Legal Framework and Regulatory Regime Required for an effective AML/CFT System

1. Legal Framework and Regulatory Regime Required for an effective AML/CFT System Richard Pratt 29 March 2005

2. The context for the regulatorThe essential elements for any effective regime • Criminalise Money Laundering/Terrorist Financing • Wide range of predicate offences • Special requirements for certain institutions* • Monitoring compliance with special requirements* • Compulsory suspicious transactions reports* • A Financial Investigation Unit • Powers to investigate and collect information • Powers to freeze and confiscate assets • Domestic and international cooperation * The regulator’s role

3. How do money launderers and terrorists abuse banks? • Cash transactions • Rapid international transfer of funds • Complex transactions • Use of trusts and companies • Identity theft • Anonymous accounts / fictitious names • Disguising source of funds • Use of legitimate businesses • Use of charities • Low value transactions for terrorist acts

4. What AML/CFT Regulations on banks should cover • Corporate Governance / Staff Training • A risk based approach • Knowing the customer • Limiting cash transactions • Monitoring the account • Complex account structures • Accepting funds only from known sources • Reporting suspicions

5. Corporate Governance • Fit and Proper Management • The Structure of Management • The commitment of management • A clear policy based on a risk assessment • Controls and Monitoring (including audit) • Record keeping • Training of staff • Regular review of policy

6. A risk based approach • Reputational, operational, legal • Drugs • Terrorism • Capital flight • Fraud and tax evasion • Corruption and extortion • Politically exposed persons • Risks inherent in new technologies

7. Knowing the Customer • FATF 5 • Financial institutions should not keep anonymous accounts or accounts in fictitious names • Financial institutions should undertake customer due diligence including identifying and verifying the names of their customers, when: • Establishing a business relationship • Carrying out occasional transactions • There is a suspicion of money laundering or terrorist financing • There are doubts about the accuracy or adequacy of information previously obtained. • Due diligence must be applied to beneficial owners

8. Knowing the Customer • Applying a risk based approach • Identification and verification • Drilling down through complex structures • Source of wealth • Source of funds • Transaction profile • Monitoring transactions • Reporting suspicions

9. Client Risk Rating ( an Example) Risk Factor Rating/Score Due Diligence 8 Nationality Drug producing country Rating System Domicile UK 2 Oil Business 1-3 6 Businessman Profession 2 4-7 Shares Origin/Source of Funds 6 8-10 Dom Co’s/Multiple Relationships Complexity 6 Asset Volume $80 M 6 36/7 = 5

10. Cash • Applying a risk based approach • Understanding the purpose, source and direction • Reporting cash transactions • Reporting suspicions

11. Monitoring the Account • The risk based approach • Comparing with profile • Identifying suspicions – the use of IT • The reason for the transaction • The reason for complexity • The source of funds • The destination of funds • Wire transfers • Charities

12. Truck Supplier Switzerland The Isle of Man 50% 50%% Nigeria Jersey

13. Understanding complex structures • The risk based approach • The purpose of the structure • The ultimate owner • Understand trusts

14. JKL settlement (A Nevis trust) GHI Nominees (BVI) DEF Trust Company (Jersey) ABC Nominees UK Mr Smith XYZ Company Cayman Islands Where is the owner? Assets

15. Funds from suspect sources • A risk based approach • Shell banks • Correspondent banks • Wire transfers • Bank secrecy jurisdictions • Non co-operating countries and territories

16. Reporting suspicions • A reporting officer • Training – what is suspicious • Monitoring and control • Relationship with FIU

17. Essential Regulatory Powers • To be independent • To make rules • To vet businesses, owners senior officers • To impose record keeping requirements • To have access to all records, officers, premises, without notice • To mount investigations • A wide range of sanctions • To share information

18. Regulatory Process • Risk Based Approach • Licensing • Supervision • Enforcement

19. Licensing • Fit and Proper • Competence, integrity, financially sound • Directors, MLROs, Compliance Officers, • Owners and controllers • Defining controlling shareholder, monitoring shareholdings, removing unfit controllers • Seeking information • Imposing conditions

20. Supervision • On-site supervision • Checking the Guidance and regulations are being followed • Sampling the files • Desk based • Periodic returns – eg on STRs

21. Enforcement • Policy on investigations • Criminal or civil • Staff training on evidence collecting • Risk based approach • Graduated response • Proper Appeal

22. Regulatory Essentials • Risk assessment for the jurisdiction • Clear regulatory objectives • Regulatory plan • Staff training and motivation • Staff Integrity • Monitoring Consistency • Risk based enforcement • Determination

23. Legal Framework and Regulatory Regime Required for an effective AML/CFT System Richard Pratt 29 March 2005