Midlands Audit Fraud Seminar

1. 1 Midlands Audit Fraud  Seminar Dave Churchill Churchill Fraud Solutions Ltd

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3. 3 A C Q U I S I T I V E C R I M E

4. 4 Money Laundering ?

5. 5 Money Laundering - Definition The process by which criminals attempt to hide and disguise the true origin and ownership of the proceeds of their criminal activities, thereby avoiding prosecution, conviction and confiscation of the criminal funds THE ABILITY TO LAUNDER THE PROCEEDS OF CRIMINAL ACTIVITY THROUGH FINACIAL AND OTHER SYSTEMS BOTH IN THE UK AND ABROAD IS VITAL TO THE SUCCESS OF CRIMINAL OPERATIONS FAILURE TO PREVENT THE LAUNDERING OF PROCEEDS OF CRIME PERMITS CRIMINALS TO BENEFIT FROM THEIR ACTIONS AND MAKES CRIME A MUCH MORE ATTRACTIVE PROPOSITION HISTORICALLY EFFORTS TO COMBAT ML WERE CONCENTRATED ON THE BANKING SECTOR BUT TODAYS CRIMINALS HAVE RECOGNISED THAT AND NOW SEEK OTHER MEANS TO CONVERT THEIR ILLEGAL GAINS OR TO MIX THEM WITH LEGITIMATE INCOME BEFORE THEY ENTER THE BANKING SYSYTEM. NONE BANKING INSTITUTIONS HAVE THEREFORE BECOME PROGRESSIVELY MORE VULNERABLE TO TO BEING USED FOR ML SOME OF THE HIGHEST RISK PRODUCTS OR SERVICES ARE THOSE WHERE UNLIMITED THIRD PARTY FUNDS CAN BE FREELY RECEIVED OR WHERE THIRD PARTY FUNDS CAN REGULARLY BE PAID TO THIRD PARD PARTIES WITHOUT EVIDENCE OF IDENTITY BEING TAKEN IE FACILITIES THROUGH CHEQUE BOOKS , TELEGRAPHIC TRANSFER & DEPOSITS THROUGH THIRD PARTIES. CORPORATE AND PRIVATE CURRENT ACCOUNTS FALL WITHIN THIS CATERGORY BECAUSE UNLIMITED THIRD PARTY FUNDS ARE CONTINUALLY RECEIVED FOR CREDIT TO THE ACCOUNT AND IT WOULD BE IMPRACTICABLE TO IDENTIFY ALL SUCH PROVIDERS. PRIVATE BANK ACCOUNTS ARE PARTICULARLY VULNERABLE THE RISKS ARE INCREASED IF THE MONEY LAUNDERER CAN HIDE BEHIND CORPORATE STRUCTURE SUCH AS LIMITED COMPANIES AND OFF-SHORE TRUSTSTHE ABILITY TO LAUNDER THE PROCEEDS OF CRIMINAL ACTIVITY THROUGH FINACIAL AND OTHER SYSTEMS BOTH IN THE UK AND ABROAD IS VITAL TO THE SUCCESS OF CRIMINAL OPERATIONS FAILURE TO PREVENT THE LAUNDERING OF PROCEEDS OF CRIME PERMITS CRIMINALS TO BENEFIT FROM THEIR ACTIONS AND MAKES CRIME A MUCH MORE ATTRACTIVE PROPOSITION HISTORICALLY EFFORTS TO COMBAT ML WERE CONCENTRATED ON THE BANKING SECTOR BUT TODAYS CRIMINALS HAVE RECOGNISED THAT AND NOW SEEK OTHER MEANS TO CONVERT THEIR ILLEGAL GAINS OR TO MIX THEM WITH LEGITIMATE INCOME BEFORE THEY ENTER THE BANKING SYSYTEM. NONE BANKING INSTITUTIONS HAVE THEREFORE BECOME PROGRESSIVELY MORE VULNERABLE TO TO BEING USED FOR ML SOME OF THE HIGHEST RISK PRODUCTS OR SERVICES ARE THOSE WHERE UNLIMITED THIRD PARTY FUNDS CAN BE FREELY RECEIVED OR WHERE THIRD PARTY FUNDS CAN REGULARLY BE PAID TO THIRD PARD PARTIES WITHOUT EVIDENCE OF IDENTITY BEING TAKEN IE FACILITIES THROUGH CHEQUE BOOKS , TELEGRAPHIC TRANSFER & DEPOSITS THROUGH THIRD PARTIES. CORPORATE AND PRIVATE CURRENT ACCOUNTS FALL WITHIN THIS CATERGORY BECAUSE UNLIMITED THIRD PARTY FUNDS ARE CONTINUALLY RECEIVED FOR CREDIT TO THE ACCOUNT AND IT WOULD BE IMPRACTICABLE TO IDENTIFY ALL SUCH PROVIDERS. PRIVATE BANK ACCOUNTS ARE PARTICULARLY VULNERABLE THE RISKS ARE INCREASED IF THE MONEY LAUNDERER CAN HIDE BEHIND CORPORATE STRUCTURE SUCH AS LIMITED COMPANIES AND OFF-SHORE TRUSTS

6. 6 Money Laundering - Sec 327/328/329 Conceals, disguises, converts , transfers, removes criminal property Enters into, or becomes concerned in, an arrangement to facilitate another person to acquire , retain, use or control criminal property. Acquires , uses or has possession of criminal property. All 14 yrs imprisonment 14 yrs imprisonment on indictment

7. 7 Defence No offence if you DO NOT KNOW or SUSPECT the property constitutes (or represents) criminal property Or is a benefit from criminal conduct

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10. 10 All Acquisitive Crimes Theft/Robbery/Fraud Illegal arms sales, smuggling, Activities of organised crime e.g. drug trafficking /prostitution rings / computer fraud Bribery and corruption Idea is – To legitimise ill-gotten gains Through money laundering

11. 11 Disclosures Suspicious Activity Reports (SAR’s); Financial information passed to SOCA Not Local Authorities

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13. 13 Local Authorities Not Regulated Auditors are Go to Police with Fraud

14. 14 COMMERCE v Know Your Customer Requirements Identify the source of funds; From where and from whom Always record details to provide an audit trail for investigators A CHEQUE OR TRANSFER FROM A REGULATED SOURCE WILL NORMALLY BE PROOF ENOUGH OF ORIGINS FOR HIGHER RISK PRODUCTS IT MAY BE PRUDENT TO UNDERTAKE ADDITIONAL STEPS AND OR ENQUIRIES IE HOW THE FUNDS WERE ACQUIRED, THEIR ORIGIN, DOCUMENTARY EVIDENCE OF THEIR SOURCE Id EVIDENCE GATHERED AT THE START OF A RELATIONSHIP SHOULD BE WEIGHED AGAINST THE RISKS OF THE PRODUCT OR SEVICE. IN THIS WAY COMMERCIAL JUDGEMENT WILL BE INFLUENCED BY THE AMOUNT/QUALITY OF THE THE KYC INFORMATION ALREADY KNOWN. THUS WHERE GOOD KYC MEASURES ARE IN PLACE AND WHERE THE RISK OF MONEY LAUNDERING IS LOW ( A WELL ESTABLISHED PRIVATE COMPANY) A LOWERE LEVEL OF IDENTIFICATION MAY BE JUSTIFIEDA CHEQUE OR TRANSFER FROM A REGULATED SOURCE WILL NORMALLY BE PROOF ENOUGH OF ORIGINS FOR HIGHER RISK PRODUCTS IT MAY BE PRUDENT TO UNDERTAKE ADDITIONAL STEPS AND OR ENQUIRIES IE HOW THE FUNDS WERE ACQUIRED, THEIR ORIGIN, DOCUMENTARY EVIDENCE OF THEIR SOURCE Id EVIDENCE GATHERED AT THE START OF A RELATIONSHIP SHOULD BE WEIGHED AGAINST THE RISKS OF THE PRODUCT OR SEVICE. IN THIS WAY COMMERCIAL JUDGEMENT WILL BE INFLUENCED BY THE AMOUNT/QUALITY OF THE THE KYC INFORMATION ALREADY KNOWN. THUS WHERE GOOD KYC MEASURES ARE IN PLACE AND WHERE THE RISK OF MONEY LAUNDERING IS LOW ( A WELL ESTABLISHED PRIVATE COMPANY) A LOWERE LEVEL OF IDENTIFICATION MAY BE JUSTIFIED

15. 15 “SUSPICION” This is personal and subjective but falls far short of proof. It is beyond mere speculation but based on some foundation

16. 16 SUSPICION A Person who considers a transaction to be suspicious does not have to know the exact nature of the criminal offence or that the particular funds were definitely those arising from the crime

17. 17 RECOGNISING SUSPICIONS Such transactions are often inconsistent with a customers legitimate transactions or with the normal business activity of that customer or account Transactions with no apparent purpose and which make no obvious economic sense THE KEY TO RECOGNISING SUSPICIONS IS KNOWING ENOUGH ABOUT THE CUSTOMER AND THE CUSTOMERS NORMAL EXPECTED ACTIVITY TO RECOGNISE WHEN A TRANSACTION OR INSTRUCTION OR A SERIES OF SUCH IS ABNORMAL. THIS WILL OFTEN DEPEND ON THE FIRMS CUSTOMER BASE AND THE RANGE OF PRODUCTS/SERVICESS IT OFFERS.AS SOME ARE MORE SUSCEPTIBLE THAN OTHERS A RISK BASED APPROACH MIGHT BE MORE APPROPRIATETHE KEY TO RECOGNISING SUSPICIONS IS KNOWING ENOUGH ABOUT THE CUSTOMER AND THE CUSTOMERS NORMAL EXPECTED ACTIVITY TO RECOGNISE WHEN A TRANSACTION OR INSTRUCTION OR A SERIES OF SUCH IS ABNORMAL. THIS WILL OFTEN DEPEND ON THE FIRMS CUSTOMER BASE AND THE RANGE OF PRODUCTS/SERVICESS IT OFFERS.AS SOME ARE MORE SUSCEPTIBLE THAN OTHERS A RISK BASED APPROACH MIGHT BE MORE APPROPRIATE

18. 18 POSSIBLE INDICATORS Where the request is out of the ordinary or outside the experience of the firm e.g. customer size or pattern of transactions is out of line with previous activity Refusal to provide requested Information Use of a relationship for a single transaction or for only a short period of time

19. 19 POSSIBLE INDICATORS Extensive use of off-shore accounts, companies etc where the customers needs do not support such extensive economic requirements Unnecessary routing of funds through third party accounts / cash transactions

20. 20 Examples Dealings in Cash – Sales of Houses High overpayment of Council tax – Repayment made Student Fees in cash

21. 21 ML Offences / Procedures involved Placement; Physical deposit of money into the financial system Layering/Blending Disassociate the illegal money from the source/complex web of transactions Integration Laundering back into the system appearing legitimate

22. 22 Restraint of a suspects assets Reasonable cause to believe an offender benefited from criminal conduct and A criminal investigation has started in relation to an offence Before Conviction

23. 23 Cash Seizure Power to search a person reasonably suspected of carrying a large sum of cash derived from or intended for use in crime. Also search premises for cash if lawfully present. Was £10,000 then £5000 – now £1000

24. 24 Confiscation Investigations An investigation into ; Whether a person has Benefited from criminal conduct and The extent or whereabouts of his or her benefit from that conduct.

25. 25 Confiscation Orders Made after Conviction Court work out the benefit from crime and order to pay. ( Could be less if not available) Enforced against realisable property whether legally obtained or not.

26. 26 Overview Criminal Activity Generates substantial profits Must control funds without attracting attention to the activity or those involved Need to Disguise the sources / change the form/ move the funds

27. 27 Money Laundering used to fight crime Connects criminals and their networks through their financial transactions Frequently the only way to locate and recover stolen funds Removing ill-gotten gains removes criminality and hits harder than many other sanctions

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29. 29 The Third European Directive

30. 30 Objective To Stop the use of Financial Systems for the purpose of Money Laundering and Terrorist Financing To be implemented by 15th December 2007

31. 31 Sofia

32. 32 Prague

33. 33 Vilnius

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36. 36 The 3rd Directive-The Main points The identification of customers and beneficial owners and the verification of their identity. This Directive to apply to those activities of the institutions and persons performed on the Internet Also to include life insurance intermediaries and trust and company service providers

37. 37 Cash Payments Covers Dealers in High value goods, e.g. precious stones/metals/works of art/auctioneers where they receive payments of €15000 or over Should use A RISK BASED APPROACH – and focus on these areas

38. 38 The Risk Based Approach Risk in all cases can vary – Customer due diligence should be simplified where appropriate BUT some cases need a more rigorous approach – An enhanced customer due diligence

39. 39 Greater Risk Areas Beneficial owner - Notaries, legal professionals holding pooled accounts – Politically Exposed Persons – Business relationships with those individuals holding or having held important public positions – particularly from countries where corruption is widespread –

40. 40 Politically Exposed Persons Persons who are or have been entrusted with prominent public functions and immediate family members and close associates of such persons.

41. 41 Enhanced Customer Due Diligence PEPS from abroad Senior Mgt approval Establish source of wealth/funds On-going monitoring

42. 42 Enhanced Customer Due Diligence Where customer not physically present for ID need additional documents /data /information to prove ID Verify/certify documents supplied Ensure first payment through an account opened in customers name with a credit institution

43. 43 Enhanced Customer Due Diligence Shell Banks Do not enter into correspondent banking relationships with Shell banks – A credit institution incorporated in a jurisdiction in which it has no physical presence involving meaningful mind and management and which is unaffiliated with a regulated financial group.

44. 44 Other issues Employees should be protected from threats or hostile action when reporting Suspicious Transactions Feedback should be received on usefulness and follow-up of reports Where have branches in third countries where legislation is deficient should apply Community standards

45. 45 Records Documents to be retained at least 5 years after the business relationship with customer ended Or Five years from the transaction

46. 46 What the Papers Say

47. 47 Bulgaria's Prosecutors Accuse Mobster Brothers of Money Laundering23 May 2007, Wednesday The Marinovs, and five others are accused of plotting the murders of businessman Nikola Damyanov, reserve general Lyuben Gotsev and late underworld boss Ivan Todoro.The two brothers are currently on home arrest The previous hearing on the case was delayed as the elderly brother Krassimir Marinov and his accomplice Ivo Karageorgiev - failed to turn up in court ?ver health qualms. Marinov, whose condition is unstable after a hernia surgery, was represented by a patient's card (sick note) The defence of Ivo Karageorgiev claimed their client is on the verge of heart-attack. The next hearing of the trial was scheduled for June 8 The previous hearing on the case was delayed as the elderly brother Krassimir Marinov and his accomplice Ivo Karageorgiev - failed to turn up in court ?ver health qualms.

48. 48 SECOND MINISTER INVOLVED IN SOFIA HEATING COMPANY CORRUPTION CONTROVERSY IN BULGARIA09:06 Fri 11 May 2007 Regional Development and Public Works Minister Assen Gagauzov and Economy and Energy Minister Roumen Ovcharov,of the Democrats for Strong Bulgaria (DSB) are involved in a corruption controversy Bulgaria’s intelligence service detected 87 phone calls between Gagauzov and Krasimir Georgiev, owner of a the company under investigation for money laundering At the beginning of May 2007, Deputy Economy and Energy Minister Kornelia Ninova was fired. Prosecutors have accused her of inciting an investigator to delay the investigation into Georgiev’s company. The investigator, Tatyana Sharlandzhieva, is also under investigation. The intelligence service came across the calls while investigating the dispute between Ovcharov and National Investigation Service head Angel Alexandrov. Alexandrov is accused of soliciting bribes, while he says that Ovcharov threatened him. Both Angelov and Ovcharov are currently on compulsory leave. Bulgarian Court Postpones Hearing in Toplofikatsiya CaseAt the beginning of May 2007, Deputy Economy and Energy Minister Kornelia Ninova was fired. Prosecutors have accused her of inciting an investigator to delay the investigation into Georgiev’s company. The investigator, Tatyana Sharlandzhieva, is also under investigation. The intelligence service came across the calls while investigating the dispute between Ovcharov and National Investigation Service head Angel Alexandrov. Alexandrov is accused of soliciting bribes, while he says that Ovcharov threatened him. Both Angelov and Ovcharov are currently on compulsory leave. Bulgarian Court Postpones Hearing in Toplofikatsiya Case

49. 49 Sofia Bank Manager to Face Court 19 January 2007, Friday Branch manager Krassimir Boyanov of a branch of Hebros Bank will face court for not observing the law for measures curbing money laundering.He did not report to the Financial Intelligence Agency for a money transaction from one bank account to another of BGN 874,000 in just one day. According to investigators working on the case, Boyanov's guilt is finally proven. The case has been introduced to the Sofia City Court. If Boyanov is pronounced guilty, he may get up to three years in prison.

50. 50 Part of Killed Mobster's Money Already Laundered in Bulgaria16 November 2006, The prosecutor admitted that Dimitrov's widow had managed to sell one of his hotels, due to a procedural oversight. The prosecutor's office had charged Anguelina Dimitrova at the end of August, but the district prosecutor forgot to freeze her assets. He confessed that his subordinates were not always effective enough in their fight with money laundering  Dimitrov, was on a trip to Amsterdam with his supermodel lover Tsetsi Krassimirova, when he was shot dead in the end of 2003.A stray bullet also hit Krassimirova, but the celebrity survived, and is now said to have fully recovered after surgery in Germany.Dimitrov used to say he was making money out of potato trade, but was widely seen as one of the major drug smugglers in Bulgaria.In 2005, the Netherlands jailed a man for 15 years for the killing of the alleged mobster.Dimitrov, was on a trip to Amsterdam with his supermodel lover Tsetsi Krassimirova, when he was shot dead in the end of 2003.

51. 51 Crime Gang Broken - Prague Police corruption Detectives charged with providing money laundering gang members with information on potential victims, police uniforms, weapons and ammunition, identification badges and falsified search warrants.

52. 52 TI Corruption Index

53. 53 2 High-Ranking Officials in Bulgaria Arrested for Money Laundering8 December 2006, Friday A director and his assistant at Bulgaria's Economy and Energy Ministry were arrested Friday for alleged graft receipts and money laundering. One of the arrested officials is the head of the Information and communication services directorate Pavel Pavlov. He was arrested with a large sum of money. A woman subordinate to him was the other arrested individual. A citizen has also been detained. One of the arrested officials is the head of the Information and communication services directorate Pavel Pavlov. He was arrested with a large sum of money. A woman subordinate to him was the other arrested individual. A citizen has also been detained.