COMBATING MONEY LAUNDERING: MOVING BEYOUND THE FINANCIAL INSTITUTIONS

1. COMBATING MONEY LAUNDERING: MOVING BEYOUND THE FINANCIAL INSTITUTIONS Presentation At The Stakeholders Seminar On Strategic Partnership With Stakeholders For Effective Implementation Of AML/CFT Regime In Nigeria Holding At Hotel Presidential Port Harcourt

2. Introduction Definition Stages of Money Laundering Effects of Money Laundering Institutional Framework Legal framework Benefits of AML/CFT Regime �Beyond FI�s Best Practice in AML/CFT ML in DNFI KYC & CDD Challenges of Implementing ML in DNFI Suggested Solutions Conclusion Recommendations

4. Definitions Money Laundering is the process of converting the proceeds of illegal and criminal activities into acceptable forms. Money Laundering is the act of concealing the criminal origin of property, which could be money or physical assets, and disguising its nature and source. Money Laundering is a derivative crime.

5. Definition by US Treasury Department Money Laundering is the criminal practice of filtering ill-gotten gains or �dirty� money through a series of transactions so that the funds are �cleaned� to look like proceeds from legal activities

6. The Financial Action Task Force (FATF) (a Paris-based multinational or inter-governmental body formed in 1989 by the Group of Seven industrialized nations to foster international action against money laundering) provided this �working definition� of money laundering: The conversion or transfer of property (i.e. money, goods, commodities, etc.) knowing that such property is derived from a criminal offence, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in the commission of such actions. The concealment or disguising of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property knowing that such property is derived from a criminal offence. The acquisition, possession or use of property, knowing at the time of receipt that such property was derived from a criminal or from an act of participation in such offence.

7. Predicate Offences Crimes such as Smuggling human beings Embezzlement & Fraud Bribery Corruption Robbery Drug trafficking Prostitution, etc These crimes produce large profits, creating the incentive to �legitimize� the ill-gotten gains through money laundering. When a criminal activity generates substantial profits, the individual or group involved must find a way to control the funds without drawing attention to the underlying activity or persons involved. Criminals do this by: disguising the sources changing the form moving the money to a place where it is less likely to attract attention

8. Placement Layering Integration

9. Usually the first phase: Most visible, most vulnerable Goal: To introduce proceeds into the system without attracting attention Disposal of proceeds How: Deposit of proceeds in FI Structuring/smurfing Travel Agency Insurance Policy Property Purchase

10. Usually second phase Goals: Separate source from ownership Break Audit Trail How: Conversion/Movement of Funds from small to large notes Cash export Cash Deposits in Foreign Banks Complex Wire Transfers Barter/Antiques Multiple Deposits Use of Scattered Accounts Mutual Funds Resale of Property

11. Integration Stage Usually Final Stage: The Victory Stage Goal: To enjoy the proceeds of the crime How: set up legitimate business through; Investment in other Assets Funding of luxurious lifestyle Reinvestment in Predicate Crimes Loans Gifts False Invoicing Purchase of luxurious Assets, Real Estate, etc Investment in Business Ventures Investments in Safe countries

12. �willful blindness� The term �willful blindness� is a legal principle that operates in money laundering cases. Courts define it as the �deliberate avoidance of knowledge of the facts� or �purposeful indifference.� Courts have held that willful blindness is the equivalent of actual knowledge of the illegal source of funds or of the intentions of a customer in a money laundering transaction.

13. Risks Associated with Money Laundering Reputational risk is the potential that adverse publicity regarding a businesses practices and associations, whether accurate or not, will cause a loss of public confidence in the integrity of the institution. Borrowers, depositors, and investors might stop doing business with the institution because of a money laundering scandal involving the institution. Operational risk is the potential for loss resulting from inadequate or failed internal processes, people, systems and external events DNFI�s that rely on the proceeds of crime have additional challenges in adequately managing their assets, liabilities and operations. Increased borrowing or funding costs can also be included in such losses. Legal risk is the potential for lawsuits, adverse judgments, unenforceable contracts, fines and penalties generating losses, increased expenses for an institution, or even closure of such an institution. Concentration risk is the potential for loss resulting from too much credit or loan exposure to one borrower. Lack of knowledge about a particular customer or who is behind the customer, or what the customer�s relationship is to other borrowers, can place a bank at risk in this regard. This is particularly a concern where there are related counter-parties, connected borrowers, and a common source of income or assets for repayment.

15. The Economic and Social Consequences of ML Increased Crime and Corruption: helps enhance the profitable aspects of criminal activity. it will attract people who will commit crime. there will also be more corruption Undermining the Legitimate Private Sector: Money launderers are known to use front companies, and engage in legitimate business but are in fact controlled by criminals, and commingle the proceeds of illicit activity with legitimate funds, to hide the ill-gotten gains. These front companies use illicit funds to subsidize front company products and services at levels well below market rates. Thus, front companies have a competitive advantage over legitimate firms that draw capital funds from financial markets. This makes it difficult, if not impossible, for legitimate business to compete against front companies. They control whole industries or sectors of the economy of certain countries. Misallocation of resources from artificial distortions in asset and commodity prices. Evading taxation, thus depriving the country of revenue. Weakening Financial Institutions: Indeed, criminal activity has been associated with a number of bank failures around the globe. Financial institutions that rely on the proceeds of crime have additional challenges in adequately managing their assets, liabilities and operations.

16. The Economic and Social Consequences of ML Loss Of Control Of, Or Mistakes In, Decisions Regarding Economic Policy: in some emerging market countries these illicit proceeds may dwarf government budgets, resulting in a loss of control of economic policy by governments or policy mistakes due to measurement errors in macroeconomic statistics arising from money laundering. Economic Distortion and Instability: Money launderers are not interested in profit generation from their investments but rather in protecting their proceeds and hiding the dirty origin of the funds. They �invest� their money in activities that are not necessarily economically beneficial to the country where the funds are located. Loss of Tax Revenue: Of the underlying forms of illegal activity, tax evasion is, perhaps, the one with the most obvious macroeconomic impact. Money laundering diminishes government tax revenue and therefore indirectly harms honest taxpayers. It also makes government tax collection more difficult.

17. The Economic and Social Consequences of ML Risks to Privatization Efforts: Criminal organizations can outbid legitimate purchasers for formerly state-owned enterprises. while privatization initiatives are often economically beneficial, they can also serve as a vehicle to launder funds. Reputation Risk for the Country: A reputation as a money laundering or terrorist financing haven Negative effects for development and economic growth in a country. It diminishes legitimate global opportunities Extra scrutiny will make them more expensive. Specific counter-measures taken by international organizations and other countries Reduced eligibility for governmental assistance. Social Costs: It drives up the cost of government due to the need for increased law enforcement and health care expenditures to combat the serious consequences that result. It could even lead to the virtual takeover of legitimate governments. Transfers economic power from the market, government and citizens to criminals Control over Political Power .

18. Terrorist Financing- What is it?

19. Difference Between ML and TF

20. �Beyond Financial Institutions The Institute of Chartered Accountants in England and Wales (ICAEW) has published advice for small businesses and consumers on how to prevent money laundering. Said Felicity Banks, head of business law at the Institute: �Back in 1963, one of the biggest problems for the great train robbers was what to do with the stolen cash. In 2006, criminals will find it even harder, given the greater awareness of what money laundering is, why it is a criminal act in its own right, and the need for vigilance in preventing it. �Yet despite all the awareness activity, many businesses, especially smaller ones, are unaware of the potential dangers to themselves or their staff of getting caught up in money laundering schemes. The risks undoubtedly exist for all businesses. By following this advice, honest business people will be able to minimise that risk.�

21. �Beyond Financial Institutions (cont�d) Money laundering is an evolving activity, and must be continuously monitored in all its various forms in order for measures taken in this effort to be timely and effective. Dirty money moves through offshore entities, wire transfers, trusts, hawala, securities dealers, car dealers, correspondent accounts, etc. Dirty money, like water, finds the route of least resistance. As many governments around the world have implemented anti-money laundering obligations for the banking sector, we see a significant shift in laundering activity from the traditional banking sector to the non-bank financial sector and to non-financial businesses and professions. Not only banks, but also non-bank financial institutions and non-financial businesses (DNFI�s) have become attractive avenues for introducing ill-gotten gains into regular financial channels. The FATF uses its annual typologies exercise to �monitor changes and better understand the underlying mechanisms of money laundering and terrorist financing.� The objective is to report on some of the �key methods and trends in these areas� and also to make certain that the FATF 40 Recommendations and Special Recommendations on Terrorist Financing remain effective and relevant

23. Economic and Financial Crime Commission (EFCC) Nigeria Financial Intelligence Unit (NFIU) National Drug Law Enforcement Agency (NDLEA) Central Bank of Nigeria (CBN) Federal Min of Commerce (FMC) Independent Corrupt Practices Commission (ICPC) Federal Inland Revenue Services (FIRS) National Insurance Commission (NAICOM) Nigeria Customs Service (NCS) Nigeria Immigration Services (NIS) Nigeria Deposit Insurance Corporation (NDIC)

24. Bank for International Settlement Basle Committee Financial Action Task Force (FATF) Inter-Governmental Body Against Money Laundering (GIABA) Egmont Group Wolfsberg Group United Nations Office of Drugs and Crime The World Bank British Council European Union Interpol The Joint Money Laundering Steering Group etc

25. The Money Laundering (Prohibition) Act 2004 The Advanced Fee Fraud Act 2006 The Bank�s (recovery of Debt) and Financial Malpractices in Banks in Nigeria Act (as amended) The Banks and other Financial Institutions Act 1991 for International Settlement Finance Miscellaneous Offences Act The ICPC (establishment) Act The EFCC (establishment ) Act 2004 Dishonored Cheques Act etc

26. Directive 2005/60/EC of the European Parliament and of the Council. Office of Foreign Asset Control (OFAC) US Patriot Act SerbansOxrlys Act

27. Financial Action Task Force-FATF An inter-governmental body whose purpose is to develop and promote international policies to combat money laundering and terrorist financing. It was created in 1989 under EU G8 group. It made 40 recommendations in 1990 and added 9 more recommendations after September 11 event. FATF Lists Countries and Territories that are not Cooperating in the Fight against Money Laundering

28. Financial Action Task Force on Money Laundering �The Forty Recommendations and Interpretative Notes Financial Action Task Force�Special Recommendations on Terrorist Financing Basel Committee on Banking Supervision�Consolidated KYC Risk Management Basel Committee on Banking Supervision-Customer Due Diligence for Banks Wolfsberg Statement on Monitoring, Screening and Searching Wolfsberg Anti-Money Laundering Principles for Correspondent Banking Wolfsberg Statement on The Suppression of the Financing of Terrorism Wolfsberg Anti-Money Laundering Principles on Private Banking Wolfsberg Group on Private Banking and Customer Due Diligence Directive 2005/60/EC of the European Parliament and of the Council. American Bankers Association Office of Foreign Asset Control (OFAC) US Patriot Act The Joint Money Laundering Steering Group- Prevention of money laundering/combating terrorist financing December 2007

29. Delisting from the Non-Cooperative Countries and Territories Removal of the US directive on Nigeria. Admission to the Egmont Group of Financial Intelligence Units Nigeria�s mutual evaluation committee scored a pass mark The banks� Compliance officers have organized themselves into the Committee of Chief Compliance Officers of Banks in Nigeria (CCCOBIN). Same for the Bureau de change association. All the banks in Nigeria have implemented the use of AML/CFT applications in monitoring suspicious activities Over 350 convictions of money laundering offences especially on high profile individuals previously thought to be �untouchable� All these have in return resulted to the following benefits We need to replicate these by extending these benefits to DNFI�s

30. Benefits of AML/CFT Regime Increased revenue due to competitive advantage Reduced risk Reduced costs (eliminate penalties / sanctions) International Financing � Direct Foreign Investment International Support for Government through sponsorship of development efforts and national security. Nigeria is now rated by S&P as BB+ Less harassment of Nigerians traveling abroad

32. Best Practice in AML/CFT Practice KYC, KYCB,KYE, CDD, EDD Account Monitoring STR/CTR/FTR Reporting Record Keeping Ongoing Training No Tipping Off Spread the Compliance Culture. Risk based Approach AML Solutions Attitude towards Regulation Sanctions Senior Management Buy in Good interface between regulators and the company Ensure all statutory returns are sent to required regulatory body as at when due. Policies /procedures approved by the Board Appointment of Chief compliance officer at senior management level Audit and Self Assessment

34. Why is Due Diligence Conducted? To assess potential risks ( Reputational, ML/CFT/Legal, operational, concentration�.) To risk profile customers To determine what level of due diligence needs to be performed ( Enhanced, Simplified,�) Who Conducts Due Diligence ? The person entering the business relation (due diligence on business, on all parties involved) The compliance /AML officer If required a Lawyer ( Legal aspects) Management depending on risk level and business type, e.g. PEPS When is Due Diligence Conducted? Before entering into business relationship Before an occasional transaction is carried out When there is suspicion of Money Laundering or Terrorist financing How is Due Diligence carried out? Obtain information from all independent sources (Name, address, identification�) How Much Due Diligence Needs to Be Conducted? Depends on the risk profiling How Much Time is Allocated for Due Diligence Completion? As much as is needed until fully satisfied and intimate conviction that our utmost as been performed Can I Be Sued for Failing to Conduct Adequate Due Diligence? You can be liable for failing to perform your due diligence as a professional of the financial sector. You have an obligation of means not of result ( you have to be able to prove to 1/3 party that you have done your most to perform your due diligence.� What to do when CDD fails? Close the account Refuse to establish the relationship Make a suspicious transactions report

35. CM(KYC + KYCB + KYT + KYE) = CDD Where: KYC = Know Your Customer (Identification, Address, Location, etc as in mandate forms-customer profile) KYCB = Know Your Customers' Business (Transaction Profile, Type & Nature of business, Sources of Funds, Risk Profile, etc as in KYC Assessment Form) KYT = Know Your Customers� Transaction (Transaction Monitoring) KYE = Know Your Employee (Staff on-boarding practices should include background checks and a continuous monitoring system for fidelity) CM = Continuous Monitoring (changes in customer behaviour through transaction monitoring and other activities) CDD = Customer Due Diligence How does this fit into the FATF 40+9 recommendations? CDD will prevent: MONEY LAUNDERING (using the 40 Recommendations) TERRORISM (Using the 9 Recommendations)

36. Full identification of customer and business entities, source of funds and wealth Development of transaction and activity profiles of each customer�s anticipated activity Definition and acceptance of the customer in the context of specific products and services Assessment and grading of risks that the customer or the account present Account and transaction monitoring based on the risks presented Investigation and examination of unusual customer or account activity Documentation of findings Appropriate internal and external reporting Auditing of the KYC system Staff training about the importance of KYC Records keeping

38. Money Laundering in DNFI�s Designated Non-Financial Institutions (DNFIs)-Defined The MLPA 2004 defines DNFIs to include dealers in: Jewelry, Cars and Luxury Goods, Chartered Accountants and Audit Firms, Tax Consultants, Clearing and Settlement Companies, Legal Practitioners, Supermarkets, Hotels and Casinos or such other businesses as the Federal Ministry of Commerce and industry may from time to time designate. The FMC has also included the following business within the definition of DNFI�s: Dealers in precious metals and stones Trust and company service providers, estate agents Pool betting and lottery Non-governmental Organisations

39. Money Laundering in DNFI�s-Activities for Mandatory Disclosure Activities for Mandatory Disclosure Buying and selling of real estate Managing client money, securities or other asset Management of Bank, saving or securities accounts Organisation of contributions for creation, operation or management of companies Creation, operation or management of legal persons or arrangements and buying and selling of business entities Acting as a formation agent for legal persons Acting as (or arranging for another person to act as) a director or secretary of a company, a partner or partnership or similar position in relation to other legal persons Providing a registered office business address or accommodation, correspondence or administrative address for a company a partnership or any other legal person or arrangement Acting as (or arranging for another person to act as) a nominee shareholder for another person Acting as (or arranging for another person to act as) a trustee of an express trust Opening of accounts wire transfers and currency exchange that are not mentioned above.

40. Money Laundering Methods in DNFI�s Money launderers can move money out of one country by simply using their illicit funds to purchase high-valued products, and then exporting them at very low prices to a colluding foreign partner, who then sells them in the open market at their true value. Some of the money laundering methods include: Casinos and Other Businesses Associated with Gambling Dealers in High-Value Items (Precious Metals, Jewelry, Art, etc.) Travel Agencies Vehicle Sellers Gatekeepers: Notaries, Accountants, Auditors, Lawyers Investment and Commodity Advisors Trust and Company Service Providers Real Estate Industry Manipulation of Prices in Import and Export Transactions Black Market Peso Exchange

41. Money Laundering in DNFI Under the MLPA 2004, the DNFIs have the following statutory obligations to perform: Registration with FMC / SCUML Identification/Verification of Customers Record-Keeping Establishment of robust Internal Control System (Plocies & procedures) Rendition of statutory Reports (CTRs & STRs) Appointment of Compliance Officers at senior level Training and awareness creation among employees Limitation to make or accept cash Maintenance of Register for transactions of US $5,000 or equivalent Mandatory Disclosure if they are engaged in some activities designated by the FMC.

42. Questions DNFI�s Employees Must Ask When dealing with your customers, ask yourself these questions: How well do I know this customer? Does the transaction make sense considering the customer's profile? Do I fully understand the transaction the customer wishes to complete? Am I comfortable with this transaction? Is this the usual method for conducting this type of business transaction? If in doubt, there may be a possibility that your customer is using your institution to launder money

43. Challenges of Implementing AML/CFT in DNFI�s Structures Designed to Hide Beneficial Ownership Shell Companies Secrecy / Confidentiality High Cost of Technology Information Gathering (KYC) Viable Controlling Authority Senior Management Buy in Cost of the implementation of AML/CFT

44. Suggested Solutions Successful collaboration between regulators and operators. Formation of a vibrant association of operators that are knowledgeable and willing to support the AML/CFT regime. Strong awareness campaign on the benefits of AML/CFT Compliance in DNFI Ensure senior management buy in Invest in Technology Review of legislation to address all identified loop holes

45. Collaboration With The FIU DNFI�s should partner with the SCUML and the NFIU in identifying the proceeds of crime Every year Law Enforcement investigations are launched as a result of information provided by DFNI�s to the FIU. Law enforcement personnel consider this information vital to identify suspected money launderers. One single indicator does not prove that a suspicious transaction is money laundering. A criminal or money launderer is typically identified from a combination of facts and events from various DFNI�s. When we are suspicious of activities that may be connected to money laundering, we should inform the NFIU and the SCUML or a law enforcement agency. Getting a second opinion can help decide whether the activity is in fact money laundering. The role of corporate Legal Counsel in deciding the legal implications is also key.

47. Creating The Balance There are no Disclosure provisions under the local laws of most countries which while obligating financial institutions to report suspicious transactions does not also provide for their protection from criminal or civil liability when they file a report, even if their suspicions prove to be wrong. The issue of customer confidentiality which the financial institutions have sworn to protect. The abuse of information by officers of the Supervisory authorities. The urge for profitability by the financial institutions

48. Consequences of Non-compliance with AML/CFT All DNFI�s must seek to comply with all laws and regulations applicable to the conduct of its business or related activities. Failure to comply with anti-money laundering or anti-terrorism laws or regulations can expose DNFI�s to severe civil and criminal penalties, including loss of professional licensing and imprisonment of his principal officers Additional risks include but are not limited to reputational harm and impairment; monetary losses resulting from asset forfeiture actions, fraud and charge offs; substantial legal fees; delay or denial by The Federal Ministry of Commerce of applications submitted for mergers or acquisitions and other needs; and Loss of Foreign Direct Investments and offshore facilities from foreign business partners banks

50. Conclusion The world is dynamic and criminals will continue to be inventive in ways to try to use financial institution to launder the proceeds of crime. Financial institutions and regulatory bodies need to constantly evaluate this risk and future risks by enhancing the compliance functions. Due to the achievement recorded by banks in reporting, focus have shifted to the DNFI�s. It is a matter of urgency for DNFI�s to institute self regulation as is the practice as in other jurisdictions so as to strengthen the culture of compliance through peer pressure. DNFI�s are encouraged to adopt all the measures put in place by the SCUML and other local regulatory and international best practice organisations in other to contribute their own efforts in combating money laundering and terrorist financing. The benefit for DNFI�s in collaborating with SCUML is enormous