Mdm (2)

Corporate Decision

Making in a Changing

EnvironmentAML and CFT

M.P.J. Sinninghe Damsté

328982

1. Introduction

2. Compliance, AML and CFT

3. The AML/CFT decision model

4. The AML/CFT decision model in a

changing environment

5. Conclusion

6. Questions

Table of Contents

Aldrich Hazen Ames (1941), former CIA

● Arrested in 1994, lifelong prison

sentence

● Espionage for Russia/USSR, one of the

biggest “moles” in CIA history

● Caught because expenses (>USD 700k)

did not match income (USD 60k)

● Thus criminals must conceal origin of

wealth

1.Introduction

● Money launderingo Concealing criminal origin of money via the financial system

o Dirty money is made clean

● Financing of terrorismo Providing funds, assets or goods with intention they will be used to carry out

acts of terrorism

o Clean money is made dirty

o Sometimes funds also obtained in illegal way (theft, extortion, e.g. Tamil

Tigers, IS)

● Crime should not payo Assistance in money laundering and terrorism financing facilitates crime and

terrorism

o Criminalization of ML/TF - preventive effect

o Crime no longer attractive if it can not be financed or benefits not reaped

1.Introduction

1.IntroductionCash from criminal

act

Money

laundering

Financing of

terrorism

Legitimate asset or

cash from criminal

act

Bank

Securities

firm

Integration: funds

used to acquire

legitimate assets

Other financial

professionals

Insurance

company

Corporate Services

Provider

SPV / Trust

/ Fund

Integration: funds

distributed to fund

terrorist activities

Money

mules

I. Placement

II. Layering

III. Integration

Hawala

Sanctions● Criminal sanctions

o Fine

o Prison

● Loss of reputation

● Criminal record

● Civil damage claims

● Crime description objectivated, facts

proven already assumes guilt

● Not only the directors or only

compliance officer, but everybody is

responsible!

● “I did not know” or “I only did what I

was told to do” are no excuses!

1.Introduction

● Compliance = management of all

regulatory risk, wider than AML and CFT

● AML = Anti money-laundering

● CFT = Combating Financing of Terrorism



Corporate norms and procedures

National lower legislation

National higher legislation

Int. treaties /

standards


Principles

from treaties,

standards and

law

Customer Due Diligence (KYC)

Risk-based approach

Suspicious/cash transaction

reporting

Record keeping

Cooperation with authorities

Internal controls, regulations,

audit

Corporate

decision

making

Step 1 - Data collection

3. The AML/CFT Decision Model

New client accepted

conditions

AML

request

Sufficient

information

received?

no

yes

Refuse client

and inform

authorities

suspicion and/or

non-cooperation

To the

next

step

Step 2 - Risk

analysis,

PEP/

blacklist

screening,

acceptance

3. The AML/CFT Decision ModelRisk-indicator Answer Score Explanation

Introduced business No, existing client 0 0 -5 points = low (accept)

6 -10 points = medium

(accept)

11 -15 points = high (reject

unless mitigating factor)

16 + = unacceptable

(reject)

Type of services provided Full-service 0

Relation with client Never face-to-face contact 1

Client country analysis Non-FATF member, high

level of corruption

6

The purpose of the

business

Securitization 0

Completeness of KYC

documentation

No structure chart but

remaining information

complete

3 Date and signature

compliance team

member

(date, signature)High- or low-risk business Low-risk (financial

business)

0

Blacklist screening result Negative 0 Date and signature

compliance officer

(date, signature)Involvement of PEP Negative 0

UBO Identified 0 Remarks

Try to obtain a signed

structure chart.Result 10 (medium, accept)

Step 2 - Risk analysis and PEP/

blacklist screening


Client to be screened

Screening

and risk

analysis

Unacceptable

Reject unless

mitigating

factor

Enhanced

vigilance

Accept

AcceptNormal

vigilance

Low vigilance

Reject client

and inform

authorities

Step 2 - Risk analysis, PEP/

blacklist screening,

acceptance

● Final decision on approval or

rejection with decision on Due

Diligence (simplified, normal,

enhanced).

● Only now business can start!



Ongoing

monitoring

Event

Rescreening AML

request

Sufficient

information

received?

Investigate

no No action

Suspicion Inform

authorities (no

tipping off!)

Risk

reclassification

uncooperativ

e

behavior

Risk

reclassification

No action

Step 3

Ongoing monitoring

Should we be strict or flexible?


Strictness of

AML/KYC

Loose criteria

Fees +500k

Strict criteria

Fees +200k

Adverse

cons.

Damage 5 M

10%

No issues

Damage 0

-4.5M

90%

+ 500k

Adverse

cons.

Damage 500k

No issues

Damage 0

- 300k

+ 200k

1 %

99%

Loose:

0.1 x -4.5M = -450k

0.9 x 500k = 450k

Total: nil

Strict

0.01 x -300k=-3k

0.99 x 200k=198k

Total: 195k

Depends on input

but strict AML/CFT

is preferred!(*) This model assumes that every type of

damage (including reputation or personal

damage) can be monetarily valued


0

Regulatory

costs

(fine, loss

reputation,

prison)

Benefit

(fees)


0

Risk

Utility

Willing participation in

criminal activitiesno longer

economic

Costs

Grey

ZoneNormal business

A


Beginning

of the

relationship

Step 1

(CDD/KYC)

Step 2 (Risk

cat)

Step 3

(Ongoing

monitoring)

Risk analysis

End

Inform

authoriti

es

Uncooperativ

e behavior or

suspicion

Willing

participati

on in

criminal

activities

no

lon

ger

ec

on

om

ic

C

os

ts

G

r

e

y

Z

o

n

e

Normal

business

A


AM

FM

Risk

switchLow

High

Output

(decision /

music)

Input

(info /

electricity/

signals)



Company

Management

Decisions

New rules and legislation

Client behavior

Political developments

Client changes

● Rescreening

● Events, appearance on updated blacklist

Consequences

● Change risk profile of client

● If necessary inform authorities

● Included in robustness of model (step 3,

ongoing monitoring)





0

Risk

Utility


criminal activities

Costs

Grey

ZoneNormal business

A

A’ (risk profile of client increased)

A’’ (risk profile increased

to unacceptable level)

A’’’ (risk profile increased

to unacceptable level or

client appears on

blacklist)

no longer

economic

Legislative changes

● Higher legislation (formal legislation)

o Parliamentary approval, takes longer

o Wider scope

o Possibly change risk criteria or model

● Lower legislation (circular, regulation)

o No parliamentary approval

o Narrower scope

o Possibly change criteria (not likely the whole

model)




changing environmentStricter requirements

(e.g. more or earlier

requirement to inform

authorities or more

CDD/KYC

New

requirementsDifferent (stricter) criteria in risk analysis

1

6

3 6

0 5

Result 10 (medium, accept) 18



0

Risk

Utility


criminal activities

Costs

Grey

ZoneNormal business

A

A’

B

B’

no longer

economic

Political changes

Example: Libya

● Before 2001:

‘mad dog’ of the

Middle East

● 2001-2011: OK

● 2011 - : Chaos



Muammar Muhammad Abu Minyar al-Gaddafi

(1942-2011)

Consequences:

● Increase of risk - higher risk in risk analysis - possibility

authorities need to be informed or client relations

need to be ended

● Clients in that country might appear on blacklist -

possibility authorities need to be informed or client

relations need to be ended

● Embargo from government - no choice but to obey

(even if it has adverse effects to the enterprise)





Different (stricter) score in risk analysis

1

6

3 6

0 5

Result 10 (medium, accept) 18

0

C

os

A

● Models proposed for

o Data collection (CDD/KYC) - normative

o Risk analysis, screening, acceptance - normative

o Ongoing monitoring - normative

o Strictness of procedures - descriptive

● Decision on strictness is most crucial decision

● Changes can affect decision model

o Changes in the client - should be captured in robustness of the

model

o Legislative changes - likely change in model

o Political changes - should be captured in robustness of the model. Be

aware of high country-exposure and concentration risk (companies

dealing with Russia)

5. Conclusion

● Anticipate on changes (“small signals”, literature, news(letters)).

● Strict is better than flexible. High fees = High risk!

● Shortcomingso Models are a simplification of reality

o Garbage in = Garbage out

● Remember:o Everybody is responsible

o Sanctions not only for knowingly or unknowingly assisting in money

laundering or terrorist financing, also for having inadequate procedures!

o Thus a suitable risk- and company tailored AML/CFT decision model is

needed, flexible and robust to changes

o Environment must be constantly monitored

o Be sure to have legal assistance at hand

5. Conclusion

5. Conclusion

Beginning

of the

relationship

Step 1

(CDD/KYC)

Step 2 (Risk

cat)

Step 3

(Ongoing

monitoring)

Risk analysis

End

Inform

authoriti

es

Uncooperativ

e behavior or

suspicion

Crime

C

os

ts

Normal

business

A

5. Conclusion

0

Risk

Utility


criminal activities

Costs

Grey

ZoneNormal business

Decision entrepreneur

Behavior client

Political changes

no longer

economic

5. Conclusion

0 0

When the government tells you to jump…

… your only choice will be how high…

...but it will be a crucial choice!

5. Conclusion

6. Questions?

Leadership & Management

Mdm (2)