that there are difficulties withfully aligning these obligations becausethe first reporting entity will not alwaysknow whether a customer ID procedureis required to be conducted by the second reporting entity.

“A pragmatic approach could beadopted such that the first reportingentity is required to conduct a customerID procedure in all circumstances exceptwhere the second designated service isexempted, or partially exempted, fromcustomer ID obligations (as is the casewith superannuation).”

Clearly, the issues of shared respon-sibility between wealth managementcompanies and their intermediaries are not fully resolved.

IFSA is also concerned about theway the AML/CTF Bill treats the rela-tionship between wealth managementcompanies and stockbrokers.

IFSA believes that the bill has theunintended consequence of requiringfund managers who sell securities on an exchange to identify the person to whom they sell such securities. Thiswill capture many thousands of dailytransactions and seriously limit thespeed with which such transactions take place. It also inappropriately coversthe sale of securities through a stockexchange to a party that the fund manager never meets due to the way inwhich the stockmarket operates – withbrokers acting as the agents of shareowners and with the ASX operating thenecessary clearing systems.

“IFSA is seeking confirmation thatthese wholesale investment activities,

and any other activities of this nature,are not intended to be captured underthe bill and that therefore appropriateexemptions will be provided.”

Lock says he has found a greaterwillingness on the part of local wealthmanagers to engage with AML. “It isnot the same as the UK situation butone worrying trend is that the risk man-agement people don’t seem to havemuch access to senior management.”

He also expects Australian wealthmanagement companies to be a targetfor Asian criminals. “Successful criminalshave investment portfolios just like anyone else who makes a lot of money,and in this region the best investmentmanagers are based here. You will needsome pretty sharp-eyed gatekeepers.”

He says one useful managementapproach for wealth management companies putting together an AMLprogram was simulation games involving senior management.

“The first thing wealth manage-ment companies need to do is recognisethat they have not spent time lookingat this issue in the past. They need tolook at the issue broadly – create sce-narios in which they are the targets formoney laundering. AML teams will findthat senior management does not paymuch attention to what they are doing.That is because it is a new area. Theyhave to work hard to get it on the senior management agenda.”

Lock says the experience in the UKhas been that wealth management companies have not had to deal withattempt at money laundering as much asbanks. “We had a case recently where abutchery was running a pension fund for its staff. The proceeds of cocainesmuggling by the business owners was also going into the fund.” ■

JOHN O'SHAUGHNESSY, IFSA

We have previously stressed that not allindustry sectors have been subject to AML

obligations in the past and therefore more time will be needed to implement the

necessary AML/CTF systems and controls

STEVE LOCK, FORTENT

Compared to banks ... wealth managers have no history and no culture of thistype of risk management. They have no existing controls. They actually need to work harder to get it right

COVER STORY


The game is upThere is no doubt that mainland – including Australian - casinosplay ball with the authorities and are keen to stamp out moneylaundering if and where they see it. But as Nick Kochanobserves, the problem lies with the proliferation of online casinos where ID verification is slipshod at best and clients at several removes from scrutiny.

COVER STORY

C ASINO GAMING is mushroomingand with it the risk of the casinobecoming a significant laundering

vehicle. Driving this growth are two factors,both of which contain inherent concerns forthe anti-money laundering (AML) community.

First of all, increasing numbers of lesser-regulated countries have encouraged thegrowth of a casino sector in a bid to boost taxation revenues. The burgeoning of casinosin the poorer parts of Asia and Eastern Europe (almost every hotel in Kazakhstan,for example, has a casino in its lobby) presents a growing money laundering risk as most of these sectors have limited regulation and enforcement.

Second, a number of developed countriesare seeking to benefit from the surge in onlinecasinos by developing new law and practice.They continue to wrestle with customer identification problems which have longbugged the online casinos. Problems withidentification underpin some of the concernsof US states which have outlawed online gambling on the grounds that it could beunwittingly sold to under-age or criminalgamblers. Owners of online casinos who have entered the US have been arrested.

Efforts have been stepped up in the developed jurisdictions – where casinos arealso burgeoning – to reduce the risk of moneylaundering that casinos present. In Australiathis takes the form of a new bill which was passed on 7 December 2006, and will receiveRoyal Assent in January. The Anti-MoneyLaundering and Counter-Terrorism FinancingBill 2006 contains a number of regulations,

whose details have not yet been promulgatedfor the management of AML risk in casinos.

The Australian Casino Association has had extensive dialogue with the federalAttorney-General over the definitions ofreportable events. The industry awaits eagerly the law’s details.

The use of casinos as vehicles for moneylaundering is as old as money laundering andtax evasion itself. The notorious MeyerLansky exploited loose regulation in offshorecasinos in the 1920s when he mingled money(largely obtained by Al Capone from extortion) with that of casinos in Cuba andelsewhere, before having the casino wire on his funds to an onshore bank account.

Lansky was the first to discover the casino’s value as a part of the process of layering – the use of money movements todeceive those following the paper trail. The casino can be used to intercede in theprocess of the funds movement as a way of legitimising funds. According to BrettWebber, a director at Deloitte in Australia,and an international expert in the field:“Depending on the jurisdiction, you might

put a dollar in, get 80c out, and when the lawenforcement or tax authorities come knockingat your door, you say you got 80c from win-ning in the casino. You have a receipt or veri-fiable record to show where that came from.”

There is a perception that casinos areinherently risky from an AML perspective,warns Webber. “Money laundering risk is all about the inherent risk of keeping the proceeds of crime from entering your organisation. That inherent risk is typicallymitigated by the controls that the casinos have in place in the regulated jurisdictions.”

Operators of onshore casinos scrutinisecustomers using tight know-your-customerchecks and use cameras to observe staff and customers on the gaming floors. Each operator is licensed following a “fit-and-proper”test, and that licence is guarded jealously.According to one analyst, “The punter wantsas little observation as possible. People holding the licence don’t want to lose theirgaming licence and they impose stringent controls. For all the talk of casinos as dens ofmoney laundering, they are heavily regulatedby state agencies and the financial intelligenceunit for good and proper reasons.”

Casinos are pulled tightly into the AMLnet in developed jurisdictions. UK casinos arecovered by the Proceeds of Crime Act 2002,which requires their owners and managers to monitor suspicious transactions. Thesetransactions must be filed with the FIU. The1985 Banking Secrecy Act in the US treatscasinos as “non-bank financial institutions”and subjects them to the same suspiciousreporting regime as financial institutions. Bothcountries have gambling authorities which also oversee daily practices at the casinos.


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The notorious Meyer Lanskyexploited loose regulation inoffshore casinos in the 1920s

BRETT WEBBER, DELOITTE AUSTRALIA

Money laundering risk is all aboutthe inherent risk of keeping the

proceeds of crime from enteringyour organisation.

COVER STORY

Australian dedicated enforcement authori-ties include the Casino Control Authority in New South Wales and the AustralianTransaction Reports and Analysis Centre,which acts as both a regulator and specialistfinancial intelligence unit. Austrac overseescompliance with the reporting requirements ofthe Financial Transaction Reports Act 1988by the gambling industry – among others.

The regulation of online casinos, on theother hand, is in its infancy. A number ofdeveloped countries are waking up to itspotential as a revenue earner and currentlyexploring regulatory regimes. Identification of the players remains the key concern.

Webber says the inherent problem with online casinos is that “they may have difficulty performing proper customer identification processes if they are online”.

“A guy may use a credit card, or electronicfunds or a stored value card to send funds tothe casino. You have the problem of unidenti-fied customers performing transactions whichare difficult to monitor and then the money ispaid out to another account. That is why thecasinos are so strongly monitored.”

Different business practices present persistent bugbears for governments that seekto introduce online regulation. For example,there is debate over when the customer to anonline casino must face an identity check.

It is well established that the visitor to abricks and mortar casino needs to be identi-fied when he enters the casino and prepares togamble. In legal terms this is usually referredto as “identification at the point of entry”.

But the visitor to the online casino maytake advantage of a free trial to see if he likesthe system. Financial criminality arguablyonly happens when money is involved soidentification is not required at the free-trialstage. The online industry argues that the customer should only have to be identified atthe point when a financial transaction occurs.

The process of online identification isalso under discussion. The industry argues

that the customer to an online site need only be identified through his credit card. A valid credit card from a reputable supplieris sufficient they argue, as the credit cardcompany will already have conducted its owncheck. But more stringent authorities wouldwant the customer to be subjected to a fulldue diligence examination in line with know-your-customer regimes used in banks.

Leslie Macleod Miller, the Australian-born legal adviser to the British AmusementCatering Trade Association (BACTA),contends: “You have been through certainchecks to obtain the credit card in the firstplace, so some of the money launderingrequirements have been met without a different requirement being imposed.’’

Due diligence of online customersremains a bugbear for many in the AML sector. Frank Yu of Hong Kong’s Ion Global,an interactive web design agency, says:“Due diligence of online gambling is not asstringent as it is in other financial institutions.The online gambling site can be properlylegitimate. But many fail in performing the due diligence of finding out who they are accepting money from and who they are giving money to.”

Similar concern was expressed by Rick McDonnell, a one-time head of the Asia Pacific Group money laundering division, a part of the Financial Action TaskForce (FATF). “Internet gambling is a vulnerable area. It is a risk.”

One investigator told of a drugs baronwho lived the life of Reilly in the West Indies.His bank account was in his home town andhe wanted to pull together into a singleaccount the profits from his drugs businesswhich were scattered around the Caribbeanand further afield. His solution was danger-ously simple. He set up an online casinobased in his West Indies island. He then gaveeach of his far-flung operatives a credit cardand told them to use the cards to merrily gamble away a fixed sum on his casino. Theirlosses were clearly the casino’s gain, and he


Australia’scasinos

AUSTRALIA HAS DECIDED to restrict its licensed online casino operators to the single

operator, Lasseters (out of AliceSprings), that was providing onlinegaming services when Australia’sgaming legislation was passed in1999. The law prohibits this (or anyother) operator from promoting onlineservices to Australian subjects. Online casinos owned by Australians,including a Brisbane-based listedcompany, provide casino servers toother jurisdictions.

Australia’s onshore operators play by the ball, say local observers.One said that Star City in Sydney is “prolific in providing suspiciousactivity reports (SARs) to the financial intelligence unit. Meantime,Publishing and Broadcasting Ltd, a listed company that owns CrownCasino, is known to report regularlyhow much money it has trackedagainst expectation in terms of winnings (from their side) and losses(from the gamblers side). ■■

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Image from Lassiters home page www.lassiters.com.au

COVER STORY

deposited them at the local bank. The Mafioso paid the creditcard bills with his dirty money, so ensuring both the transfer of the earnings to his account and the removal of some compromising cash.

“Online casinos are ready made for money laundering,“says Michael Adlem, the head of security at Barclays PrivateBank. “This criminal activity relies on the use of credit cards,and the only way it can be stopped is if Visa and Mastercardare excluded from the gambling arena. That would kill onlinelaundering stone dead, but the credit card firms would resist itfiercely. For them, it is a money machine.”

The issue of online regulation is becoming more pressingas more jurisdictions seek to take a share of the sector. Onlinereputable casino operators are predominantly based in Gibraltarand Malta, although a number use small Caribbean offshorejurisdictions. The UK and Italy, both of which once prohibitedthe online operators from their jurisdictions, have changed theirthinking and want to entice them to their shores. The UK ispreparing a Gaming Act which will provide a structure for theiradmission. The new act will revise all previous practice for theregulation of the gaming industry, both on and offline.

The act’s exact provisions have yet to be announced, but itis expected a more stringent regime for background checks into the backgrounds of casinos owners and their spouses willbe required as part of the regime’s anti-money launderingrequirements. The assets of the owners and spouses will alsobe subject to examination for evidence of unusual movements.

The best model for casinos seeking to match internationalstandards is provided by Nevada state law. This details manyseries of checks for casino operators seeking to excluded laun-dered funds. For example, the law shows how casinos can detectsmurfing schemes. These involve multiple transactions, whichare individually less than $10,000 (the point at which a US casi-no must report a cash transaction), but whose aggregate exceedsit. Nevada casinos are required to aggregate transactions by anindividual within a 24 hour period. If the total exceeds $10,000,it must be reported.

Similar controls apply to those engaged in transactions onblackjack tables and crap tables, as they may be handled bydifferent staff. So efforts are made to ensure staff aggregatepurchases by a single punter to check if they breach the$10,000 limit.

One source in Nevada said that cash in amounts smallerthan $10,000 may be conveniently laundered through any ofthe casinos. Larger amounts may also be laundered, but will

have to be spread across different gaming areas or differentgaming days, or divided up and laundered across severalNevada or tribal casinos.

The fast flow of cash across the casino table or online system may superficially look tempting to the launderer withsome doubtful money to offload. But the gambling industry’slong history of malfeasance has ensured that regulation istight. Uncertainty over controls of off-shore casinos presentthe weakest link in the casino system, but that door is also shutting with the entry of new and morerespectable jurisdictions and their tighter law. One observer stated: “Casinos are not the bestplace to launder money. There is no doubtthat some occurs. But if you really are going to launder money, there are much more efficient ways ofdoing it than putting it through a casino.” ■■


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The fast flow of cash across the casino table or online system may superficially look tempting to the launderer with some doubtful money to offload. But the gambling industry’s long history of malfeasance has ensured that regulation is tight

FEATURE

Red flags – what’s the use?A number of the leading international anti-money laundering and counter-terrorismfinancing (AML/CTF) bodies, including finan-cial intelligence units (FIUs) and regulatoryauthorities, produce lists of common traits andtransaction scenarios that criminals traditionallyuse when attempting to legitimise the proceedsof their nefarious deeds. Such lists are commonly known as ML/TF “red flags”.

Many AML/CTF specialists are oftensceptical about lists of red flags and whetherthey are really useful. After all, if a financialinstitution can access a list of “red flags” via aregulator’s or FIU’s website, what’s to stop anorganised crime outfit’s laundryman fromaccessing the same information? Won’t thatmean that the laundryman has exactly the sameinformation as the bank that is trying to thwarthim so that he can circumvent its systems?

In addition, criminologists will attest tothe fact that money laundering is a fluid crime.The methods by which money is laundered areconstantly changing to take advantage of newfinancial products and channels and the thriv-ing corruption in poorly regulated, developingnations. By the time a list of “red flags” or apaper on money laundering methodologies hasbeen released, the methods discussed may beup to five years out of date: the laundrymanhas washed the cash and moved on.

Part of a risk-based approachThe trend towards combating dirty money and terrorist financing through effective riskmanagement has meant that financial institu-tions must be pro-active in identifying their

exposure to ML/TF risk. Here’s where the lists of red flags come into play, as theycan be used to:• train staff and raise awareness of

ML/TF risk;• develop policies on how to mitigate

ML/TF risk in a range of scenarios;• develop procedures on how to conduct

customer verification procedures andongoing customer due diligence, eg if a red flag is that a customer’s telephonehas been disconnected, consider buildingin a mechanism into a customer identifi-cation program whereby select new customers receive a “courtesy” call upon opening an account;

• develop scenarios to feed into transactionmonitoring and reporting systems; and

• identify potential ML/TF risk when considering whether to lodge a suspiciousmatter report. Remember, just becauseactivities or transactions are suspiciousdoes not mean that they are illegal – they may just require additional attentionor due diligence.There will also be some criminals

(albeit those who may be not too bright)

who still attempt to launder money via themethods outlined by red flags or whose typical “red flag” behaviour will alert the financial firm to their activities. By pro-actively building red flags into anAML/CTF program as needed, such criminalscan also be readily identified and their behaviour may be just the tip of the iceberg.

Arguably, however, the real value in listsof red flags is their use as a starting point toget staff thinking about how money is laun-dered and how it could be laundered throughtheir business and that is one of the corner-stones of the risk-based approach to combat-ing ML/TF. The main reason that authoritiesare so keen to implement the risk-basedapproach is that “no-one knows your businesslike you do”. In other words, who is betterplaced than a firm’s employees to understandthe products/services it offers, its customerbase, its access channels and the markets inwhich it operates? If a firm combines thisknowledge with a list of red flags, then it canstart to identify the areas and/or methodswhich money launderers or terrorist financiersmay use at the firm and to act to mitigatethose risks.


Like red flags to a bullLists of so-called “red flags” are often said to help detect money laundering and terrorist financing, but how do red flags really help and how can organisations create lists of their own?Emily Brayshaw and Julie Beesley from KPMG discuss the pros and cons of red flags in combating money laundering and terrorist financing and how to develop a list.

EMILY BRAYSHAW JULIE BEESLEY

FEATURE

Such lists can also be used as a startingpoint when developing scenarios that maydrive rules in monitoring and reporting sys-tems to help detect unusual transaction pat-terns and transactions which may be high-risk.

This means that a pro-active firm can also develop its own, internal lists of red flags,which can be updated more easily and readilythan those produced by AML/CTF authorities.This also has the advantage in that it can be kept and maintained more discretely than public lists.

Creating a tailored list of red flagsAt some stage, there is a very real chance thatAUSTRAC may want to see that a firm isusing red flags to help train staff, developAML/CTF policies and procedures and identi-fy suspicious matters. Certainly this trendexists among US regulatory authorities, whichmake no secret of the fact that they expect USfinancial institutions to use red flags.

Having a sample list of red flags maymake it easier for a financial institution to

develop its own list. By way of a startingpoint, a simple Google search of “launderingred flags” produced a swathe of documentson the subject, including one from the US Federal Financial InstitutionsExaminations Council Bank Secrecy Act(BSA) Anti-Money Laundering InfoBase. This document can be found online athttp://www.ffiec.gov/bsa_aml_infobase/pages_misc/red.htm and contains lists of red flags for the following functions within the financial industry:• general ML/TF red flags;• cash management: branch and

vault shipments;• deposit accounts;• lending;• monetary instruments;• safety deposit boxes;• wire transfers; and• other activities involving customers

and/or bank employees. An AML/CTF compliance officer may

also wish to organise a series of brainstormingsessions with other compliance colleagues

and parts of the business to develop internallists further.

It is also important to remember that a redflag may help to point to activities other thanML/TF. For example, a customer who usesunusual or suspicious identification docu-ments that cannot be readily verified may notbe a money launderer, but may be involved inidentity crimes, such as identity fraud or iden-tity theft. Another red flag, eg transactionsinvolving foreign currency exchanges fol-lowed within a short time by funds transfersto high-risk location, may not necessarily beML/TF, but may indicate that the customer isinvolved in some kind of fraud.

Red flags as a compliance toolClearly, lists of red flags can be useful toolsfor a reporting entity when maintaining a risk-based approach to detecting and preventingML/TF in the areas of staff training andawareness, transaction monitoring and report-ing and developing AML/CTF compliance


��

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FEATURE

policies and procedures. There is a caveat,however. Austrac has already gone on therecord in the press saying that risk manage-ment is a continuous process that is carriedout on a dynamic basis. In addition, the draftAML/CTF rules state: “When determiningand putting in place appropriate risk-basedsystems and controls, the reporting entitymust have regard to the nature, size and complexity of its business and the type ofML/TF risk that it might reasonably face.”

In the current absence of guidance from theregulator, this could be interpreted to mean thatjust as firms will need to conduct ongoingML/TF risk assessments as these risks evolve, sotoo will they be likely required to keep lists ofred flags current. For example, it would be diffi-cult for a reporting entity to demonstrate that ithad trained its staff effectively on the latestML/TF techniques that threatened its businessby using a dated list of generic red-flags.Similarly, without regularly refreshing the sce-narios used in transaction monitoring and report-ing systems developed from tailored lists of red

flags, even the most sophisticated systems willrapidly become dated and virtually ineffective.

Red flags, therefore, may be a blessing or a curse for a reporting entity. As with somany facets of a risk-based approach to countering ML/TF, real value lies in keepinglists of red flags fresh and in tailoring them to fit a reporting entity’s business. Withoutregularly-updated lists of tailored red flags a reporting entity may do itself a great disservice; the most comprehensive systems,training and procedures are only as effectiveas the information they contain. ■■


Customers who provide insufficient or suspicious information

• A customer uses unusual or suspicious identification documentsthat cannot be readily verified.

• A business is reluctant, when establishing a new account, to provide complete information about the nature and purpose of itsbusiness, anticipated account activity, prior banking relationships,the names of its officers and directors, or information on its business location.

• A customer’s home or business telephone is disconnected.• The customer’s background differs from that which would be

expected on the basis of his or her business activities.• A customer makes frequent or large transactions and has no record

of past or present employment experience.• A customer is a trust, shell company, or private investment

company that is reluctant to provide information on controllingparties and underlying beneficiaries. Beneficial owners may hire nominee incorporation services to establish shell companiesand open bank accounts for those shell companies while shielding the owner’s identity.

Activity inconsistent with the customer’s business

• The currency transaction patterns of a business show a suddenchange inconsistent with normal activities.

• A large volume of cashier’s cheques, money orders, or funds transfers is deposited into, or purchased through, an account when the nature of the accountholder’s business would not appearto justify such activity.

• A retail business has dramatically different patterns of currencydeposits from similar businesses in the same general location.

• Unusual transfers of funds occur among related accounts or amongaccounts that involve the same or related principals.

• The owner of a retail business does not ask for currency whendepositing cheques, possibly indicating the availability of anothersource of currency.

• Goods or services purchased by the business do not match the customer’s stated line of business.

Other suspicious customer activity

• A customer frequently exchanges small-dollar denominations forlarge-dollar denominations.

• A customer frequently deposits currency wrapped in currencystraps or currency wrapped in rubber bands that is disorganisedand does not balance when counted.

• A customer purchases a number of cashier’s cheques, moneyorders, or traveller’s cheques for large amounts under a specifiedthreshold.

• A customer purchases a number of open-end stored value cards for large amounts. Purchases of stored value cards are not commensurate with normal business activities.

• A customer receives large and frequent deposits from on-line payments systems yet has no apparent on-line or auction business.

• Monetary instruments deposited by mail are numbered sequentiallyor have unusual symbols or stamps on them.

• Suspicious movements of funds occur from one bank to another,and then funds are moved back to the first bank.

• Deposits are structured through multiple branches of the samebank or by groups of people who enter a single branch at the same time.

• Currency is deposited or withdrawn in amounts just below identification or reporting thresholds.

• The customer may visit a safe deposit box or use a safe custodyaccount on an unusually frequent basis.

• Safe deposit boxes or safe custody accounts may be opened byindividuals who do not reside or work in the institution’s servicearea despite the availability of such services at an institution closer to them.

• Loans are made for, or are paid on behalf of, a third party with no reasonable explanation.

A selection of customer-related ML/TF red flags

Source: US Federal Financial Institutions Examinations Council Bank Secrecy Act (BSA) Anti-Money Laundering InfoBase

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THE AML RULES

BY ALEXANDRA CAIN

W HILE THE AML/CTF laws have now successfully passedthrough parliament, many banks

and financial institutions are still scratchingtheir heads about how they should complywith the new laws.

This is because formal rules and guidelines about compliance obligations areyet to be issued by the Australian TransactionReports and Analysis Centre (Austrac),the regulator charged with administering the new laws.

An exposure draft of the rules was issuedin July for public comment, but final ruleswon’t come through until 2007, leaving industry in the dark about what needs to bedone to comply with even the most basic obligations of the new laws.

Money laundering expert Joy Geary saysAustrac’s draft rules “give a broad idea aboutwhat the final rules will look like – but weneed much more certainty at this point.”

Industry commentators are not expectingfinal rules to be issued by Austrac before theNew Year, despite financial institutions havingto comply with new obligations such asrecording electronic funds transfers from the time the new legislation receives royalassent on January 1.

Mallesons Stephen Jaques’ partner Ros Grady says: “I’m not expecting any of the new rules to be finalised before the end of March.”

Although the federal government hasindicated it won’t back down from thetimetable it has set out for full compliancewith the new rules, it has agreed to extend by a further three months the 12 month moratorium period during which Austracwon’t prosecute banks that are in breach of the new laws.

The government is arguing this effectivelyextends the transition period for the new laws,but experts say this concession will have a lim-ited effect if new rules have not been issued.

“I’d like to see the transition periodchanged to 12 months from when the rules are finalised,” says Grady.

According to Joy Geary there are two key rules that everybody needs that won’t beavailable before the laws come into effect.

These are the crucial ‘know your customer’ rules, which set out how banksshould properly identify their customers, aswell as the transaction monitoring rules.

Geary argues that if the new customeridentification rules are not available until,say, April 2007, entities caught by the new laws “will lose 25 per cent of the implementation period” that has been provided for these requirements.

Another key issue, says Grady, is thelack of direction over what constitutes a “lowrisk service” under the new laws. There isprovision in the draft bill for certain low riskservices to be exempt from the identification

requirements of the new laws, yet there is noinformation about which services might fitthis category, making it tricky for financialinstitutions to know how to comply.

“You can’t assume you will get relief forlow risk services – you just have to comply. It would make sense for Austrac to work outwhich services are designated as low-risk soorganisations know how to pull together theirfull compliance program,” she says.

Grady also says organisations are particularly nervous about how Austrac willapply its new powers because of the potentialfor it to issue fines of up to $11 million tocorporates that fall foul of the new laws.

In contrast to Grady and Geary’s views,PricewaterhouseCoopers’ partner SteveIngram is less concerned over the tighttimetable and the lack of defined rules to support the new AML/CTF laws.

Ingram says he is comfortable with theevolutionary nature of the development of

the rules, and says industry should get used to an ongoing program of amendments to the laws and be prepared to respond tochanges as they evolve.

“The rules will change fairly regularly –the legislation will change again in February;this is a normal procedure. It’s going to be anevolutionary process – this is just the end ofthe beginning,” he says.

Commentators and the industry are counting on considerable consultationbetween industry and government during thetransition phase, particularly in relation to the development of guidance notes to supportthe new legislation.

Austrac has just issued its first guidancenote but, rather than treating the directive as a guide, Geary says “everyone will

regard this as what they have to do unlessthey have very good reason not to”.

“This potentially becomes regulation by stealth. Austrac has broad powers to create this guidance, but it is not subject to government review,” she says.

Geary says that it will be important forAustrac to work with industry to develop the guidance notes for the new laws to ensurethey can be practically applied. Discussionsare underway between Austrac and industry to establish new consultation frameworks and processes for 2007.

A spokesperson for AUSTRAC said there will be ongoing consultation with industry on the development of the rules as the AML legislation is progressively introduced over the next couple of years.

He said the draft rules would be amended to reflect the final legislation,but would not confirm a timetable for therelease of the final rules. ■■


A spanner in the regulatory works

I’d like to see the transition periodchanged to 12 months from when the rules are finalised

ROS GRADY, MALLESONS STEPHEN JAQUES

FEATURE

I N THE VIRTUAL online communitySecond Life, players freely trade itemsvalued in virtual currency, known as

Linden dollars.Second Life has a growing base of more

than 1 million users from over 100 countrieswho buy and sell everything from virtual realestate to virtual aeroplanes to fly them to avirtual holiday destination.

Last year, Second Life set up its own currency exchange, the LindeX, which allowsSecond Life residents to buy and sell Lindendollars and exchange them for US dollars.

And if Second Life residents are confusedabout how to manage their Linden dollars,they can always hope for an invitation to visitStagecoach Island, the virtual island set up byUS banking giant Wells Fargo. In betweenskydiving, hovercraft riding and clothes shop-ping, visitors to Stagecoach Island can learnhow to manage their money by earning virtualinterest on deposits and being rewarded with Linden Dollars for completing onlinefinancial-related quizzes.

Second Life isn’t alone. All around theworld virtual communities are popping up to cater for gamers who value their virtualpossessions as highly as their real ones.

In 2004, a 23-year old gamer known as “Deathifier” spent $US26,500 (real greenbacks) to buy a virtual island inside


��

Policing a virtual world How do you apply old-worldtracking and policing techniques to a new world of virtual cash? How do youkeep in touch with an onlinegame where fantasy is thegame, anonymity the aim?Charis Palmer asks how theneeds of a growing internetuser population can besquared with the informationneeds of regulators and law enforcers.

FEATURE

role-playing game Project Entropia. Deathifiersays he regained his initial investment in lessthan one year by selling real estate on theisland and has since made a killing charginggamers to “hunt” for Linden dollars on hisvirtual treasure island.

Much has been written by psychologistsabout the motivations behind online role-play-ing games. The one constant theme is thedesire by players to immerse themselves in a fantasy world. The desire to be someoneelse and act out their wildest dreams under theshield of their anonymous persona or “avatar”is all too strong.

And while anonymity may be a key factorbehind the popularity of virtual communities,it is the issue of anonymity that has the atten-tion of regulators and law enforcers. How dothey apply old-world tracking and policingtechniques to a new world of virtual cash?

In September, Australian High TechCrime Centre director Kevin Zuccato asked anaudience of IT executives: “What is to stopsomeone purchasing a block of virtual land inthe game that is worth 1000 Linden dollars,but actually paying $2 million?”

Zuccato lamented the difficulty of tracingthe activities of criminals in virtual communi-ties. “The transfer occurs automaticallybecause you are just buying something fromSecond Life, no one knows the difference,no Austrac, no nothing.”

In the buzzing trade of virtual assets forreal cash, online auction house eBay plays abig role. One academic has even gone so faras to calculate the gross national product ofonline world EverQuest by aggregating eBaysales of virtual items and currency.

A large chunk of payments on eBay areconducted using the auction house’s paymentsarm PayPal. PayPal operates in 103 countries

and while it only officially launched itsAustralian operations in 2005, by November2006 it had 3 million Australian accounts.

One of the major drivers of PayPal’s success is the fact that sellers and buyers can remain anonymous, with no need for thebuyer to reveal their bank account details to the seller.

PayPal managing director Andrew Pipolosays while this anonymity is important, it isstill critical for PayPal to identify both parties.

“I think Australians like that added security to be able to shop without sharingtheir financial details, but it is important for us to know who you are and where you are.”

Pipolo says while on the face of it PayPal would seem an easy target for moneylaundering because payments are online andoccur instantly, the reality is PayPal has over 2000 staff monitoring transactions inwhat is a closed loop.

“We see the transaction from both a buyerand a seller point of view instantly and that

gives us an incredibleadvantage in terms oflooking at the risk ofeach transaction.”

PayPal is generallysupportive of the newAML legisaltion andPipolo says he envis-ages very little impacton the organisation.“Austrac are advocatinga risk-based approachwhich is very consistentwith how we alreadyrun our business.”

Pipolo says PayPalalready reports suspi-cious transactions toAustrac, and while he

says he is unable to discuss the amount ofmoney laundering detected, fraud is a muchbigger issue for the company. “The audit trailthrough a PayPal transaction is a bit like an ele-phant in a china shop. We see the transactionsvery clearly, we have proprietary risk tools, andso it’s not a particularly good approach from amoney laundering perspective.”

PayPal account holders must register afinancial instrument, which Pipolo arguesmeans the user would have gone through a100-point ID check which PayPal then relieson. The organisation then deposits a smallamount of money into the new user’s accountand asks them to return the funds to PayPal to ensure the user has control of their linkedbank account and isn’t fraudulently usingsomeone else’s account. Random depositchecks are also conducted as part of an ongoing verification process.

For regulators, the key difference betweena payment method that is high risk, versus onethat is less so, is whether anonymity exists.

Recommendation 5 of FATF’s 40Recommendations states: “Financial institu-tions should not keep anonymous accounts oraccounts in obviously fictitious names.”However, FATF is clearly aware that newtypes of payment methods that bypass institu-tions are on the rise. Recommendation 8 says:“Financial institutions should pay specialattention to any money laundering threats thatmay arise from developing technologies thatmay favour anonymity, and take measures,if needed, to prevent their use in money laundering schemes.”

In October FATF released a report on newpayment methods, arguing that many of themethods highlighted in the report raise con-cerns about money laundering and terroristfinancing because criminals can adjust quicklyto exploit new opportunities.

DECEMBER 2006 / JANUARY 200726

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ANTI-MONEY LAUNDERING

As stored-value cards gradually replace cash, the anonymity of low-valuecash transactions couldbecome a thing of the past

NIGEL WATERS,

APF POLICY CO-ORDINATOR

FEATURE

The report discusses the trends and money laundering implications of prepaidcards, mobile payments, electronic purses orstored value cards, internet payments not based directly on a bank account and digital precious metals, all of which it says haveanonymity as a potential risk factor.

The concern over anonymity related toprepaid and stored value cards is likely tohave major implications for the organisationsthat issue such cards, and a debate is alreadyunder way over just how far Australia’s AMLlegislation will go in demanding holders ofsuch cards be identified.

In its submission to the Senate Committeeinquiry into the provisions of the AML andCTF Bill, the Australian Privacy Foundationhas raised concerns over the possibility hold-ers of low-value stored value cards, such astelephone cards and public transport smartcards, will be required to identify themselves.

APF policy co-ordinator Nigel Waterssays: “As stored-value cards gradually replacecash, the anonymity of low-value cash trans-actions could become a thing of the past – nodoubt a welcome prospect for the taxationauthorities, but hardly the proper function of alaw supposedly focused on serious crime.”

In Australia, prepaid cards have only juststarted to grow in popularity as institutionslook for new ways to generate card revenuebeyond credit card interchange fees.

One of the first re-loadable prepaid cardsto be launched is the bopo card, offered bypayments processor Bill Express and managedby wholesale banking services provider Cuscal.

Spokesperson Julie Sheather says: “Oneof the great strengths of the bopo card is that

it provides the convenience of a credit cardwithout linking it to a transaction account andwith access to only limited funds and – as aresult – without the need for the usual identityand credit checks.”

The bopo card can only be used to storeup to $1000, with up to a maximum of $2000able to be loaded to the card in any 30 dayperiod. Sheather says although this falls underthe AML threshold, activity on the cards isalready being monitored.

Sheather says: “AML requirements willbe more relevant for bopo in the future, whenan option is introduced which enables card-holders to increase this limit by providingadditional identification as described in theproduct disclosure statement. This facility willcontinue to meet all EFT and the AMLrequirements before its introduction (andobviously is being reviewed in light of theAML bill introduced in the past month andany amendments which may occur during itspassage through parliament).”

Cuscal is a designated service providerunder the new law, and therefore has an obligation to monitor and mitigate suspiciousmatters, such as loading up numerous cardsunder the $1000 threshold.

The Australian Privacy Foundation sayswhile it welcomes the setting of monetarythresholds for stored value cards “we are concerned that these thresholds can bechanged, including reduced, by regulation”.

The challenge for the financial servicesindustry will be to work out how to meet theneeds of a growing internet user populationthat values anonymity, and regulators and lawenforcers that are seeking to remove it. ■■

27DECEMBER 2006 / JANUARY 2007ANTI-MONEY LAUNDERING

The concern over anonymity related to prepaid and stored value cards is likely to have major implications for the organisations that issue such cards

AML UPDATE

T HE Anti-Money Laundering andCounter Terrorism Financing Bill2006 (Cth) (AML Bill) and the

Anti-Money Laundering and Counter-Terrorism Financing (Transitional Provisionsand Consequential Amendments) Bill 2006(Cth) (Consequential Amendments Bill) were introduced into the House ofRepresentatives on 1 November 2006. Since that date, government has also releaseda replacement Explanatory Memorandum to the AML Bill and a draft version of the Anti-Money Laundering and Counter-Terrorism Financing Rules that are proposed to apply in relation to:• the reporting of movements of physical

currency and bearer negotiable instruments; and

• the register of designated remittance services. A final version of the draft Anti-Money

Laundering and Counter-Terrorism FinancingRules (rules) is yet to be released, and withmuch of the practical requirements of the

proposed new AML regime to be containedin the rules, it is not possible to know theextent of the practical ramifications of theproposed new AML regime. Nevertheless, itis apparent that there are some important dif-ferences between the AML Bill introduced toParliament and the draft bill that wasreleased for consultation in July 2006.

THE AML BILLThis update highlights some of the significantelements of the AML Bill.

Phased implementationThe AML Bill will be implemented over two years with a prosecution-free period thatwill expire 12 months after each section commences, provided reporting entities areusing their best endeavours to comply.

Obligations relating to the following matters begin the day after the AML Billreceives royal assent:

• reports about cross-border movement ofphysical currency and bearer negotiableinstruments;

• electronic funds transfer instructions;• the register of providers of designated

remittance services;• entering into transactions with residents

of prescribed foreign countries; and• certain record-keeping requirements.

Obligations relating to AML/CTF compliance reports and correspondent bank-ing begin six months after royal assent.

Obligations relating to identification procedures and AML/CTF Programs begin 12 months after royal assent whilst obligationsrelating to ongoing customer due diligenceand the reporting of suspicious matters,threshold transactions and international funds transfer instructions begin 24 monthsafter royal assent.

Many criminal offences replaced with civil penaltiesMany of the criminal offence provisions havebeen replaced with civil penalty provisions.The effect of this policy change is that breachesof those provisions of the AML Bill to whichcivil penalties apply can be more easily provenby the authorities as only the lesser civil standard of proof needs to be met. The AMLBill provides maximum penalties for breachesof civil penalty provisions of $11 million forcompanies and $2.2 million for individuals.


A legal perspectiveBlake Dawson Waldron’s AML experts look at the latest billintroduced into parliament and what it means in legal terms.Many of the criminal offences have been replaced by civil ones, and the fines for breaches are heavy. The upshot is, it’s time to begin planning.

AML UPDATE

Designated servicesThe list of designated services in clause 6 has been amended. Whilst some designatedservices that appeared in the previous versionof the bill have been removed, the descrip-tions of many other designated services havebeen amended and new designated serviceshave been added.

For example:• Items 37, 38 and 39 only apply to a

“life policy” as defined. The definitionexempts life risk insurance as well asother life insurance that falls within certain criteria.

• Item 54 of clause 6 provides for a newdesignated service that can affect AFSLicensees – described as “in the capacityof holder of an Australian financial services licence, making arrangements for a person to receive a designated service (other than a service covered by this item)”.Item 54 is potentially far-reaching

but its interpretation is open to argument and clarification is likely to be sought byindustry bodies. Many parts of the AML Bill do not apply to reporting entities thatprovide this designated service – for examplethe requirements relating to ongoing customer due diligence, suspicious matterreporting, threshold transaction reporting and AML compliance reports do not apply in respect of item 54.

One improvement is that a number ofdesignated services, such as the provision ofloans, guarantees, finance leasing and supply-ing goods, will only come within the ambit ofthe AML Bill when a reporting entity “carrieson the business” of providing that service.

Designated business groupsThe definition of “designated business group”has changed from that found in the previousdraft of the AML Bill, with the term nowapplying to a group of two or more persons,rather than a group of two or more companies.

In order to be a member of a designatedbusiness group, each member of the designatedbusiness group must elect in writing to be amember, and no member of the designatedbusiness group can also be a member of another designated business group.

The AML Bill leaves additional require-ments to the rules and without an up-to-dateversion of the draft rules, it cannot be said howthe definition of a designated business groupwill ultimately operate. For example, an elec-tion to be part of a designated business groupmust be made in accordance with the rules,each member of the designated business groupmust satisfy any conditions specified in the

rules, and the designated business group cannotbe of a kind that is, according to the rules,ineligible to be a designated business group.

Importantly, if a reporting entity is part ofa designated business group, the AML Billprovides that the reporting entity’s ongoingcustomer due diligence responsibilities, aswell as other obligations (such as record keep-ing obligations), can be discharged by anothermember of its designated business group.

Anti-money laundering and counter-terrorism financing (AML/CTF) programsChanges have also been made to the require-ment on a reporting entity to adopt anAML/CTF program. Under the AML Bill thereare three types of AML/CTF programs:Standard AML/CTF programs, Joint AML/CTFprograms and Special AML/CTF programs.

A Standard AML/CTF program is to be adopted by individual reporting entities,whereas a Joint AML/CTF program is to beadopted by reporting entities in a designated

business group. The Special AML/CTF program is a program that applies to a reporting entity in circumstances in which allof the designated services provided by thereporting entity are covered by item 54.

Standard and Joint AML/CTF Programsare to comprise two parts:• Part A – which is designed to identify,

mitigate and manage the reporting entity’santi-money laundering counter-terroristfinancing risk; and

• Part B – which sets out the applicablecustomer identification procedures forcustomers of the reporting entity. Special AML/CTF Programs are to

comprise only Part B.

AgentsThe concepts of internal and external agents,which were part of the previous version of the bill, have been abandoned in favour of thegeneral law principles of agency. This changewill provide reporting entities with lessrestrictions and more flexibility than under the previous version of the bill.

The AML Bill specifically stipulates (at subclause 37(2)) that an agent may be

used to carry out the required customer identification procedures.

The Consequential Amendments BillThe Consequential Amendments Bill sets out amendments to be made to existing legislation. In particular, the ConsequentialAmendments Bill clarifies that the AML Bill,when enacted, will operate in parallel with theFinancial Transaction Reports Act 1998 (Cth)(FTR Act).

Many of the amendments to the FTR Act made pursuant to the ConsequentialAmendments Bill are aimed at avoiding duplication of obligations under the AML Bill and the FTR Act. Generally, this means thatafter the AML Bill has received royal assent, asobligations are imposed on a reporting entityunder the new AML regime, the current corre-sponding obligations under the FTR Act will nolonger apply to that reporting entity.

In addition to amending the FTR Act (and many other acts), the Consequential

Amendments Bill amends the Privacy Act 1988(Cth) (Privacy Act) with the effect of regulatingthose small business operators that are alsoreporting entities under the new AML regime.This is to ensure that those small business oper-ators comply with the Privacy Act for personalinformation collected by the small business.

Time to begin planningOn 8 November the Senate referred the AML Bill and the Consequential AmendmentsBill to the Legal and Constitutional AffairsCommittee for inquiry and report by 28November 2006. Both Bills passed onDecember 7th, and with some obligationscoming into force as soon as the day after theBill receives Royal Assent, the time to beginAML planning has definitely arrived. ■■

Stephen Cavanagh, Partnert > 02 9258 6070 e > [email protected] Trinca, Partnert > 03 9679 3258 e > [email protected] Young, Senior Associatet > 02 9258 5881e > [email protected]


... the time to begin AML planning has definitely arrived

REGIONAL REVIEW


Japan: keeping old traditions at bay Japan faces unique threats of money laundering that areas much a result of its cultural intricacies as its role asAsia’s primary financial centre. As Carl Fredriksen andGary Gill from KPMG discover, the Yakuza, pachinkoparlours and the Stalinist state of North Korea all play key roles in the Japanese world of money laundering and influence the country’s attempts to fight it.

REGIONAL REVIEW

Major economy, major money laundering hub?

Japan’s status as the world’s second-largesteconomy presents it as an attractive option fordomestic and international money launderersand its abundance of financial activity bearsthe affliction of large-scale financial crime. Asalluded to by the US Department of State’s2006 International Narcotics Control StrategyReport (INCSR) in its country report forJapan, the scope and scale of this white-collarcrime extends beyond the activities of oppor-tunistic fraudsters to the highly sophisticated,organised crime operations which havebecome deeply ingrained into so many facetsof Japanese society.

The most widely recognised of Japan’sorganised crime operations is referred to as“the Yakuza”. Though more of a collection ofstand-alone operations than a co-ordinatedsingle operation, Yakuza financial crime operations include loan sharking, illegal gambling and illicit conduct in relation toproperty and corporate activities. Anotherdomestic predicate crime which contributessignificantly to Japan’s money launderingproblems is narcotics trafficking. Japan’sNational Police Agency suggests that of anestimated US$10bn in annual income derivedby Japanese organised crime syndicatesapproximately US$3.4bn is attributable to the trafficking of methamphetamines.

A more prevalent predicate crime whichis pervasive throughout all tiers of Japanesesociety, to varying extents, is illegal gambling.To put this risk into perspective it is importantto understand that gambling in Japan is highlyregulated by the government to the extent thatcasino operations are illegal, while gamblingon horse racing is controlled by the JapanRacing Association. However, despite theJapanese government’s stance in banning cer-tain categories of gambling, such as casinos,locating an underground casino in Japan isabout as difficult as trying to locate a TAB inMelbourne on the first Tuesday in November.The Japanese government is mainly concernedabout the lost tax revenue as a result of unre-ported income generated by such underground

gaming enterprises that is launderedback through the financial systemmasked under the guise of legitimateinvestments.

A form of gambling known aspachinko is also extremely popular in Japan. Pachinko is a pinball-stylepoker machine which manages to circumvent government regulation in that players play for the chance to win prizes, rather than cash – the twist being that the essentiallyworthless prizes can be exchanged at adjoining businesses for cash. Amore interesting facet to this attemptat legitimising this thinly veiled formof gambling is that a large portion ofJapan’s pachinko parlours are ownedby North Korean immigrants.

Pachinko parlours may not technically be illegal, but evading tax on the proceedsderived from their operation certainly is. Inaddition, the North Korean owners of thepachinko parlours regularly remit funds totheir families in the Stalinist state, which isfacing international criticism in relation toallegations of smuggling weapons, drugs andcounterfeit currency and most recently ques-tionable pursuit of nuclear capability. Whenviewed in this light, Japan’s efforts to combatsuch activity have greater international ramifi-cations than fighting domestic tax evasion.

Other obstacles to fighting money laundering

Japan’s Achilles heel in bringing efficacy tolegislative reforms has been bureaucratic corruption. Transparency International’s (TI)Global Corruption Perception Indices reflectthis stagnancy, indicating that in the period2001 to 2005 Japan’s ranking decreased from21 to 24 in 2004 before returning to 21 againin 2005, with a corresponding increase in ratings from 7.1 to 7.3. Things are looking up,however. The 2006 TI index rated Japan in17th place with a rating of 7.6.

Such a rating belies global expectations ofthe government driving the world’s secondlargest economy and it also places it consider-ably lower than TI’s 2006 rating of regional

neighbours Singapore and Hong Kong, whichscored 9.4 and 8.3 respectively. Political orbureaucratic corruption in any form ultimatelyleads to inefficiencies and difficulties in enforc-ing compliance with legislative requirements.

In addition, recent events questionwhether Japan’s AML legislative reforms arebeing implemented to the extent required byreporting entities or whether the actual legisla-tion does not pack quite as much punch ascomparable jurisdictions. For example, earlierthis year a Japanese financial institution wassubject to financial sanctions by Chinese andUS financial regulators following AML com-pliance breaches by foreign domiciled branch-es and subsidiaries. Following this, Japan’sregulators came under criticism from foreigncounterparts for what was perceived to be a laxapproach to enforcement of AML measures.

Steady progress and stronger reformsEach jurisdiction in the world faces at leastsome risks of money laundering, but in starkcontrast to many countries the efforts ofJapan’s financial regulators exhibit an acuteawareness of the vital role Japan plays in com-bating regional and global money laundering.

The Japanese parliament (the Diet) hassteadily introduced a comprehensive suite of


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REGIONAL REVIEW

AML measures since the introduction ofJapan’s anti-organised crime legislation in2000, including suspect transaction reportingand customer identification requirements andthe creation of the Japan Financial intelligenceOffice (JAFIO) – a financial intelligence unitoperating under the auspices of Japan’sFinancial Services Agency.

The JAFIO has been instrumental inestablishing information sharing memorandawith other countries, including Australia,and has provided procedural guidelines toJapanese reporting entities to assist with compliance and undertaking analysis of suspect transaction reports. In addition,Japan has also recently implemented improvements to its AML measures, includingstricter customer identification requirementsand a lowering of its cash transaction reporting threshold.

The Financial Action Task Force on Money Laundering’s (FATF) most recent mutual evaluation of Japan’s progress in combating AML was in 2004. The mutual evaluation acknowledged that Japan’s legislativecoverage of the FATF’s 40 Recommendationsand Nine Special Recommendations (the 40+9 Recommendations) was generally sufficient, but recommended improvements via the creation of better international cooperative mechanisms and a more cohesivesystem for administering and reviewing compliance with AML requirements.

These comments appear to have beentaken on board by the JAFIO and the Diet,with the JAFIO involved in continuing effortsto sign memoranda of understanding withother FIUs and the Diet developing legislation to streamline Japan’s AML compliance administration and ensure

full compliance with the FATF’s 40+9Recommendations. The proposed changes will require AML compliance efforts fromaccountants, lawyers and jewellers, entitiesnot previously captured under AML legislation. The draft AML Bill is expected to be introduced to the Diet in 2007.

Japan’s commitment to ongoing legislative reform ensures that the country is well-placed to combat money launderingthreats from organised crime, illegal gamblingand pachinko. However, the recurring linksbetween North Korea and Japan continue to remind Japan of the global ramifications of its AML efforts and that the internationalcommunity will not tolerate lax regulationwhen it comes to issues such as financial dealings with jurisdictions of questionablecharacter. ■■


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The Financial Action Task Force on MoneyLaundering’s (FATF) most recent mutual evaluation of Japan’sprogress in combating AML was in 2004

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Don’t get taken to the cleaners

INSIGHT


By Joe GarbuttSENIOR MANAGER, GROUP COMPLIANCE

RISK, NATIONAL AUSTRALIA BANK LTD.

I T IS OBVIOUS to most that successfulfirms avoid regulatory fines, public censure and resultant reputational

damage. Not that Austrac will necessarilycopy other regulators but the UK’s FSA did fine four of the eight largest banks forAML compliance failures.

The “final notices” of the enforcementcases at www.fsa.gov.uk are therefore a good read for future Australian AML/CTFcompliance officers.

Don’t underestimate the cost and effortof facing enforcement of this magnitude. It is clear from the near £2m fine of Abbey that its chief executive personally spent considerable time responding to the enforcement.

There is relevance for Australian firmswho may be considering spend on theirAML/CTF change management programs to implement the bill.

Any firm that knowingly under-investsruns the risk of both the pain of enforcementand a financial cost that is likely to outweighthe alternative of having invested appropri-ately in the first place.

It has been said that Austrac will enforceagainst recalcitrant firms. We will doubtlesssee the outcome of this in due course.

How do we avoid getting near enforcement?There are no guarantees in life but you need to understand your position. Liken it to a road race – are you at the front,middle or back?

If you are at the back, do somethingabout it. In 2002 it became clear that theFSA’s expectations of industry performanceon AML/CTF did not necessarily match the industry’s historical approaches, withenforcement action likely to follow quickly.In such circumstances rapid investment ofeffort – or a sprint forward – was needed.

Where are we in the road race?

Seek to understand what Austrac actuallyexpects firms to do to implement its rules.What are the regulator’s views on a risk-based approach for your industry segment? Study any formal guidance or other material such as conference speeches.

Use opportunities to gain as much feedback as possible. For example, anapproach that has worked well for me is toask financial intelligence units whether they are content with both the quantity andquality of suspicious transaction reports.

Gain a sense of where you are placed inthe context of your peers. Understand peers’new initiatives. It is hard to see AML/CTF as a truly competitive issue and informationsharing on approaches and initiatives is ofgreat benefit.

Don’t panic in response to big spendingpeers. Solutions always need to be costeffective and the Australian regime is to bebuilt around the risk-based approach.

Equally, your firm cannot avoid expenditure where it is needed. Where CTF is deemed high risk (and not forgetting existing legislative requirements) some significant systems spend may be inevitable.Detecting terrorist financing has beenexpressed as being harder than finding a needle in a haystack. So you may not find it,however hard your firm tries.

You must therefore be able to defendyour firm’s systems, procedures and controlsas adequate in the event of a terrorist attackwhere your firm had a role, such as process-ing payments, in the financing of the attack.

If you have weaknesses identified by an Austrac inspection, compliance review or audit, remedy them quickly and comprehensively.

The path toenlightenment

While the kind of heavy penalties handed down in the US andUK for poor controls and systems have not featured here, theAustralian Transaction Reports and Analysis Centre’s stance on compliance post AML reform is yet to be determined. Here Joe Garbutt gives handy tips to ensure all compliancebases are covered.

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INSIGHT

Many regulatory enforcement cases havefollowed directly as a consequence of failureto correct in this manner.

What should our relationship with the regulator be?• Work hard at your relationship with

the regulator, as the framework allows.• Listen to the regulator’s personnel, meet

them and talk to them but don't botherthem with low-level questions that youshould be solving for yourself.

• Develop different contacts at the regulatorso you know where to go to if you need help.

• If you have a relationship manager,provide the regulator’s manager with anexcellent service, meeting informationrequests promptly, for example.

• Follow disclosure rules carefully and be open and honest about problems.Suggest to the regulator how you aregoing to fix your problems, so that it is able to influence your thinking whilst at the same time sees you are accepting your responsibilities for compliance.

• Consider wider stakeholders who mayinfluence your reputation with the regulator. For example, avoid developinga reputation with law enforcement agencies for being unco-operative.

How do we approach AML/CTF?If we want a good compliance record, weneed to apply our compliance disciplines by:• Following our established mechanisms

for regulatory change.• Making sure systems, processes, and

training are embedded through the business. [Avoid the old trap of compliance being ring-fenced in the compliance department.]

• Establishing appropriate governance and oversight mechanisms.

• Ensuring compliance controls are monitored or inspected for effectiveness.

• Establishing AML/CTF compliancebreach reporting systems.

• Developing and reinforcing an appropriate AML/CTF compliance culture throughout the firm.

How do we measure?One common thread from the UK fines was thatthey were imposed for failing to meet compli-ance requirements that could be measured:

account opening accuracy and the length oftime it took the AML unit to process suspicions.

Measurement gives firms evidence as tohow it is managing its risk-based approachand provides one of the major inputs to theAML/CTF governance committee.

Developing a dashboard is a key compliance tool. Content can include:• Suspicion reporting levels, analysed by

business unit and subject to trend analysis.• Volume activity from automated

monitoring systems, and resultant suspicion reporting, again subject to trend analysis.

• Account opening accuracy, againanalysed by business unit and subject to trend analysis.

• Specific case numbers around high-riskareas, eg politically exposed persons,sanctions.

• Training statistics.• Any lessons from major cases. [Have due

regard to security and legal requirements,and the fact that an individual case couldpotentially lead to enforcement action, asit has with the UK FSA].

• Results of compliance inspections oraudits, including progress with the annualcompliance plan.

• Details of impending regulatory changeor regulator activity.

Is measuring enough?No. The US President Theodore Rooseveltapparently saw his foreign policy as to “walk softly but to carry a big stick”.

The application for the AML/CTF compliance officer is, I suggest, to walk softly but to carry a divining rod!

This is because the AML governancecommittee or board will rely upon the dashboard for oversight but expect that data it contains is accurate. It is the job of theAML/CTF compliance officer, I suggest, to“divine” where it is inaccurate and correct it.

Account opening accuracy must be subject to thorough and independent compliance review.

Are all the procedures that flow fromaccount opening policy being followed?Opening a business account under the UK’sJoint Money Laundering Steering GroupGuidance Notes regime where there were

beneficial owners could be complex, lengthyand only one failure (such as a failure to verify an account signatory) in the, say,10 or 20 account opening actions, could lead to an overall account opening failure.

Similarly, consider lessons from the UKfine that included late reporting by the moneylaundering reporting officer – just because theAML/CTF unit is the specialist area, don’toverlook the need to verify its dashboardentries, as for all other submissions.

Also, if your business is not managingchange quickly enough or getting it right,call this out – that’s what being a complianceofficer is all about.

Now can I rest?Again, no. If we remind ourselves thatAML/CTF is one of the truly global compliance issues, we need to stay abreast of developments and deploy new solutions –apply the concept of continuous improvementof your risk-based approach to yourAML/CTF compliance program.

And let’s not overlook the financial crimeangle. Sometimes the criminals seem to bewinning the race and it can be hard to evenkeep them in view, so effort is surely needed.

Joe’s summary for a good compliance record• Don't knowingly under-invest, it might

cause pain and more cost later.• Use the road race analogy to assess where

you are. How fast does the regulatorexpect you to run?

• When you identify a problem, fix it.• Work hard to develop a constructive

relationship with the regulator that bothparties benefit from.

• Apply tried and tested compliance disciplines to AML/CTF.

• Develop a dashboard as a key measuringtool.

• Independently verify the data you receive.• Good compliance means a risk-based

approach to fighting financial crime.Fighting is usually hard work. There is no steady state after which you can relax.

• Keep running! ■■

Joe Garbutt is the senior manager, group compliance risk at National Australia Bank. The views expressed in the article representJoe's personal opinions and he is not speakingfor National Australia Bank Ltd. in this article.


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© 2006 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.December 2006. VIC10647FO.

AFMA and KPMG havejoined forces to develop atraining course for financialservices' professionals. The course will equipprofessionals with theskills and knowledgenecessary to understandthe implications of the newanti-money laundering andcounter-terrorism financing(AML/CTF) legislation.

The one-day trainingcourse includes casestudies, examples andactivities designed to helpyou develop effective risk-based AML/CTFprograms.

You will learn practical tips on how to; designcustomer and enhanceddue diligence programs,establish internalmonitoring and evaluationsystems and build aculture of compliance. It will also help youunderstand post-reportingconsiderations.

Successful completion of the workshop andassessment will earn credittowards the nationally-recognised FinancialServices training packageat Diploma level andcontribute to on-goingprofessional developmentrequirements.

One day public and in-house coursescommence February 2007 in Sydney andMelbourne. For furtherinformation and a coursesyllabus contact DianaZdrilic on 02 9776 7923 [email protected]

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Anti-money

laundering

are you

ready?

CASH REMITTERS


C ASH REMITTERS are often identified as being a high risk for undertaking money laundering activities, either with the remitter acting as the launderer or as a vehicle for laundering activities by other launderers or criminals. A recent

case in October, as part of an Australian Crime Commission’s Task Force Gordian operation,resulted in the arrests of nine people in Sydney and Melbourne for alleged drug and moneylaundering offences. It is alleged that between December 2005 and October 2006 around$93 million from illicit drugs was laundered overseas. 1 In this case it appears that a large proportion of the funds had been laundered through a cash remitting service betweenAustralia and Vietnam and Hong Kong and Cambodia on the directions of organised crime syndicates. This case highlights how significant amounts of money can be laundered outside the formal financial sector through avenues such as cash remitters or currencyexchanges. However, the financial sector still needs to be aware of the potential moneylaundering activities of cash remitting services as the formal financial sector can be used as part of the process.

Cash remitting agencies can be either formal or informal networks. Formal cash remitters are registered businesses and may operate through the formal financial sector or through a formalised network of other cash or currency remitters. The majority of themoney transferred is for immigrants sending money to family overseas, or for travellers to receive money or to exchange currencies. Formal cash remitters may also use the financial system to undertake money transfers or currency exchanges if this is a cheaper or more efficient option.

Informal cash remitting services are more like alternative remittance systems (ARS).These services operate outside the formal financial sector and through an informal or loosenetwork of other cash remitters or ARS operators. These networks can be based on familyor ethnic-based relationships and again are often used by immigrants sending money back to families, especially where families may live in areas not serviced by the formal financialsystem or where the cost of using the formal financial system is prohibitive. It should benoted that where an established relationship or network exists between two remitters, cashmay not physically move, rather a book entry is made with the outstanding total altered foreach transaction and at an agreed time the balance outstanding will then be transmitted.

Both the more formalised cash remitting services and the informal network structure ofinformal cash remitters do not use detailed records and their network structure make these

Outside the system?

Both the more formalised cash remitting services and the informal network structure of informalcash remitters do not use detailed records and their network structure make these businesses difficult to regulate and oversee for money laundering activities. Michelle Hannan explains

Cash remitters, either formal or informal services,represent a high risk formoney laundering activitiesdue to the characteristics of the business.

1 Sourced from the Australian Crime Commission’s website media releases dated 27 October available on www.crimecommission.gov.au.

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CASH REMITTERS

businesses difficult to regulate and oversee for money laundering activities. This means that cash remitters have a number of conducivefeatures for money laundering such as:

• Cash remitters accept and move large volumes of cash.• They undertake currency and cash movements to countries that

are difficult to reach, or often involved in drugs or organised crimeactivities, particularly in Asia.

• Minimal or no records or paper trail to follow.• Operate using a network of relationships that are adaptable.

However, as one of the aims of money laundering is to integrate the funds within the formal financial sector to make those funds appear legitimate and therefore available for legitimate expenditure,cash remitters also use the formal financial sector to launder funds.Cash remitters, in particular the more formal cash remitters, may blend legitimately sourced funds with funds sourced from illegal activities, such as drugs. Cash remitters may use the formal financialsystem, in particular banks, to transfer money overseas or exchangecurrencies and, as this is their business and they may move quite largesums, then blending some illegitimately sourced funds with legitimatefunds can and is undertaken quite easily.

Under the new risk-based AML/CTF regime, where cash remittersundertake financial transactions through a bank, it will be the banksresponsibility to identify if that activity potentially involves moneylaundering. This will require customers with registered cash remittingbusinesses being identified and the organisations’ risk assessment being applied, with the most likely outcome that this customer groupwill represent a high level of risk to the financial institution or potential money laundering activity.

Identifying the more informal cash remitting businesses or activities is more difficult, but should still be captured through the riskassessment process as these accounts can be identified through theirtransaction activities rather than their business or customer type. Forinstance, there will be more currency transactions than expected for theaccount type, particularly where those transactions are for currencies of countries with high risk of criminal activity, particularly drugs, suchas Thailand. Those transactions will be for significant amounts andmay occur quite regularly or with a sweeping transaction that clears the account. Informal cash remitters may operate as part of another business even with a registered name and separate business account orusing a business front, such as a restaurant. In the case above a moneytransfer business operated through a clothing business. Again, a keyindicator of potential money laundering activity will be where a customer account does not behave as expected. For instance, it wouldbe irregular for a small take-away restaurant in Australia to transferlarge amounts overseas or to exchange Australian dollars for Thai baht.

Cash remitters, either formal or informal services, represent a highrisk for money laundering activities due to the characteristics of the business. They also represent a high risk for the financial sector as bothformal and informal cash remittance services can and do use the finan-cial sector to move funds and exchange currencies from both legitimateand illegitimate sources. For financial institutions with cash remittanceservices for customers or where the banks’ services can be used to trans-fer money overseas or exchange currencies, there is a high risk of the financial institution being used as part of money laundering activities. It is a key component of any risk assessment methodology and processto identify not just high risk customer groups, such as cash remitters,but to also link this with identifying potential money laundering activi-ties that either formal or informal cash remitters may undertake. ■■


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PROFILE

BY JOHN KAVANAGH

B IG BANKS have a fixation with customer satisfaction. In recentyears they have taken to citing

customer satisfaction ratings in their financialresults presentations. What the banks are targeting is a small group of satisfied cus-tomers who are so pleased with their bankthey become advocates – they recommend the bank to others. New customer acquisitionis hard to achieve in highly competitive markets such as banking, and customer advocacy is one sure way of doing it.

As part of this trend, the customer expe-rience has become an important metric formeasuring the performance of banking staff.Surprisingly, even managers working in backoffice and head office departments have cus-tomer satisfaction as a performance driver.

Alison Bright, the senior manager regula-tory compliance and group anti-money launder-ing officer at ANZ, does not escape from therubric that everyone is working to make the

customers happy. A central part of the planningfor ANZ’s AML program is to make sure thecustomer experience is not compromised.

“We aim to make sure there is no negative impact for customers resulting from

the processes we are developing for AML,”says Bright. “When you are collecting moreinformation about people you may meetsome reticence. Our job is to strike the balance between regulatory compliance and customer needs.”


Striking the balanceWhen customer satisfaction is high on a bank’s agenda, then getting the balance between regulatory needs – and collecting the all-important important KYC information – is crucial,according to Alison Bright, ANZ Bank’s group anti-money laundering officer.

The big challenge in the job is translating

written obligations intopractical applications

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PROFILE

Bright says most of the members of her team have had experience working in customer-facing roles before moving intocompliance. This helps give them a sense of the customer issues. She has been with the bank 12 years and before moving into the compliance department was a relationshipmanager in institutional banking.

“I have degrees in law and economicsand when the compliance position came up I thought it would be a good combination ofmy tertiary qualifications and banking experi-ence. It is very important to have had thatrelationship management experience.”

Bright estimates that between one andfive per cent of the bank’s customers will fall into a risk category. The bank will needto know more about these people, where their money comes from and how they areusing it. While the percentages are low,for a bank with millions of customers it isstill a large number.

The Anti-Money Laundering andCounter-Terrorism Financing Bill does notrequire banks to update their profiles of existing customers, and for customers who do not fall into a risk category the informa-tion-gathering requirement is not very different from the present 100 points system.But things will be different for the one to five per cent.

“We will avoid an intrusive scoring system,” says Bright. “We have not finalisedour approach but we will do as much as we can to embed the AML program in the business process through the product approvalprocess and procedural design.”

Bright says one of the good things ANZ has done is start building awareness

within the bank early. “Even though we did not know the specifics we could see what was emerging with AML overseas and we knew it was coming here. Three years ago we started building awarenessthrough a staff education program. We will make adjustments and introduce more specific training programs as the implementation date gets closer.”

For Bright those training programs,starting at an early stage, are an indicator ofmanagement’s commitment to the process.“We have conducted regular briefings over anumber of years for senior management. Wehave used international standards as a bench-mark and briefed senior management at eachstage as we have introduced changes.”

Bright says there is strong backing for the AML/CTF Bill in its present form.“The view here is that risk-based is betterthen prescription. But it is still challenging.You have to get the risk assessment right and need regular engagement with the regulator and other industry participants.Over the longer term customer feedback will also be a factor in determining if you have got the balance right.

”The big challenge in the job is translating written obligations into practicalapplications. We ask ourselves how to makethe compliance process work efficiently in a banking environment. There is a lot ofproblem solving in this job.” ■■


Alison BrightSENIOR MANAGER REGULATORY COMPLIANCE

AND GROUP ANTI-MONEY LAUNDERING OFFICER, ANZ

We have conducted regularbriefings over a number ofyears for senior management. We have used internationalstandards as a benchmark and briefed senior managementat each stage as we have introduced changes.

CASE NOTES


Y OUR CUSTOMER HAS a number of personal depositaccounts with your bank along with a business cheque accountfor a Thai restaurant. The restaurant has particularly good take-

away Thai food and has been operating for nearly five years. It is timefor you to review their business account to see if they need any otherbanking services that your organisation can offer. Firstly, you look backover their account activity and see a weekly pattern where the ownersmake a large deposit on Monday of the weekend takings (as Thai take-away is popular over the weekend). However, there also appears to besignificant deposits every Wednesday from an account called ThaiFinance and held with your bank at another branch. Whilst these depositsare significant they differ sufficiently week to week to suggest they areassociated with some form of business undertaking. Every month, anamount equal to the month’s Wednesday deposits is exchanged into Thai baht and transferred at the end of the month to an account held at an international bank in Thailand in the name of another company. Thename of this company suggests it is associated with financing activities.

You think maybe the owners of the restaurant may have family orother business interests in Thailand, but it is a bit strange so you decideto investigate the company making the deposit to try and get a clearerpicture of the transaction activity. You ask the restaurant manager who makes the next Monday deposit about the family's business inter-ests in Thailand and she says that she does not think that they have any,but she appears ill at ease and leaves the branch very quickly, avoidingfurther questions. The account details for Thai Finance held by yourbank indicate that the owners of the restaurant are also the owners ofThai Finance. However, when you then check these details with theAustralian Securities and Investment Commission, you find that theThai Finance business is not officially registered as either a company or business name, although the restaurant is registered. This was notdetected on account opening.

Possible explanations1) A legitimate explanation could be that the restaurant manager

does not know everything about the owners of the Thai take-awayrestaurant and that they do have business interests in Thailand. The Thai Finance account might be being used simply as a way of keeping track of funds they are sending to Thailand.

2) An alternative explanation could be that the owners of the Thaitake-away are using the shop as a front for an informal cash remittance operation. The funds being passed through the restaurantaccount are either to settle their outstanding remittances with theirconnection in Thailand or the deposits and withdrawals through the restaurant account are part of a laundering operation.

Questions you should consider1) How do you establish more about the relationship between the

restaurant and the Thai Finance accounts than is known from theabove facts? Do you question the owners?

2) How do you establish more about the relationship between both the restaurant and the Thai Finance accounts held in Australia and the account in Thailand? Do you do a company search inThailand? Do you ask the bank in Thailand – where the Thai baht monthly payment is sent to – about their customer?

3) What additional information do you have available within yourorganisation regarding the owners of the restaurant, their accountsand their account activity?

4) Should you close the Thai Finance account unless the owners canexplain satisfactorily what the account is for and provide evidenceof the correct registration of a business name or company in accordance with Australian law?

5) Do you know enough to regard the operation of these accounts as suspicious under section 41 of the proposed AML/CTF Bill?

6) Should both the restaurant account and the Thai Finance account be classified as high risk accounts and treated accordingly?

7) How should future transactions through both accounts be treated inthe future to manage and mitigate any possible future risk of theseaccounts being used for money laundering activity? ■■

When food is not theonly thing on the menuCould that brilliant Thai take-away restaurant be a front for something less tasty? Michelle Hannan asks the questions some banks may need to ask when checking out banking activities.

six steps to implementation

© 2006 KPMG, an Australian partnership, is part of the KPMG International network. All rights reserved. August 2006. VIC10327FAS.

AML legislation.In-depth

knowledgeworking for you.

The Government’s new anti-money laundering(AML) legislation is upon us. At KPMG, we can help you assess clearly and pragmatically theimpacts for your business.

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

We can help you assess the money laundering andfinancing of terrorism risks faced by your business – and more importantly how to address them.

Our team can assist in the design and implementationof new policies and processes, systems selection andintegration advice and staff training.

We have worked with leading financial institutions,globally and in Australia, in areas such as moneylaundering and terrorist financing risk reviews anddeveloping AML processes, policies, training andtechnology. It all translates into more focused, up-to-date and relevant advice for your business.

So when it comes to understanding the new AMLlegislation, contact the professionals in the know – KPMG Forensic.

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Documents

anti-money - AFMA · Why a Thai takeaway restaurant with strange banking transactions may not have only food on the menu. COVER STORY: ... but it’s really time to roll up the sleeves,”