INTRODUCTION TO MONEY LAUNDERING DETERRENCE The Chartered Institute for Securities & Investment Mission Statement: To set standards of professional excellence and integrity for the investment and securities industry, providing qualifications and promoting the highest level of competence to our members, other individuals and firms Formerly the Securities & Investment Institute (SII), and originally founded by members of the London Stock Exchange in 1992, the Institute is the leading examining, membership and awarding body for the securities and investment industry We were awarded a royal charter in October 2009, becoming the Chartered Institute for Securities & Investment We currently have around 40 000 members who benefit from a programme of professional and social events, with continuing professional development (CPD) and the promotion of integrity, very much at the heart of everything we Additionally, more than 40 000 examinations are taken annually in more than 50 countries throughout the world The CISI also currently works with a number of academic institutions offering qualifications, membership and exemptions as well as information on careers in financial services We have over 40 schools and colleges offering our introductory qualifications and have University Centres of Excellence recognised by the CISI as offering leadership in academic education on financial markets You can contact us through our website www.cisi.org Our membership believes that keeping up to date is central to professional development We are delighted to endorse the Wiley/CISI publishing partnership and recommend this series of books to our members and all those who work in the industry As part of the CISI CPD Scheme, reading relevant financial publications earns members of the Chartered Institute for Securities & Investment the appropriate number of CPD hours under the SelfDirected learning category For further information, please visit www.cisi.org/cpdscheme Ruth Martin Managing Director INTRODUCTION TO MONEY LAUNDERING DETERRENCE Dennis Cox Risk Reward Ltd, London, UK A John Wiley & Sons, Ltd., Publication This edition first published 2011 © 2011 John Wiley & Sons, Ltd Registered office John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom For details of our global editorial offices, for customer services and for information about how to apply for permission to reuse the copyright material in this book please see our website at www.wiley.com The right of the author to be identified as the author of this work has been asserted in accordance with the Copyright, Designs and Patents Act 1988 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books Designations used by companies to distinguish their products are often claimed as trademarks All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners The publisher is not associated with any product or vendor mentioned in this book This publication is designed to provide accurate and authoritative information in regard to the subject matter covered It is sold on the understanding that the publisher is not engaged in rendering professional services If professional advice or other expert assistance is required, the services of a competent professional should be sought Library of Congress Cataloging-in-Publication Data Cox, Dennis W Introduction to money laundering deterrence / Dennis Cox p cm ISBN 978-0-470-06572-3 Money laundering Money laundering—Prevention Terrorism—Finance Terrorism—Prevention I Title HV8079.M64C69 2010 364.16′8—dc22 2010031108 A catalogue record for this book is available from the British Library ISBN 978-0470-06572-3 Typeset in 10/12pt Trump Medieval by Toppan Best-set Premedia Limited Printed and bound in Great Britain by TJ International Ltd, Padstow, Cornwall CONTENTS About the author Introduction xiii xv WHAT IS MONEY LAUNDERING? The initial concerns What is money laundering? The process of money laundering The primary offences Due diligence The evasion of taxation Suspicion and reporting The local service provider 2 6 Licence payments The process of money laundering 10 INTERNATIONAL MONEY LAUNDERING REGULATION – THE ROLE OF THE FINANCIAL ACTION TASK FORCE 15 Who are the Financial Action Task Force? History of FATF The 40 FATF Recommendations The Special Recommendations 16 16 17 38 vi CONTENTS EUROPE – THE THIRD MONEY LAUNDERING DIRECTIVE 43 Background to the Directive Aims of the Directive The UK implementation of the Directive Key provisions of the Directive Overview of the Directive 44 44 45 45 46 THE UK REGULATORY FRAMEWORK 61 Background The Financial Services and Markets Act 2000 Fit and Proper Person Rules FSA Regulation and Money Laundering Deterrence The Proceeds of Crime Act 2002 The Terrorism Act 2000 and the Anti-Terrorism Crime and Security Act 2001 The Money Laundering Regulations 2007 62 62 63 64 65 66 67 HOW RULES ARE APPLIED IN THE UK – THE JOINT MONEY LAUNDERING STEERING GROUP 69 Membership The risk-based approach The regulatory framework 70 71 72 THE WOLFSBERG PRINCIPLES 75 The Wolfsberg Group What is the real significance of the Principles? 76 76 CONTENTS vii The Wolfsberg Principles, Statements and Guidelines The Statement against Corruption The Statement on Private Banking (May 2002) 81 Principles on correspondent banking 85 THE US REGULATORY FRAMEWORK 89 The US Patriot Act The other key US regulations Key issues in the US Patriot Act The Bank Secrecy Act 1970 90 90 91 97 77 77 FINANCIAL SANCTIONS 103 What are financial sanctions? Failing to comply Sanctions lists Compliance with financial sanctions Financial sanctions as part of normal money laundering deterrence procedures Difficulties faced by firms when monitoring financial sanctions 104 104 105 107 109 THE ROLE OF THE MONEY LAUNDERING REPORTING OFFICER 111 What is a Money Laundering Reporting Officer? Who can be appointed as an MLRO? The role of the MLRO The safe harbour and its limitations Matrix management What is an MLRO’s internal reporting procedure? 108 112 112 113 114 114 116 viii 10 11 12 CONTENTS What is contained in the MLRO’s Annual Report? 117 MONEY LAUNDERING TRAINING 123 The importance of staff awareness and training The core obligations of training Legal and regulatory obligations Staff responsibilities Internal training procedures Training methods and assessment 124 124 125 126 128 129 KNOW YOUR CUSTOMER 131 What is Know Your Customer? Why should firms carry out KYC requirements? What does KYC involve? What are the general issues? Reliance on third parties The Third EC Directive – KYC requirements The UK KYC requirements 132 139 140 RETAIL CUSTOMER IDENTIFICATION 145 Who are retail customers? Basic retail identification evidence Documentary verification Customer exclusion Electronic verification Impersonation fraud Family members 146 146 147 149 150 150 151 133 134 134 138 CONTENTS 13 14 15 ix Transaction monitoring Source of funds 152 152 CORPORATE CUSTOMER IDENTIFICATION 155 Who is a corporate customer? Risks associated with corporate customers Beneficial owners Standard evidence for corporate entities Private and unlisted companies Enhanced due diligence Charities and trusts 156 157 158 158 160 161 162 POLITICALLY EXPOSED PERSONS 165 What is a politically exposed person? The definition of a politically exposed person (PEP) At what level is someone a PEP? Prominent public functions The immediate family rules The associate rules What is the risk-based approach? The risk-based approach to determining PEPs Transparency International 166 174 176 NON FACE-TO-FACE CUSTOMERS 179 Who are non face-to-face customers? Additional measures for non face-to-face customers 180 167 168 170 171 172 174 181 x 16 17 18 CONTENTS Risk-based approach to non face-to-face customers 182 SUSPICIOUS CONDUCT AND TRANSACTIONS 185 Introduction What is a suspicious transaction? Activity inconsistent with the customer’s business Avoiding a national reporting or record-keeping requirement Wire or fund transfers Insufficient or suspicious information by customer Other suspicious customer activity 186 186 192 193 UNUSUAL TRANSACTIONS 197 The identification of unusual transactions The development of policy The types of events that might cause suspicion The problems of customer identification What might highlight terrorist activity? 198 198 201 202 203 INVESTIGATING SUSPICIONS 205 The investigation process Making a report Internal reporting External referrals What is meant by “knowledge” and “suspicion”? What is meant by “reasonable grounds” to know or suspect? 206 206 207 210 187 189 190 211 212 ... financing programmes and risk management The risk of money laundering and terrorist financing Money laundering and terrorist financing risk 241 MONEY LAUNDERING DETERRENCE SOFTWARE 243 What is money. .. 77 77 FINANCIAL SANCTIONS 103 What are financial sanctions? Failing to comply Sanctions lists Compliance with financial sanctions Financial sanctions as part of normal money laundering deterrence. .. Reward Limited London Introduction to Money Laundering Deterrence By Dennis Cox © 2011 John Wiley & Sons, Ltd Chapter WHAT IS MONEY LAUNDERING? INTRODUCTION TO MONEY LAUNDERING DETERRENCE THE INITIAL