ICA International Diploma in Anti Money Laundering

Money laundering is a process whereby criminals conceal the money coming from their criminal activity in order to reintegrate it as legitimate earnings. Steven M. D’Antuono, highlights in his Statement before the Senate the traditional “three-stage” money laundering as follows: “Money laundering generally involves three steps: placing illicit proceeds into the financial system; layering, or the separation of the criminal proceeds from their origin; and integration, or the use of apparently legitimate transactions to disguise the illicit proceeds”.[1] However, this traditional process remains general and presents some limitation due to the globalisation of the financial sphere and especially the type of sector involved. Nowadays, with the democratisation of payments online, the money can be laundered directly by placement due to the many alternatives and intermediaries of payments that exist online. It simply needs to be justified to the financial institutions So, the money launderers can easily skip one of these stages by using other means. Petrus C. van Duyne depicts in his book Money Laundering Policy, Fears and facts, a fourth stage at this process: “justification: the crime-money must be justified (this is the actual laundering in the narrow sense)”.[2] This is what leads the money launderers to use other methods which are directly supplied by the financial system. A technique such as an over invoice: A company ships under value material and rise voluntary the price over the value to a colluding partner by issuing a falsified invoice. The company receiving the goods will pay the invoice from criminal revenue and mixed with legit cash. The exchange appears legitimate due to the official documents supporting their trading activity. This example as many others shows that the stake for money launderers is to take advantage of the lack of control in the financial system in order to remain undetectable whatever the process used. Therefore, the stake to determine which process will profit the most to criminal activities is to look inside the irregularities of the international trade and financial system.

1. The Financial Action Task Force (FATF) is an intergovernmental organism whose purpose is to develop a framework for the defence of governments against Money Laundering (ML) and financing terrorism (FT) risks. It was created in 1989 during an international summit Group of Seven in Paris. It was established due to concerns from government whose laws were not sufficiently adapted for the authorities to fight the increase of money laundering process. The FATF also expands its influence thanks to the FATF-Style Regional Bodies (FSRB’s) for implementing its standards requirements. The first objective of the FATF is to create reforms and recommendations after analysing the evolutions of the money laundering process. It created 40 recommendations of Anti Money Laundering (AML) and 9 recommendations for Countering the Financing of Terrorism (CFT) which recommendations are regularly updated.[3] Its second objective is to supervises an ongoing monitoring on its 38 members through a system of Mutual Evaluation Reports (MER). [4] This evaluation is based on two area. It assesses the enforcement of the FATF requirements within the legal system of its members which is called the “technical compliance”. [5]  The second domain evaluated is the efficiency of the legal framework against the present risk of ML and TF risk and to what extent the results are achieved which is called the “effectiveness assessment”. [6] Both fields must provide a complete analysis of the way a nation place the FATF recommendations within their legal system. The country assessed must provide their AML/CFT regime to the FATF which select a group of experts to evaluate the country. They look at the implementation of the 40 recommendations through a rating according to their level of compliance. This is made in one year before a visit to the country. During the visit, the experts write a report on the extent that the FATF standards and recommendations have been established and identify the weaknesses to determine the areas of improvement. The report is discussed during a plenary session for its acceptation and if a monitoring is necessary before its publication.

The procedure of the fourth round illustrates that two kind of follow-up can be made over the five years following the MER, a regular follow-up or an enhanced follow-up according to their compliance rate. [7] Once the MER is accepted, a list of success and vulnerabilities will be issued. In the further years, the country has to address the action taken to resolve its vulnerabilities through several updates. This method also includes an evaluation of the progress made by the government to react on the issue detected during the MER. The process takes five years to keep a constant evaluation through three reports on the progress made until the 5^th year follow-up assessment. The primordial function of the MER is to create an international cooperation and involvement between jurisdictions to incorporate the FATF requirement and to identify their area of improvement. The effects allow governments to identify high risk jurisdiction and to lead the country to adopt or improve their policy thanks to the political weight of the FATF members. Furthermore, as the FATF president reports many aspects for the fight against ML and TF such as the multilateral legal assistance, the seizure of assets and forfeiture of properties, extradition require a partnership between governments in order to provide a successful support to the international financial investigations. [8]

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3. The jurisdiction chosen is France to describe the main laws and the regime applicable to the fight against Money Laundering. France taking part of the European Union had to transpose within its internal regime the five European directive against Money laundering and counter financing Terrorism directly linked to the FATF recommendations. The French regime defines the offences and the applicable sanctions of Money Laundering and Financing Terrorism in the article 324-1[9] and 421-1[10] in his Penal Code. This is the main support for the government to define the offenses and the applicable sanctions. The ministry for the economy and finance is the responsible for settling preventing measures against these offenses which are edited by the Monetary and Financial Code (CMF) and gathered in the article L.561-1.[11] This article regulates all professions whose role is to control, realise or advise money movement for individuals to complete a Suspicious Transaction Report (SAR) if they are aware that the origins of the funds come from criminal activity.

Their reports must be conveyed to TRACFIN, the French Financial Intelligence Unit. Its goal is to collect, analyse and complete suspicious activity reports made by professional subject to the law and to pass these reports to the court in case of judicial prosecution. All professions quoted in this article have the duty to report all suspicious activity and can be sanctioned if they did not execute the protocol willingly. TRACFIN can transmit the STR to the following judicial authorities: prosecutors, magistrate but also to different police depending on the case or authorities. According to the article 561-35, the Authority of Financial Market (AMF) is also a competent authority for controlling financials investment and asset management.[12] In a resume in the French regime the article 561-1 and the following paragraphs is the main component that is regularly updated to transpose the European directives and apply the FATF requirements. Beyond fighting the money laundering and terrorism financing, these laws and actors help to maintain and reinforce a healthy economy by eradicate risk of inflation that can come from integration of criminal money into the economy. The fourth European directives[13] was implemented to create more transparency over the Non-profit Organisation and company. Now, they are obligated to declare the beneficial owner who possess twenty five percent or more of a company asset or an association. This directive was transposed in the French regime by the decree n°2017-1094 of the 12 June 2017 in relation to the beneficial ownership of entities which complete the article of law L561-2-2of the Monetary and the Financial Code. [14]  More recently, after the terrorist attacks in Europe, the fifth European directive have been adopted on the 30 of May 2018. [15] It extends its regulations over entities which provides  virtual currencies service, lower the thresholds for identifying prepaid card owners and make accessible to the public a register of beneficial owner and many  other requirements that France as all European Union members will have to transpose in their internal legislation before the 1st of January 2020. We can highlight the fact that through the past events and constant technologic innovations in Finance, the French regime is in constant adaptation of its laws and development of its process to keep up to date its ML/FT regime at the highest level.

4. According to the FATF recommendation 20, all persons in the regulated financial sector are subject to the duty to make a suspicious transaction report (STR). They must know their client and their business. Furthermore, they must be aware of the risks associated with money laundering and terrorist financing through specific training to increase their awareness in this field.

Therefore, a person subject to this recommendation must file an STR after reviewing elements on an account that raised suspicion in his mind such as an abnormal transaction volume, the refusal of a client to provide supporting documents. Thanks to his knowledge of the client and his activity and all the risks related to ML/TF, a person can complete an STR rationally on reasonable grounds of suspicion. A person guessing just based on inaccurate assumptions might be speculating on a doubt. Hence, the objective test of knowledge or suspicion must determine the transition from a subjective to an objective suspicion due to rational foundations and elements that raised red flag indicators.

However, a person that fails to make an STR while he knows about it and hides his suspicion; he commits a professional misconduct punishable by law. It means that he voluntarily remained in the ignorance of crucial elements to avoid reporting this transaction and can be accused of wilful blindness. This principle, used by law, means that a person has voluntarily remained in ignorance about elements to hide a criminal liability. This type of situation can have serious financial consequences and also on the reputation of a financial institution or even its closure. The New Zealand Society articles depicts the judgement sentence of the director of Pin Han Finance LTD in New Zealand.[16] He fails to verify the identity of 372 customers and miss to report 172 suspicious transactions. The default of due diligence and STR resulted in a fine of $ 5.29 million, 6 months in jail and 200 hours of general work for the director and therefore its liquidation.

5. The obligation of confidentiality towards a customer is not total but delimited by the contract which binds the customer and his bank. Richard Spearman QC outlines the consequences of the decisions taken by the UK Court of Appeals on the Tournier vs National Provincial & Union Bank of England case in relation to the duty of confidentiality.[17] Therefore, reporting a transaction does not conflict with the obligation of confidentiality for several reasons.

In application of the law, for example the requirement to report a suspicious transaction that results to freeze an account or to have to inform the taxes.

In the case of a duty to inform the public, for example when a bank requests information on behalf of the government relating to a crime committed or when the bank considers that the client is involved in activities that do to the interests of the country a disservice.

When he has received foreign funds that should be seized following a sanction from a government.

 In banking deontology, a bank may also share the account information of its client with another bank for its interest with the consent of its client. However, if an STR is carried out without rational grounds and this causes a direct financial loss to the customer. The customer may sue the institution if the report of the transaction is not founded, especially if the contract signed with the client does not provide a clause specifying the share of information under exceptional circumstances.

Recently, the FATF has also extended the Tax Evasion as a predicate offence of ML, which leads international pressure on offshore financial centre to have a compulsory process for reporting suspicion transaction. That has led the sacred secrecy of foreign financial institution in a turmoil. Face to the FATF members pressure they progressively includes the mandatory STR within their AML/CFT regimes.

6. The new payment services (NPS) on the Internet offering no restricted geographic services and no face-to-face control remains one of the most vulnerable payment industries for ML and TF Risks given the ease for creating an account, the speed of transactions without really having to justify the activity.

On the one hand, an individual can create an account just by adding an email address and password, by entering the name, address and phone number. Since identity checks are only from a certain amount, the account can be created by usurping information. The source of financing that we add to this type of can varies from adding a bank account, prepaid or credit card. At this point, it is easy to use stolen financial data and identity and then make purchases without impunity or distribute the money received on other accounts to withdraw it later.

On the other hand, this type of account allows an excellent flexibility one can receive and send money in personal payments or for purchases/sales of goods or services in the whole world without almost any geographical restriction.

It is also straightforward to pass funds from one criminal activity from one continent to another by simulating payments between friends or sales on marketplaces such as eBay.

Seamus Hugues describes a prominent example of trial in the case of Mohamed Elshinawy.[18] He received $ 8700 between March and June 2015 from a UK company, Ibacstel Electronics, which had established front companies in Turkey and Bangladesh.

These transactions passed through PayPal by simulating the sale of printers on eBay’s online auction site. The transaction seems suspicious given the origin of the funds and its destination especially when we observe the location of subsidiaries in Bangladesh and Turkey not far from the Islamic state. The second red flag is that it would make more sense for profit that the business specialised in IT sells to a US consumer according to the volume of payment.

This situation may be subject to verification, but international transactions of this type are still very common with online payment services.

The third red flag is that this amount received has been divided into four payments spaced in time of fifteen days in order to make think of a stable business relationship over time.

In fact, this individual has received funds by the intermediary of Ibacstel Electronics which carried out these transactions on behalf of ISIS members to finance a terrorist attack on US soil. In consequences, he was arrested by the FBI on December 11, 2015, for terrorism charges. Other person to person payment services were also used such as Western Union and an attempted transaction via Money Gram.

7. Three main methods are used by terrorists to move money or transfer value in order to achieve their objective. The first is the use of the financial system which tends to decrease due to the strengthening of regulations. However, to avoid detections, the abuse and exploitation of charities is a method to abuse the financial system to redirect transfer of funds from to their activity. For instance, a charity in charge of collecting the Zakat which is a tax imposed by the third Pillars of Islam can easily be directed to a geographic location pretending building a school but instead it is used to finance terrorist activity in this area. Jerry Gordon argues the connection of Zakat with the financing of terrorism, for instance the Holy Land Foundation which layered $12 million to Hamas from donators; and the impact of counter terrorism action on the Muslim traditions.[19]  Also, it is important to note that the system of Hawala which is an informal financial system does not include cash exchange or wire transfer but a mutual debt recognition between money brokers. Hence, it remains almost undetected in the international financial system and is often used by terrorists. The second method is smuggling the physical money movement which remains prominent in a cash-intensive economy with low jurisdiction such as the Middle East and South East Asia. The third main method is the international trade that remains important as there is a vast volume of transactions and the intermingling of legitimate money with criminal funds allow terrorist to transfer funds for their activities.

Bibliography:

1. Basel Committee on Banking Supervision, Fifteenth progress report on adoption of the Basel Regulatory framework (October 2018)

https://www.bis.org/bcbs/publ/d452.pdf

2. Egmont Group, Annual Report (2016-2017)

https://egmontgroup.org/sites/default/files/filedepot/EGAR_2016-2017/Egmont%20Group%20Annual%20Report%202016-2017.pdf

3. FBI, Common Fraud Schemes

 https://www.fbi.gov/scams-and-safety/common-fraud-schemes

4. FATF (2012-2018), International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation, FATF, Paris, France, www.fatf-gafi.org/recommendations.html
5. FATF (2018), Procedures for the FATF Fourth Round of AML/CFT Mutual Evaluations, updated June 2018, FATF, Paris, France, figure 1 p.20: www.fatf-gafi.org/publications/mutualevaluations/documents/4th-round-procedures.html
6. FATF (2018), FATF President’s paper: Anti-money laundering and counter terrorist financing for judges and prosecutors, FATF, Paris, France, www.fatf-gafi.org/publications/methodandtrends/documents/AML-CFT-judges-prosecutors.html
7. ICA Course Manual

8. Jerry Gordon, “Zakat and Terrorism”, New English Review (July 2009) https://www.newenglishreview.org/Jerry_Gordon/Zakat_and_Terrorism/
9. Legifrance, Penal Code, Article L324-1 available at:

https://www.legifrance.gouv.fr/affichCodeArticle.do?cidTexte=LEGITEXT000006070719&idArticle=LEGIARTI000006418330&dateTexte=&categorieLien=cid

10. Legifrance, Penal Code, Article L421-1, from the available at:

https://www.legifrance.gouv.fr/affichCodeArticle.do?cidTexte=LEGITEXT000006070719&idArticle=LEGIARTI000023712838&dateTexte=20111204

11. Legifrance, Monetary and Financial Code, Article L561-1, available at:

https://www.legifrance.gouv.fr/affichCodeArticle.do?idArticle=LEGIARTI000020196700&cidTexte=LEGITEXT000006072026&dateTexte=20090201

12. Legifrance, Monetary and Financial Code, Article L561-1,2°

https://www.legifrance.gouv.fr/affichCode.do?idSectionTA=LEGISCTA000020196437&cidTexte=LEGITEXT000006072026&dateTexte=20190124

13. Legifrance, Monetary and Financial Code, Decree No.2017-1094 of June 12, 2017 on the order of the article L. 561-2-2                                      https://www.legifrance.gouv.fr/affichTexte.do?cidTexte=JORFTEXT000034920785&categorieLien=id

14. Margaret Heffernan, The danger of wilful blindness, TedxDanubia ( March 2013)

https://www.ted.com/talks/margaret_heffernan_the_dangers_of_willful_blindness#t-5782

15. Official Journal of the European Union, Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC (Text with EEA relevance)

                         https://eur-lex.europa.eu/eli/dir/2015/849/oj

16. Official Journal of the European Union, Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU (Text with EEA relevance) 

https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32018L0843

17. Members and observers of the FATF

http://www.fatf-gafi.org/about/membersandobservers/

18. New Zealand Society, “$5.29 million in penalties for AML/CFT compliance failure”, (5 October 2017)

https://www.lawsociety.org.nz/news-and-communications/latest-news/news/$5.29-million-in-penalties-for-amlcft-compliance-failure

19. Petrus C. van Duyne, Money Laundering Policy: Fears and Facts In Duyne P, van et al (eds) Criminal Finances and Organising Crime in Europe, 2003, Nijmegen, The Netherlands: Wolf Legal Publishers. Publication available at:

http://www.petrusvanduyne.nl/wp-content/uploads/2017/08/Witwassen-Fears-and-Facts.pdf

20. Publication du ministère de la Justice – Rédaction : Direction des affaires criminelles et des grâces – Conception : SG – DICOM – Edition : octobre 2014

https://www.economie.gouv.fr/files/guide_blanchiment.pdf

21. Richard Spearman QC, “Disclosure of confidential information: Tournier and “disclosure in the interests of the bank” reappraised”, Butterworths Journal of International Banking and Financial Law (February 2012)

http://www.39essex.com/docs/articles/disclosure_article_for_butterwords.pdf

22. Seamus Hugues, “The only Islamic State-Funded Plot in the U.S.: The curious case of Mohammed Elshinawy”, Lawfare, Terrorism trial & Investigations (7 March 2018)

https://www.lawfareblog.com/only-islamic-state-funded-plot-us-     curious-case-mohamed-elshinawy

23. Steven M. D’Antuono, Statement Before the Senate Banking, Housing and Urban Affairs Committee on November 29, 2018 I

https://www.fbi.gov/news/testimony/combating-money-laundering-and-other-forms-of-illicit-finance