Non Face-to-Face Transactions: Risks and Challenges

1. Richard Parlour Financial Markets Law International Non Face-to-Face Transactions: Risks and Challenges © FMLI 2006

2. OARRs • Outcome • Agenda • Roles • Rules © FMLI 2006

3. Outcome • Risks of non face-to-face (NF2F) transactions • Regulation of NF2F transactions • Psychology of NF2F transactions • Developing solutions for challenges of NF2F transactions

4. Agenda • Key Issues • International Experience • Role of Psychology • Developing Solutions

5. Richard Roles Active participants HANDOUT!!

6. Handout Survey • Ten statements • Select which response closest to you • No right or wrong answers • Be as honest as possible • Self marking

7. Rules

8. Background for NF2F • Desire to be Offshore Financial Centre • Growing industrial, financial, tourism, IT sectors • 5-6% annual growth since 1968 • >10,000 offshore entities • Banking sector investment > $1 billion • India, South Africa • Internet banking

9. Local Background Risk • Minor consumer and trans-shipment point for South Asian heroin • Small amounts cannabis produced and consumed locally • Low terrorism risk and experience • Significant offshore financial industry creates ML potential • Corruption levels low (TI level 4.1) • Government committed to regulation, moderate country risk

10. India Major ML centre Major drug transit, precursors Largest number terrorist incidents Terrorist risk severe Hawala TI level 2.8 Medium country risk South Africa ML centre of concern Not major drug centre Organised crime Terrorism risk elevated TI level 4.6 Medium country risk Related Offshore Risk

11. Medium Post Telegraph Telephone Fax Email Internet SMS Instant messaging Dealing system Electronic banking Risks “Physicalities loss” Privacy Hacking Cracking Spyware Data loss Ease of access Depersonalisation of contact Transaction speed Non Face-to-Face Transactions

12. Losses Gender check Age check Body language Dress signals Signature Likeness Forensics Gains Speed Reach Reduced costs E tracing E matching Better psychographic profiling? NF2F Loss/Gain

13. International Experience on NF2F • FATF recommendation 8 – policies and procedures to address any specific risks with NF2F business relationships or transactions • BIS BCBS CDD paper 2001 2.2.6: • Apply equally effective ID procedures • Specific and adequate measures to mitigate higher risk • EU MLD 3 Art 13.2 • Wolfsberg 1.2.5 - specifically address measures to establish ID of NF2F customerssatisfactorily

14. BCBS NF2F Risk Mitigation • Certification of documents presented • Requisition of additional documents over F2F clients • Independent contact with client by bank • Third party introduction (subject to conditions) • Requiring first payment through account in client’s name subject to same CDD standards

15. EU Third Money Laundering Directive Art 13.2 Where customer not physically present for ID, take specific and adequate measures for higher risk: • ensuring customer ID established by additional documents, data or information; • extra measures to verify/certify documents supplied, or confirmatory certification by MLD 3 financial institution; • ensuring first payment through account in customer’s name with a credit institution.

16. Reinforce no anonymous accounts KYC over life of relationship Uniform standards worldwide Develop IT to detect suspicions Limit online services or amounts On line accounts only if opened off line Online services only where licensed Home and host state oversight FATF Suggestions

17. UK on F2F • Nothing in primary legislation • MLRs – ID procedures to take into account greater potential for ML when applicant for business not physically present when being identified • FSA removal of ML sourcebook, emphasis on senior management principles, JMLSG • JMLSG

18. JMLSG on F2F • Risk based approach • Risk increasing factors: • Ease of access despite time, location • Ease of multiple fictitious applications • Absence of physical documents • Speed of transactions • Verify electronically or by documents • Care over impersonation fraud

19. Psychology and the fraudster • Average fraud 3½ years before detection • 51% uncovered by accident • 19% uncovered by audit • 10% uncovered by management controls • 20% disclosed by disgruntled mistress • Police no better at detection than public • 20: 60: 20 rule

20. Don’t look shifty Do maintain eye contact Don’t gesture a lot Speak more slowly Motivation not so much greed, as fear of failure Work hard Easily bored Take risks Creative Charming No remorse Impulsive Self confident Competitive The Financial Psychopath – Common Myths and Traits

21. High flyers/gurus most prone Not in your interest to uncover They move faster on loopholes Junior staff understand system better than senior staff Would have to display own ignorance to uncover Would have to own up to being not a good supervisor Cost of checks Couldn’t happen here Outcome oriented Lose objectivity Uncovering the Financial Psychopath – Key Difficulties

22. Internet psychology • Informal language as more isolated from consequences of behaviour • Productivity/addiction • Lose inhibitions – increased emotional intensity • Increased social isolation • Different impression formation/creation • NJ teenager manipulated stock market through chat rooms – fined $273k by SEC

23. Scoring • Add up total As and Bs • The more Bs, the more likely you are to be a financial psychopath or more prone to fraud • If more than 7 Bs, likely you have already committed fraud • Also means you are likely to be a high flier

24. SDD for equivalent jurisdictions EDD for non-equivalents Highly political FATF members? Others deemed equivalent by non-FATF members? GCC members? ESAAMLG members? Other FATF style members – EAG, APG, MENAFATF? Egmont members? Risk based? Effectiveness? Equivalence

25. Specific VISIT THE RISK VTC/webcam? EDD/lifestyle report Limit service/level Only if F2F a/c opening Official documents Information security Encryption, comms choice, e monitoring Backup Privacy policy General Risk assessment Added documentation Database/ Internet searches Document certification References/3rd parties Credit checks Sanctions checks Regular KYC Transaction monitoring IT First payment through client account at third bank Disaster recovery plan NF2F Tools

26. Conclusion • Key Issues • International Experience • Role of Psychology • Developing Solutions

27. Still Curious?

28. www.fmli.co.uk Richard Parlour Financial Markets Law International © FMLI 2006