Fti-Suplementry Handbook

Anti Money Laundering Exam Study Guide & Practice Exam
Chapter 1
Learning to
Learn
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Getting Started
For many, studying for this exam is the first formal test of this
complexity and importance since school, college or university. Maybe
your current job or future promotion prospects depend on your results.
It is important to realize that you might find yourself experiencing

emotional pressures, such as anxiety and stress. It’s important to accept
that these feelings are perfectly normal and that everyone sitting the
exam will feel similarly.
This study guide, and your own tenacity, are quite sufficient to excel.
If you haven’t studied in a while, this section aims to help you form
some good study habits.
Structure Your Time
Firstly, give yourself enough time. It’s best to set up a routine where you
dedicate time to learning. I personally spent half an hour each day over
lunch working through my materials. It’s never too early to start your
studying, so don’ t leave it until the end thinking you can cram.
Work together with colleagues who are also sitting the exam. Consider
organizing a once weekly study hour as you get closer to the exam. It’s
best to set some expectations as to what these study hours should
contain.
Maybe it’s just quiet time in a conference room where you can all learn a
set topic. Maybe you each prepare some quiz questions from the last
week’s topic. Or maybe you split the topics up, learn them separately,
and then do a show and tell session where you explain your topic to
other people.
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The best way to learn something is to teach someone else. After all, you
can’t teach what you don’t know. It doesn’t have to be one of your co-
workers. You could explain the topic to a friend or even a pet and still get
the same benefit.
Don’t underestimate the usefulness of being able to ask questions to

clarify your understanding – others will also have questions, and you can
learn from their questions and the answers they receive.
How To Revise
Start by reading through all of your preparation material. At this point,

do not try to make notes and do not try to memorize anything.
Your aim here is to get a grasp of the layout of the material. Your brain
needs a structure onto which to hang important information. By reading
through you materials first, your brain will create a map of the material
for you.
Next break the study material down into topics using the table of
contents. Assign sections to study times so you know what you need to
revise and by when.
Tackle each topic by reading and understanding the material. This is the
time to take your own notes. Reading aloud or explaining a topic to
someone else can really help facts stick.
In your notes, use diagrams and flow charts to help you visually
remember information.
Mind maps are another visual tool that allows you to link information.
Forming these connections and being able to visualize them is the key to
learning.
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If you are struggling to memorize a particular list of set of features of a

topic, visualize it. Start by remembering how many items there are.
Name each item using a mnemonic. For example, a list of seven items
could be remembered using the days of the week. Think of a heading for
each of the items that matches the first letter of the day of the week – so
item one should be a word beginning with M, the second with T and so
on.
This creates an index in your mind that can be used to retrieve

information by following the logic.
Use flash cards if you are struggling to remember something. The best
way to overcome this problem is simple repetition. Look at the flash
cards whenever you have a spare moment. Do this over and over again
and the information will stick in your memory.
Scents can also help with your memory. Try using a few drops of
essential oil while you study, and again on exam day. Your brain is very
good at associating smells with memories so this will help your brain
work with the specific set of information related to the exam.
Your frame of mind is an important asset to your studies. If you

approach each study session with dread, feeling as if you can’t learn,
then you are preconditioning your brain to achieve your expectations.
A positive frame of mind, knowing that you can succeed if you put in
the effort, primes your mind to achieve. Don’t let set-backs put you off.
If you don’t understand something, come back to it later.
If the concept still doesn’t make sense, no matter how much you study
or look it up online, then ask someone else.
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Finally, if you simply can’t grasp a topic, realize that it’s not such a big
deal. You don’t need to get every question right to pass the exam. Even if
you get one in ten questions completely wrong, you will still have a pass
grade of 90%.
Meditation can be a great way to relax, put worries in perspective and

also improve your mental clarity and focus.
There are many ways to approach meditation, but if this is new to you,
look for guided meditations that last about 10 minutes. There are lots of
apps and downloadable audio files that can help you pick up this useful
habit.
Using test questions is an excellent way to help you prepare for the exam
itself.
Firstly, this will help you understand areas where your knowledge could
be improved so you can use test questions to check the areas where you
should study more.
Secondly, it will give you confidence with the format of the exam itself.
Sometimes the structure of the questions can be sufficient to throw you
completely in the exam.
Having the knowledge is one thing, being able to translate this into the
format required by the exam, is another.
In this book there are two exams, designed to help you learn both the
material in the book, and also the exam format itself.
Take the first exam to assess your level of competence with the study
material, and fill in any gaps you identify.
Once you are confident with the material, you can use the second exam
to practice the exam technique you will be using on exam day.
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Any differences in your scores will be down to weaknesses in exam

technique; this will allow you to correctly focus on the right aspects to
ensure success on the day.
Exam Day
Make sure you are organized well in advance of the day. Plan your route
and check parking arrangements. Leave plenty of time for your journey
so that any delays will not impact you.
Check the regulations for the exam, and prepare a checklist of the items
you need to bring with you, including an acceptable form of ID.
If there is a choice of times for the exam, consider whether you are a
morning or afternoon person. Most people feel drowsy just after lunch,
so avoid this time if possible.
Don’t stay up all night revising for the exam. Your brain processes
information while you sleep, so a good night’ s rest will be more
beneficial that a night of last minute studying.
Just prior to the exam, go for a 20 minute walk. Not only will this help
your circulation it will also take your mind off any last-minute nerves.
There is also some evidence that light exercise can improve brain
performance.
Eat a small nutritious snack like a banana or some nuts, this will provide
your brain with food. Do not be tempted to snack on sugary junk food as
you will have a crash within an hour.
Check the regulations to see if you are allowed water, if so bring in a

bottle to stay hydrated. If not, check how to access water once inside.
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When you are taking the exam, make sure you answer every question. If
you are unsure about a question, you can come back to it. If you really
don’t know the answer, or feel that two answers are equally correct, then
make sure you make a selection.
Question Strategies
The way that the exam questions are phrased and organised, means that
you can often apply one of several useful strategies to help you answer
correctly. We look at a number of these here.
In the exam, you will often be presented by a list of items, and asked
which are correct in the context of the question.
You will then be offered a set of possible combinations of those items.
Sometimes you might have various levels of confidence about whether

the items are correct or not.
Let’s say you are very confident that one of the items is correct. Look for
the answer combinations that list this item. Usually this will allow you to
discount several of the answer options, leaving you with one or two to
evaluate.
Look at the list of items again and see if you are very confident that one
of the items is wrong. You can then discount any of the answers that list
this item as a correct choice.
In this way you can usually reduce the answer space significantly,
preventing you from having to fully evaluate every answer.
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Be careful with answers that include the phrases “all of the above” or
“none of the above”. Sometimes these are trick questions and there
might be a single word in the question that is misleading. For example,
the question might state which of the following must you do, and then
list some very plausible options of things that you can do.
However, unless the law or regulation requires you, it’s unlikely that you
must do everything. Check the question again and look for words like
“can” and “must” to ensure that you are correctly answering the right
question.
Another common mistake is to not carefully consider the best way to do

something. Often a question may ask which of the following answers is
the best way to achieve a specific objective. The list may contain several
very good ways to do this. Your task is to work out which way is the best
way.
In order to check this, take all the plausible answers, and ask yourself, if
this answer was all that was done, would there be any need to add in any
further methods to improve it, or would that just lead to duplication of
effort?
If you have two answers that both seem to tackle the issue, but in
different ways, ask yourself which one is more reliable, less prone to
human error or dishonesty?
Always remember that a preventative control – one that prevents

something unwanted from occurring, is always better from a control
effectiveness perspective, than a detective control, which is one that
notices that something unwanted has already occurred.
After you have answered all the questions, you should use any
remaining time to check your answers.
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Make sure you haven’t made any silly mistakes such as confusing
questions that ask for opposites: for example, many questions ask which
of the following are features of something, whereas some questions ask
which of the following are not features of something.
It’s extremely easy to confuse your answer to these questions, so take

time both when answering and also when reviewing to make sure you
are answering the correct question.
Multiple choice questions, where you have to select several items can
sometimes be reversed so that the question is the opposite.
This is often the simpler way to ask, and thus answer, the question.
Take this example question:
What are the three objectives of FATF?

i. Monitoring implementation of recommendations by
members
ii. Promoting AML messages worldwide
iii. Encouraging the use of risk-based methods
iv. Monitoring money laundering trends and
countermeasures
A) i, iii, iv
B) ii, iii, iv
C) i, ii, iv
D) i, ii, iii
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We can reverse this question by changing the question into the opposite
statement, and changing the answer selections to include only the item
that was missing.
So the question could be rephrased as:
Which is NOT an objective of FATF?

i. Monitoring implementation of recommendations by
members
ii. Promoting AML messages worldwide
iii. Encouraging the use of risk-based methods
iv. Monitoring money laundering trends and
countermeasures
A) i, iii, iv ii
B) ii, iii, iv i
C) i, ii, iv iii
D) i, ii, iii iv
Both of these questions are the same. Having two ways to look at a single
question, including one that is more straight-forward, can be very useful
to you in the exam.
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Chapter 2
Introduction to
Anti Money
Laundering
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Risks & Methods of Money Laundering and

Terrorist Financing
Definition
The process of making dirty money (derived from criminal activity) look
clean by disguising the link to the source of the funds. This can be by
moving the money or changing its form.
Laundering is not just about cash; almost any medium can be used
including financial and non-financial instruments.
Money laundering requires knowledge that the money is the proceeds of

crime; however, knowledge could also be inferred from willful
blindness (deliberate avoidance of the facts).
Classic Money Laundering Process
Money laundering has three distinct stages that transform the dirty
money into clean money. These are outlined in the following table.
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Placement Taking dirty money and physically depositing it
with a financial institution or using it to purchase
P
an asset. This is the highest risk area for the
criminal, and most policing efforts are focused
here. Examples: depositing cash in a financial
institution, purchasing high value assets such as
art, precious metals or stones, which can then be
sold with payment made by bank transfer or
check.
Layering This distances the dirty money from its source by

a series of transactions designed to help
anonymity and disguise the audit trail. In this way
L the source, ownership, and location of the funds is

disguised. Examples: wiring funds from one
account to another, converting cash into
depositary instruments (money orders, travelers
cheques etc.), buying and reselling high value
goods or prepaid access or stored value items (like
gift cards), investing in property or legitimate
businesses, investing in stocks bonds or life
insurance, using shell companies which disguise
the beneficial owner.
Integration Placing clean money into the economy using an

apparently normal business or personal
I
transaction, so that criminals can add it to their
wealth. By this stage separating illegal and legal
wealth is very difficult.
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Effects of Money Laundering

 Increased crime and corruption
 Undermine the legitimate private sector by undercutting their prices
 Weakening financial institutions, possibly to the point of collapse
(BCCI and, Barings Bank for example). Reputational risk of dealing
with criminals, costs of investigations and fines
 Loss of control over monetary policy in smaller countries, as the size
of money laundering transactions causes measurement errors. This
can cause currency exchange rate and interest rate fluctuations
 Economic distortion, because money launderers are not interested
in the economics of a transaction, they will put their money into
schemes that offers privacy rather than economic benefit
 Loss of tax revenue, as the funds are disguised, so the collection of
taxes is more difficult. This increases the burden of taxation on
normal tax payers
 Risks to privatization, as criminals can outbid legitimate purchasers,
so key assets come under criminal control
 Reputation risk for the country
 Social costs e.g. treating drug addicts
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Chapter 3
Techniques
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Money laundering techniques

Electronic transfers
Wires, ACH, ATMs and credit/debit cards. Indicators of money

laundering include:
 Transactions to secrecy havens or high risk areas without
justification
 Many small incoming transactions that are then sent out of the
account in one bulk payment
 Funds activity that is repetitive, unexplained, or with unusual
patterns
Correspondent banking
 This is where one bank (the correspondent) provides services to

another bank (the respondent).
 Banks set up these correspondent relationships across the globe to
provide services in jurisdictions where they have no physical
presence.
 Large international banks have many thousands of correspondent
banking relationships.
 The respondents obtain services such as: cash management (e.g.
interest bearing accounts in a range of currencies), international
wires, check clearing, payable through accounts, foreign exchange.
 Credit worthy banks can be offered credit products such as letters of
credit or credit card account services.
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 Correspondent banking is vulnerable for two reasons:
 The financial institution carries out transactions for the
customers of another institution. This indirect relationship
means the customers identity hasn’t been verified by first-
hand knowledge
 The volumes of transactions mean that it’s not possible to
know which transactions represent legitimate business and
which are suspicious
 Additional risks:
 Although the regulatory regime may be understood, the
effectiveness over a specific respondent bank may be
difficult to ascertain
 The level of AML controls at the respondent can be assessed
using standard questionnaires, however the effectiveness of
the due diligence may be difficult to ascertain
 Nesting of respondent banks means that the correspondent
is further away from the actual customer
 Note that the USA Patriot Act enforced a number of provisions
against correspondent banking – see separate section for details.
Payable Through Accounts (PTAs)
These are accounts, similar to respondent accounts, but where the

respondent bank offers the service direct to their customers. This means
that they could send a wire transfer without first clearing the transaction
with the respondent. This means that the respondent’ s customers can
directly control funds at the correspondent bank without oversight from
the respondent.
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The PTA account has a number of sub-accounts that can be offered to

customers such as individuals, commercial businesses, exchange houses,
or other banks.
Aspects of PTAs that could impact AML efforts:

 PTAs with banks in offshore locations may have weak licensing or
supervision
 PTAs where the CDD is performed only on the respondent, not the
respondent’s customers
 PTAs where the sub-account holders can deposit and withdraw
currency
 PTAs used by a subsidiary of a respondent bank, which can perform
banking activity without direct supervision
Concentration Accounts
 Also known as special use, omnibus, settlement, suspense, intra-day,

sweep or collection accounts. They are internal accounts used to
assist with the settlement and processing of customer transactions,
often in conjunction with private banking, trust and custody
accounts, funds transfers.
 They pose an AML threat if the customer-identifying information is
lost when the account is used, this loses the audit trail.
Good practices include:

 Require dual signatures on all general ledger entries
 Prevent direct customer access to concentration accounts
 Capture information in customer statements
 Prevent customer knowledge of concentration accounts
 Reconcile the accounts frequently, ensure segregation between the
reconciliation staff and those that use the accounts on a day-to-day
basis
 Resolve discrepancies timely
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 Monitor for recurring customer names
Private Banking
 Offered to wealthy customers who seek confidentiality and

personalized service. Often operates semi-autonomously to other
parts of the bank, and is highly lucrative.
Key factors in private banking:

 High profitability
 Competition
 Powerful clientele
 Confidentiality and secrecy between client and banker
 Trust between client and banker
 Commission-based compensation
 Relationship managers that can become client advocates in order to
protect their clients
 Often assets move overseas to corporations in secrecy havens.
 PICs (Private Investment Companies) are established by individuals
to hold assets. They maintain confidentiality and are used for tax or
trust related reasons. The secrecy laws of the offshore havens where
PICs are located conceals the true identity of the beneficial owner.
 Sometimes PICs are created with nominee owners (who hold the
title to the company for the benefit of unnamed owners) this can
sometimes be protected by attorney-client privilege to prevent
information about the beneficial owner from being obtained.
 Many private banks establish PICs for clients, often using a trust
company in an offshore secrecy haven.
 PEPs (Politically Exposed Persons) are a further risk in Private
Banking, as they may have access to the proceeds of bribes,
extortion, and embezzlement.
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Structuring/Smurfing
 Organizing a transaction in such a way as to avoid triggering a

reporting or record-keeping threshold. It is one of the most well-
known money laundering methods, and is a crime in many
countries. The people who perform this activity are known as
runners or smurfs, employed by the launderers. They deposit small
amounts of cash under the reporting threshold, or purchase
monetary instruments (cashiers checks) in amounts under the
reporting threshold.
 A structurer may have 20 or more accounts open, some in false
identities of dead people. Cash is supplied to the structurer by a
money broker. The structurer deposits the cash in small quantities.
The money broker then uses checks drawn on the accounts to make
payments for exports from the country where the structuring takes
place to a different country (often linked to drug production).
Microstructuring
 This is the same as structuring, but for very small amounts, e.g.
$800. The cash from the sale of drugs is deposited in one country
and often withdrawn in a foreign country to pay for the supplies of
the drugs.
It is very difficult to detect, but some signs might be:

 Using blank deposit slips rather than paying in book slips
 Frequent small cash deposits not consistent with usual business or
personal activity
 Cash deposits followed quickly by ATM withdrawals in a high risk
country
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Cuckoo Smurfing
This requires an insider in a financial institution, often a money

remitter or alternative remittance system.
The first step is when a customer provides money to an alternative

remittance system for transfer to a bank account in a foreign country.
Rather than sending the money to the destination, the insider advises an
accomplice in the destination country of the bank account details of
where the cash should have been sent.
The associate then deposits dirty cash into the unwitting customer’s
account, who believes that it is the international transfer they awaited.
Then the alternative remitter provides the funds to the associate, who
has swapped dirty money for clean money received from the remitter,
which is supported by a genuine receipt.
The bank account used here is often innocent, but the cash deposit
would be by a launderer, so retain CCTV footage.
Bank Complicity
Employees can pose a significant money laundering risk. Background

screening for criminal history should be performed, as well as ongoing
monitoring for any employees that may be performing criminal
activities. Screening should include outsourced staff such as cleaners.
Credit Unions/Building Societies
Although a low risk due to their small size, and the difficulty of hiding
large transactions, they are still vulnerable because they handle a large
volume of cash transactions.
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Credit Cards
Includes:
 Credit card associations such as MasterCard, Visa, American
Express, Discover
 Issuing banks, which issue cards to customers
 Acquiring banks, which process transactions for merchants who
accept credit cards
 Third-party processors, who have contracts with issuers and
acquirers to provide transaction processing and other services
 Credit cards are often used in the layering or integration stages, as
cash payments to cards are often restricted. Accounts are usually
over-paid, creating a credit balance, which can be returned via a
refund.
Money Remitters & Money Exchange Houses
 Money remitters move money for their customers, who often don’t
have access to traditional banking services; they are also often
cheaper than banks. Their services also cover all global locations,
including ones without a formal banking infrastructure.
Key types:
 Separate networks such as Western Union and MoneyGram
 Underground networks (alternative remitters)
 Money transfers via foreign branches of a bank, where visiting
workers can remit funds back home
 International money orders
 They can be well regulated, if properly licensed.
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Insurance Companies
 Investment products such as life insurance, which can be canceled

and cashed in (whole of life or permanent life) and annuities are
highest risk. Annuities allow a large cash payment to be exchanged
for a series of income payments. This is similar to purchasing
investments such as stocks, shares or bonds. Normal insurance (car,
household etc.) do not have the redeemable value feature and are
thus not susceptible to money laundering.
Key risks:
 Brokers have a lot of freedom over the policies they sell
 Salesmen may not work for the insurance company, and be
incentivized to sell, which makes them overlook suspicions
 Overpaying the insurance, and receiving the payment as a clean
money check from the insurance company
 Using the ‘free look’ period to take out a policy, the cancel it without
penalty for a clean check
 Redeeming polices early, paying the redemption charge, and
receiving a clean check.
 Customers who are more interested in the cancellation terms than
the policy may be a money launderer.
 Products that allow purchase with cash or cash equivalents
 Products that allow a customer to borrow money against the product
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Securities & Futures Broker-Dealers
 The industry runs on electronic transfers not cash, so is usually part

of the integration or placement stages.
Key risk areas:

 High speed, international nature, using wire transfers.
 Ease of converting to cash without loss or penalty.
 Competitive, commission driven culture, meaning salespeople can
overlook the source of funds.
 Use of nominee or trustee accounts, obscuring true beneficiaries.
 Use of cash trading accounts which are not subject to the AML
controls of banks.
 There are also activities within the securities markets, such as
insider trading and market manipulation which generate illegal
funds that need to be laundered.
 Wash trading is where two opposite transactions are placed – for
example dirty money could be introduced into a brokerage, and a
long and a short position could be taken on the same security or
future in different brokerages. No matter which way the market
moves, the principal is safe, as losses on one side are offset by gains
on the other side. If the market moves so that the dirty money is lost,
then the gains in the other brokerage account can be withdrawn
which look like legitimate investment returns.
Casinos & Gaming
 Bookmakers, horse racing, and lotteries all are cash intensive, and
offer a potential source of recently acquired wealth.
 Casino money laundering is usually at the placement stage,
converting cash into checks. The cash is used to buy chips, and then
the chips can be converted into a check drawn on the casino’s
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account. The credit can also be transferred to a different jurisdiction
where the casino operates, and the funds can be made available
there.
 One method of gambling is to bet in such a way as to risk very little
of your capital (e.g. by betting on favorites). The winnings can then
be withdrawn and are the verifiable winnings from gaming.
Dealers in High Value Items
 Precious metals, gem stones, jewelery, art and antiques are all
vulnerable. Gold is compact, valuable, and convertible to cash in
many parts of the world anonymously. For example, gold or
diamonds can be purchased using cash generated from drug sales.
The gold or diamonds can be smuggled back to the drug production
country and converted into clean money. This then funds the drug
production, with the reminder as profits for the producer. Often
dealers will buy the high value item, and will make payment to a
third party, allowing the change of the item from one form to
another (e.g. object to cash) and from one person to another. As a
result, this feature is useful in the layering phase.
 Art auction houses have very high value items which are bought by
anonymous agents for elusive purchasers. The funds for the
purchase arrive as a wire transfer from an off-shore location.
Travel Agencies
 Susceptible to money laundering where an expensive ticket or hotel

package is purchased for another person, who then cancels and
obtains a refund.
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Vehicle Sellers
Cars and other vehicles (aircraft, helicopters, and yachts) are susceptible
to money laundering for four reasons:
 You can often make multiple part payments, allowing you to

structure a cash deposit
 You can downgrade your vehicle, and accept the difference in a
check made out to a third party (or yourself) which represents clean
money, or a layering technique
 Dealers will accept third party payments for the vehicle (layering
technique)
 The ability to trade multiple vehicles, which creates complex layers
of transactions
Gatekeepers: Accountants, Auditors, Lawyers, Notaries,

Company Formation Agents
They can all facilitate the entry of illicit money into the financial system
via the following methods:
 Creating corporate vehicles and complex legal entities such as trusts.
These obscure the links between the proceeds of crime and the
perpetrator.
 Buying and selling property can be used in the layering stage, or in
the integration stage where the asset is purchased and retained
 Performing financial transactions on behalf of a client (making
deposits, issuing checks, making and receiving wires, buying and
selling stock).
 Providing financial and tax advice. Criminals may pose as wealthy
individuals who need help sheltering wealth from tax.
 The issue of lawyers or attorneys providing advice to their client is
controversial, as they have a confidential relationship with their
clients.
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Investment and Commodity Advisors
Accounts for commodities futures and options can be used for

laundering. These include:
 Commodities: food, grains and metals are traded on exchanges,
often using futures
 Commodity pools: combines funds from several members to allow
them to trade
 Futures: contracts to buy or sell a commodity at a future date and set
price
 Omnibus accounts: accounts held at a futures merchant on behalf of
another merchant, the transactions for multiple customers are
combined which obscures their identity
 Options: create the right but not the obligation to buy or sell a
quantity of an item at a set price on or before an expiration date
Key risks:
 Withdrawing assets by transferring the proceeds to unrelated
accounts or high-risk countries
 Custodial relationships that allow the client to remain anonymous
 Movement of funds to disguise the origin
 Investing illegal proceeds
Trust & Company Service Providers
These create and administer companies.
They:
 Form legal entities
 Act as directors, secretaries, partners
 Provide registered offices and business addresses
 Act as a trustee of an express trust
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 Act as a nominee shareholder on behalf of another person

 Many of these activities can be performed by lawyers under legal
privilege provisions which prevent the disclosure of information.
Real Estate Industry
 Investing illicit funds into real estate is common, because houses

provide shelter for criminals; rural properties can be used for
growing and storing drugs. The proceeds of crime can be used to pay
deposits/down payments, mortgages, and construction costs. Using
nominees to hide the beneficial owner is common.
 Buying and selling real estate is used in layering or integration for
example, where a holiday resort can be purchased.
 Escrow accounts are used to hold funds for the purchase, and these
accounts have many deposits and withdrawals related to the sale.
They can be used to disguise criminal transactions that look like
legitimate business transactions related to the sale or purchase of a
property. As a result escrow accounts require specific monitoring.
Reverse Flip
A technique where an asset is apparently acquired for less than the

normal price. This is paid for partly in clean money and partly in dirty
money. For example, a $2M house could be acquired for $1M plus a
further $1M of dirty money outside of the transaction (‘under the
table’). The property is later sold for the full $2M which is now all clean
money.
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Loan back
Dirty money is placed in the account of an offshore entity that is owned

by the criminal. The offshore location means that the beneficial owner is
difficult or impossible to determine. The offshore entity then makes a
loan to the criminal which is clean money. In addition, repayments on
the loan are also tax-deductible.
Manipulation of import/export prices
A technique where goods are shipped and the buyer either under- or
over-pays. This allows monetary worth to move from one country to
another. It may also be used to avoid taxes. They are known as
fraudulent transfer pricing schemes. Often exports are under-valued,
because governments scrutinize imports so that they collect import
taxes.
Letters of Credit
Letters of credit (L/C) are normally used to ensure that an exporter is

paid for the goods they are exporting. The buyer of the goods will
purchase a letter of credit from their bank, and forward it to exporter,
who lodges it at their bank. Payments will be released by the buyer’ s
bank when the conditions of the L/C are fulfilled – these are sometimes
stage payments such as when goods are loaded onto a shipping carrier,
when they arrive in the country, and when they are cleared by customs.
L/C facilitate money laundering by allowing funds to move country

when they don’t relate to an actual shipment, which is achieved in
countries with lax export controls. L/C can be used when import and
export prices are manipulated for money laundering or tax evasion
purposes.
48
Black Market Peso Exchange (BMPE)
Money in the US or other drug consuming countries is purchased by

agents working on behalf of drug producing countries. They deposit the
cash into accounts they control, and use these funds to purchase goods
in the drug consuming country. These goods are then shipped to the
drug producing country and sold, with the proceeds handed to the drug
producers.
Online/Internet Banking
 Helps create distance between customer and the bank, by

eliminating face to face contact.
 Cross border transactions from anywhere on earth.
 Rapid execution of instructions.
 To counter the threat, log files should be kept, including the IP
addresses of access, maintained for at least a year.
Internet Casinos
 Transactions are primarily using debit or credit cards, and the

casinos are located in unregulated off-shore locations so prosecuting
individuals is difficult. Credit card transactions are identified by
codes which enable such transactions to be blocked by banks and
credit card companies.
 Online gambling is not used for cash movement as there is no
physical presence to pay in cash.
49
Prepaid Cards and E-cash
 Prepaid cards are gift cards or Visa and MasterCard branded

payment cards, portable, valuable, exchangeable for cash or products
(via an ATM or shop purchase), and anonymous.
Key risks:
 Anonymous card holders and funding, access to funds
 High value limits, and no limits to the number of cards that can be
acquired
 Global access to cash at ATMs
 Offshore card issuers
 Substitute for bulk-cash smuggling
50
 There are some regulatory discrepancies over prepaid cards – in

Germany adding value is considered the same as making a deposit,
so prepaid card institutions are considered credit institutions, and
are regulated. In the US regulations do not exist that cover such
situations.
 Stored value cards (or electronic purses) hold the funds physically
on a chip inside a card.
Ways to reduce risk:

 Limit the functions and capacity of smart cards
 Link new payment technologies to financial institutions and bank
accounts
 Require standard documentation and record-keeping
 Allow the examination of records by investigating authorities
 Establish international standards for the above measures
51
Types of Pre-Paid Cards
Name Description Anonymity Reloadable Value Examples

stored on
card
Open A Visa, MasterCard, Usually not, Yes: electronic Usually no – Visa or

system or American often banking, via transactions MasterCard
cards Express card that embossed retailers authorized prepaid cards
can be used in with the in real-time
ATMs and retailers card-holders
name
Semi- Same as open cards, No – same Yes Usually yes

open without ATM as open – lost and
system access (purchase cards stolen
cards only) cards/
vouchers
cannot be
replaced
Closed For buying goods Typically Often not, but Usually yes Proprietary gift
system from participating yes some cards can – lost and cards
cards retailer. be reloaded stolen
cards/vouch
ers cannot
be replaced
Semi- Can be used at Usually yes Often not, sold Usually yes Gift cards or
closed selected retailers at preset – lost and vouchers that
system denominations stolen can be used at a
cards cards/ range of
vouchers merchants.
cannot be
replaced
52
Structures Designed to Hide Beneficial

Ownership
Shell Companies
Types:
 Shelf company: A corporation without any activity, waiting to be
sold as a ready-made company
 Shell company: A corporation which at the time of incorporation
has no significant assets or operations
They can be used for legitimate purposes (tax and estate planning,
mergers and acquisitions) and also by money launderers. They can issue
shares to natural or legal persons, and in registered or bearer form.
Bearer shares mean that whoever physically holds the share certificate,
owns the share. They can be created for a single purpose or to hold a
single asset.
Shell companies convert cash proceeds of crime into alternative assets.

The launderer can create the illusion of business activity by creating a
fictitious but cash-rich business (restaurant etc.). Any criminally
controlled company can offer the criminal employment in order to
appear legitimate.
Shell companies can disguise ownership. Nominees can be used as

owners, directors, shareholders. Criminals can avoid being linked to
assets by registering these assets in the name of a company. The records
can be held in offshore locations where the information is difficult to
access by law enforcement. In many cases the beneficial ownership
information, if collected, is not verified in any way.
53
Front Companies
Launderers can also use legitimate businesses that offer a service, and
co-mingle illicit funds with legitimate proceeds from the business. Such
criminally controlled companies often use nominee owners or directors
to hide beneficial ownership.
Selling these criminal companies is a way to create legitimate funds for

the launderer, and they often get high prices as the turnover appears
artificially high.
Buying a company already owned by the criminal
This is a way of repatriating funds. The criminal business is bought by

an offshore company that was used to hide the criminal’s funds. In this
way the funds are repatriated, and appear as the legitimate proceeds of
the sale.
Double invoicing
An offshore company orders goods from an onshore subsidiary. The

payment is sent in full to their account. The payment is actually
repatriating funds that have been spirited out of the country. If the
subsidiary was over charged, they will show lower profits, reducing tax.
This can also work in reverse where the subsidiary purchases from the
parent at too high a price.
Trusts
These differ by jurisdiction, but generally the legal relationship is set up

by a settler, where assets are put into the trust for the benefit of one or
more beneficiaries (or for a stated purpose, such as a charitable trust).
54
Trust accounts are very useful for money laundering, hiding beneficial
owners, converting between assets, and processing illicit funds. They
can also be formed in privacy havens making details about them
impossible to locate.
Payments to beneficiaries can also be used as they don’ t require any

justification as to the source of the wealth.
Bearer Bonds, Securities & Checks
Bearer bonds and shares have no registry of owners, so physical

possession is ownership. Banks should ask questions about the
beneficial owners of such entities and share this information with law
enforcement.
A bearer check is a check that can be paid out to the holder, usually
without any identification.
A non-bearer check can be converted into bearer form if the original

payee has endorsed it.
Terrorist Financing
Money laundering is always about money received for illegal activity.

Terrorist financing however may use legitimate funds for illegal
activities.
Terrorists wish to disguise the link between their funding source and
themselves so many of the layering techniques are used.
Key suspicious items:

 Account holders name on a list of suspected terrorists
 Frequent large cash deposits in a non-profit’s account
 High volume of transactions
55
 Lack of clear relationship between activity and account holders
business
 Large cash deposits followed by frequent withdrawals until the
funds are depleted
Informal Value Transfer Systems
 Alternative money remittance systems: Hawala, poey kuan, Chop

shop, hundi. It is cheaper than sending international transfers.
 Similar to Western Union® in operation:
 A customer attends a local business such as a trading business
and deposits funds, asking that they be sent to another country.
The customer receives a code which they communicate to their
beneficiary, which enables them to collect the funds
 The trader then asks his counter-party in another country to
make the funds available upon production of the code.
 The debt between the two traders is either settled as part of the
usual trade process, or is balanced by incoming remittances
 It can be used in any phase of money laundering
 There is very little paper-trail maintained
Charities & Not-for-profits
 Charities are cash intensive, have considerable funds, often with a

global presence, minimal oversight or regulation.
 To minimize risks, charities should have full budgets and account
for all expenses, conduct independent audits and perform field
audits to ensure funds are being used for legitimate purposes.
 Standard bank accounts should be used to ensure the normal
banking system controls are in place.
56
Chapter 4
Regulatory
Framework
57
58
Standards for AML and Combating Financing

of Terrorism
FATF was launched in 1989 by the G7, and is based at the OECD
(Organization for Economic Cooperation and Development) in Paris.
There are 38 members, comprised of 36 jurisdictions, and 2 regions

(GCC/Gulf Cooperation Council, and EU). There are 29 regional and
international organizations that are associate members or observers, and
participate in the work of the FATF.
Members:
Argentina, Australia, Austria, Belgium, Brazil, Canada, China,
Denmark, Finland, France, Germany, Greece, Hong Kong
(China), Iceland, India, Ireland, Italy, Japan, Luxembourg,
Mexico, the Netherlands, New Zealand, Norway, Portugal, the
Russian Federation, Singapore, South Africa, South Korea,
Spain, Sweden, Switzerland, Turkey, the United Kingdom, and
the United States.
Although the GCC is a member, the individual member countries of the

GCC are not members, this is Bahrain, Kuwait, Oman, Qatar, Saudi
Arabia and the United Arab Emirates.
To be a member, the jurisdiction must be strategically important (by

GDP, size of banking sector, or impact to the global financial system),
and lead to a more balanced geographic spread of members.
It also should provide political commitment to the 40

recommendations, and AML/CFT, agree to implement all 40
recommendations within three years, be assessed for compliance
periodically, and actively participate in FATF. The country should also
be a member of the regional FATF member.
59
The compliance criteria must be met in relation to:
 Money laundering and terrorist financing offenses
 Freezing and confiscation
 Customer due diligence (although there is some flexibility in this
requirement)
 Record-keeping
 Suspicious transaction reporting
 Financial sector supervision
 International cooperation
Objectives of FATF:
 Promote AML messages worldwide
 Monitor implementation of recommendations by members (annual
self-assessment, plus periodic visit from another member)
 Monitoring money laundering trends/countermeasures (the
‘typologies’ exercise)
 FATF cannot impose fines or other penalties, if members do not
comply it applies a graduated approach of enhanced peer pressure,
including putting the jurisdiction on a watch list, and ultimately
rejecting the member.
60
40 Recommendations
 First issued in 1990, revised in 1996, 2003 and 2012.

 Interpretive notes clarify the application of specific
recommendations
 After September 11, 2001 terrorist attacks, they issued nine
recommendations on terrorist financing: eight were adopted on Oct
31, 2001, and one was Oct 22, 2004.
 The 2012 version of the 40 recommendations combined the nine
into the 40.
Recommendations cover:
 Identify risk and develop policies
 Criminal justice system and law enforcement
 Financial system and regulation
 Transparency of legal persons and arrangements
 International cooperation
 2003 revisions expanded the global reach of ways to crack down on
the illicit movement of funds; it also strengthened measures to
combat money laundering and terrorist financing.
Key changes in 2003:

 Included terrorist financing
 Included real estate agents, precious metals dealers, accountants,
lawyers, trust services providers
 Specified procedures on customer identification, due diligence,
including extra ID for high risk customers
 Clear definition of predicate offenses for money laundering
 Prohibited shell banks, urged transparency over legal persons
 International cooperation in terrorist financing investigations
61
2012 revision introduced:
 The risk assessment as the first step
 Incorporated the nine terrorist financing recommendations into the
main 40
 Measures against weapons of mass destruction
 Domestic PEPs and those with prominent functions in international
organizations
 Identifying risks of new products prior to launch
 Financial groups should have a group-wide AML/CFT program
 Include tax crimes within the scope of predicate offenses
62
Overview of the 40 recommendations
Group Topic Recommendations
I  AML/CFT Policies & Coordination 1-2

 Assessing risks and applying a risk
based approach
 National cooperation and
coordination
II  Money laundering and confiscation 3-4

 Money laundering offense
 Confiscation and provisional
measures
III  Terrorist financing and financing of 5-8

proliferation
 Terrorist financing offense
 Targeted financial sanctions related to
proliferation
 Non-profit organizations
63
IV  Financial and non-financial 9-23

institution measures
 Financial institution secrecy laws
 Customer due diligence and record
keeping
 Additional measures for specific
customers and activities
 Reliance, controls and financial
groups
 Reporting of suspicious transactions
 Designated non-financial businesses
and professions
V  Transparency and beneficial 24-25

ownership of legal persons and
arrangements
 Transparency and beneficial
ownership of legal persons
 Transparency and beneficial
ownership of legal arrangements
VI  Powers and responsibilities of 26-35

competent authorities and other
institutional measures
 Regulation and supervision
 Operational and law enforcement
 General requirements
 Sanctions
64
VII  International cooperation 36-40

 International instruments
 Mutual legal assistance
 Mutual legal assistance: freezing and
confiscation
 Extradition
 Other forms of international
cooperation
65
Key highlights of the 40 recommendations
 Risk based approach: countries and financial institutions should

understand the risks they face, and take measures against those risks.
This allows limited resources to be targeted.
 Designated categories of offenses: where the money derived from
the specific offense is concealed in the financial system, this would
constitute criminal money laundering. Countries should also
confiscate the proceeds of crime.
 Terrorist financing and proliferation: countries should criminalize
terrorist financing, freeze the assets of any entity that is identified by
the UN Security Council as involved in terrorism. Also control
against the use of non-profits for terrorist support.
 Knowledge and criminal liability: willful blindness (deliberate
avoidance of knowledge of the facts) should not shield an entity
from money laundering offenses. Civil, or if possible, criminal
offenses should apply to legal entities.
 Customer due diligence: should occur when business relations are
started, when occasional transactions occur above a specified
threshold, suspicions of money laundering or terrorist financing
arise, doubts about previous customer identification exist.
Financial institutions should:

 Identify customers on a risk basis and verify their identity using
independent source documents.
 Identify the beneficial owner and verify their identity.
 Understand the nature of the business relationship.
 Scrutinize transactions and ensure they match the knowledge of the
customer.
 Maintain records.
66
Heightened CDD is recommended on the following:

 PEPs including verifying source of funds.
 Cross-Border correspondent banking, understanding the
respondent’s business and customers, levels of AML controls,
mitigate risks of payable through accounts.
 Money or value transfer services (MVTS) should be licensed and be
subject to AML requirements.
 New technologies should be risk-assessed, especially new products,
delivery mechanisms and business practices. Risks should be
mitigated.
 Wire transfers – accurate originator, intermediary and beneficiary
information, and monitor for missing data, also sanctions screen the
data.
 Suspicious transaction reporting: institutions must report to the FIU
any suspicions.
 Expanded coverage of industries:
 Casinos
 Real estate agents
 Dealers in precious metals and stones
 Lawyers
 Notaries
 Accountants
 Legal professionals (when they manage client money or
other assets, buy or sell real estate, create or manage
companies)
 Trust and company service providers (when they act as
formation agents, act as a director or secretary, act as a
trustee or nominee shareholder for another person)
67
FATF designated thresholds:
 Financial institutions for occasional customers: €15,000.
 Casinos, including internet: €3,000.
 Dealers in precious metals and stones, when dealing in cash
€15,000.
 Transparency and beneficial ownership of legal persons: particularly
those that issue bearer shares.
 Powers and responsibilities of authorities: ensure FATF
recommendations are being implemented in financial institutions,
and are not owned or controlled by criminals.
 International co-operation and mutual assistance.
Non-Cooperative Counties
FATF identifies non-cooperative countries assessing them on 4 criteria:

 Loopholes in financial regulations: including inadequate
supervision or creation of financial institutions, excessive secrecy,
and lack of suspicious transaction reporting.
 Obstacles raised by regulatory requirements: inadequate business
registrations, lack of beneficial owner information.
 Obstacles to international cooperation: administrative or judicial
blockages.
 Inadequate resources for AML efforts, including the absence of an
FIU
Nigeria and Myanmar were the last two countries to be removed from
the list in 2006.
FATF now risk rates jurisdictions based on the compliance with the
above.
68
Basel Committee on Banking Supervision
Established in 1974 by central bank governors of the G10. The

Secretariat is provided by the Bank for International Settlements (BIS)
in Switzerland, which promotes financial stability among central banks
and international organizations. Central bankers are not directly
responsible for AML, but they can enforce high ethical standards.
The Basel Committee’s members are Argentina, Australia, Belgium,

Brazil, Canada, China, France, Germany, Hong Kong SAR, India,
Indonesia, Italy, Japan, Luxembourg, Mexico, Netherlands, Russia,
Saudi Arabia, Singapore, South Africa, South Korea, Spain, Sweden,
Switzerland, Turkey, the United Kingdom and the United States.
In 1998, Basel Committee set out a statement of principles entitled

“Prevention of Criminal Use of the Banking System for the Purpose of
Money Laundering” covering:
 Customer identification
 Compliance with laws
 Conformity with high ethical standards and local laws and
regulations
 Full cooperation with national law enforcement to the
extent permitted without breaching customer
confidentiality
 Staff training
 Record keeping and audits
They stressed confidentiality, as this was a time before legislation that

required the identification of customers.
In 1997 the Basel committee issued the “Core Principles for Effective
Banking Supervision” that required strong KYC, and high ethical
69
standards to prevent the use of the financial system by criminals. It also
urged adoption of the FATF 40 recommendations.
In October 2001 paper “Customer Due Diligence for Banks” covered:
 Introduction
 Importance of KYC standards for supervisors and banks
 Essential elements of KYC standards
 The role of supervisors
 Implementation of KYC standards in a cross-border context
The paper indicates that banks should monitor account activity and
ensure that it is in line with expected usage. Numbered accounts are not
prohibited, but the real customer’s identification can’t be hidden from
compliance staff or regulators.
The paper introduces 7seven specific customer situations:

 Trust, nominee and fiduciary accounts
 Corporate vehicles, especially with nominee shareholders or
shares in bearer form
 Introduced businesses
 Client accounts opened by professional intermediaries (i.e.
pooled accounts for mutual funds, pension funds, and
money funds)
 PEPs
 Non-face-to-face customers
 Correspondent banking
70
The following recommendations are made:

 Private banking should not be exempt from KYC
 Customer acceptance should include the country, business
and other risk factors and should indicate who is, and is not,
an acceptable customer
 Understand the beneficial owner
 Periodic training on KYC & AML
 Internal audit and compliance should regularly monitor staff
performance and adherence to KYC policies
 High risk accounts should be monitored for suspicious
activities away from normal patterns of usage
 Regulators should ensure staff follow KYC procedures
The four key elements of KYC according to the paper are:

 Customer identification
 Risk management
 Customer acceptance
 Monitoring
71
EU Directives on Money Laundering
First Directive
Issued in 1991 as 91/308/EEC, requires member states to prevent

domestic financial services being used for money laundering, amending
national law if needed. It only covered drug trafficking (as defined by the
1988 Vienna Convention), however member states could broaden the
predicate crimes.
Second Directive
Issued in 2001 as 2001/97/EEC; required stricter money laundering

controls.
 It included all serious crimes as predicate crimes, including fraud

 It brought bureau de change/currency exhanges and money
remitters into scope
 It introduced ‘willful blindness’
 A precise definition of laundering (i.e. concealing the criminal
source of funds, or using property knowing it was from a criminal
source)
 It went much further than US law, and even the FATF guidance
 It included lawyers moving money for clients, auditors, accountants,
tax advisers, real estate agents, notaries, legal professionals
72
Third Directive
2005/60/EU is based on the FATF 40 recommendations, and was

adopted in 2005, to be implemented by 2007.
 Defined money laundering and terrorist financing as separate

crimes, and ensured that the directives covered both
 Risk based CDD – enhanced CDD for riskier customers
 Protect employees who report suspicions
 Collect statistics on the SARs, e.g. number filed, follow-up
performed, number of cases, prosecutions and convictions
 Financial institutions must record beneficial owner of accounts held
by legal persons i.e. natural persons controlling 25% or more of a
legal entity
 Defined PEPs as those in prominent positions and their publically
known associates, ceasing to be a PEP after one year of not holding
office
It applies to:
 Credit institutions
 Financial institutions
 Auditors, external accounts, tax advisors
 Legal professionals
 Estate agents
New for the third directive are:

 Trusts and company service providers
 Dealers selling goods for cash (>€15,000)
 Life insurance intermediaries
73
Regional FATF-Style Bodies and FATF
Associate Members
There are eight regional FATF-style bodies and FATF Associate
Members that have similar form and functions to those of FATF. Many
FATF member countries are also members of these bodies.
Asia/Pacific Group on Money Laundering (APG)

 A Financial Action Task Force (FATF)-style autonomous
voluntary and cooperative regional body, not derived from an
international treaty, and not part of an international
organization. Established in 1997 consisting of jurisdictions in
the Asia/Pacific Region. See www.apgml.org
Caribbean Financial Action Task Force (CFATF)

 A FATF-style regional body comprising Caribbean states,
including Aruba, the Bahamas, the British Virgin Islands, the
Cayman Islands and Jamaica. Established as the result of
meetings in 1990 and 1992. Cooperating nations include
Canada, France, Mexico, the Netherlands, Spain, UK, US. 19
recommendations, revised in 1999 which complement the FATF
40. See www.cfatf.org
Council of Europe Select Committee of Experts on the Evaluation of

Anti-Money Laundering Measures (MONEYVAL)
(formerly PC-R-EV)
 Council of Europe Select Committee of Experts on the
Evaluation of Anti-Money Laundering Measures. Formerly PC-
R-EV, the committee was established in 1997 by the Committee
of Ministers of the Council of Europe to conduct self and
mutual assessments of anti-money laundering measures in place
74
in Council of Europe countries that are not FATF members.

MONEYVAL is a sub-committee of the European Committee
on Crime Problems of the Council of Europe (CDPC).
Eastern and Southern Africa Anti-Money Laundering Group

(ESAAMLG)
 A FATF-style regional body comprising fourteen countries from
the Eastern region of Africa down to the Southern tip of Africa.
It was established in 1999. Has adopted the FATF 40
recommendations. See www.esaamlg.org
Eurasian Group (EAG)

 A FATF-style regional body formed in October 2004 in
Moscow. Member countries include Belarus, China,
Kazakhstan, Kyrgyzstan, Russia, Tajikistan, Turkmenistan and
Uzbekistan. Observers include UK, USA, Italy, Georgia plus
organizations such as FATF, World Bank, IMF. See
http://www.eurasiangroup.org/
Financial Action Task Force of South America against Money

Laundering (GAFISUD – Grupo de Acción Financiera de Sudamérica)
 A FATF-style regional body for South America, established in
2000. Members include: Argentina, Bolivia, Brazil, Chile,
Colombia, Costa Rica, Ecuador, Mexico, Panama, Paraguay,
Peru, and Uruguay. Created by inter-governmental treaty which
permits more countries to join. Adopted the FATF
recommendations. See http://www.gafisud.info/home.htm
75
Intergovernmental Action Group against Money-Laundering in West
Africa (GIABA – Groupe Intergouvernemental d’Action contre le
Blanchiment d’Argent en Afrique de l’Quest)
 GIABA is an institution of the Economic Community of West
African States (ECOWAS) responsible for facilitating the
adoption and implementation of Anti-Money Laundering
(AML) and Counter-Financing of Terrorism (CFT) in West
Africa. It is also a FATF-Styled Regional Body (FSRB) working
with its member States to ensure compliance with international
AML/CFT standards.
Middle East and North Africa Financial Action Task Force

(MENAFATF)
 A FATF-style body established for the Middle Eastern and
North African regions in 2004. Algeria, Lebanon, Saudi Arabia,
Bahrain, Libya, Sudan, Egypt, Mauritania, Syria, Iraq, Morocco,
Tunisia, Jordan, Oman, UAE, Kuwait, Qatar, Yemen. Voluntary,
not derived from international treaty, independent from any
other international organization. See www.menafatf.org
76
Other AML initiatives
CICAD (Organization of American States: Inter-American Drug

Abuse Control Commission.
 1992, OAS (Organization of American States) is a permanent

international body which provided model legislation tackling money
laundering. Forms Western Hemisphere’s drug policy.
 1999 a specialist AML unit (CICAD-AMLU) formed, which
provides technical assistance and develops regulations (influenced
by and compatible with FATF 40).
 They provide support to bankers and regulators, judges and
prosecutors, financial intelligence units, law enforcement.
Egmont Group of Financial Intelligence Units

 1995 FIUs worked together informally to reciprocate information,
supply training, create the Egmont Secure Web (ESW) technology
platform, promote operational autonomy, promote the
establishment of further FIUs.
 It defined an FIU as: central, national agency for receiving analyzing
and disseminating SARs related to money laundering and terrorist
financing, as required by national legislation.
 In 2010 there were 117 Egmont members.
Wolfsburg Group of Global Banks

 Association of 11 global banks, settings standards for KYC, AML,
and terrorist financing policies.
 Created in 2000, principles carry no force of law or penalties.
 In partnership with Transparency International.
 Covers private banking.
77
 Indicates the following as high risk: PEPs, high risk countries (those
without good AML standards), high risk activities (clients whose
wealth originates from activities susceptible to money laundering).
 In 2002, prohibited concentration accounts (internal non-client
accounts) that sever the link between the sources of funds.
 In 2002, agreed how to deal with terrorist financing, by sharing lists
of suspected terrorists globally, providing information on the
methods used by terrorists, defining business guidelines for sectors
and activities prone to terrorist financing, and develop uniform
policies.
 Enhanced CDD for remittance services, exchange houses, bureau de
change, money transfer agents, and underground banking
businesses and alternative remittance systems.
 Correspondent banking services should not be provided to a shell
bank, CDD should not be performed on IMF and World Bank.
Other International Organizations
 Any country wanting financial assistance from the World Bank and
International Monetary Fund must have adequate AML controls.
 Other organizations with AML or anti-terrorist financing initiatives
include:
 African Development Bank
 Asia Development Bank
 The Commonwealth Secretariat
 European Bank for Reconstruction and Development
(EBRD)
 European Central Bank (ECB)
 Europol
 Inter-American Development Bank (IADB)
 Interpol
78
 International Organization of Securities Commissions

(IOSCO)
 Offshore Group of Banking Supervisors (OGBS)
 World Customs Organization (WCO)
79
Key US Legislation and Regulation relevant to
International Transactions
USA Patriot Act
The October 2001 Act strengthened money laundering laws introduced

in 1986, and the Bank Secrecy Act in 1970.
Title III (public law 107-56) “International Money Laundering

Abatement and Anti-terrorist Financing Act” of 2001 contains most of
the AML content. It governs US and non-US financial institutions that
operate in the US. It enables international access points to the US
financial system to be controlled.
Section 311: special measures for primary money laundering concerns.

Allows the US Treasury to specify as a specific money laundering
concern: a foreign jurisdiction, a foreign financial institution, any type
of international transaction, or a type of account. US banks would then
need to take special measures with these types of concerns.
There are five, graduated special measures that can be taken:
1) Keep records, or file reports containing transaction data

including beneficial owners as well as originator and beneficiary.
2) Keep information about the beneficial owner of any US account

opened or maintained by a foreign person or their
representative.
3) Identify and obtain information about customers who are

permitted to use foreign bank’ s payable through accounts.
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4) Identify and obtain information about customers who are

permitted to use foreign bank’s correspondent accounts.
5) Close certain PTA or correspondent accounts.
Section 312: Correspondent and Private banking
 Required due diligence or enhanced due diligence for foreign

correspondent and private banking accounts for non-US persons. It
covers almost all account relationships that can be held with a
foreign financial institution.
 The rules apply to US banks, credit institutions, thrift institutions,
trust banks, broker-dealers, futures commission merchants, and
introducing brokers in commodities and mutual funds, and US-
based agencies and branches of foreign banks.
 Foreign institutions includes: foreign banks, foreign branches of US
banks, credit unions, foreign businesses that would be considered
broker-dealers, futures commission merchants, introducing brokers
in commodities or mutual funds if operated in the US, and foreign
money transmitters or currency exchangers.
Due diligence should:

 Determine whether enhanced DD is needed
 Assess the money laundering risk associated with the correspondent
account
 Use risk-based procedures and controls designed to detect and
report suspected money laundering
Enhanced DD should apply to a correspondent account for a foreign

bank operating under:
 Off-shore banking license
 A license issued by an non-cooperative country
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 A license issued by a country deemed a risk under section 311 of the
Patriot Act.
 Private banking is deemed as an account with a minimum deposit of

$1 million, assigned to a designed banker, for a non-US person
 All beneficial owners should be identified
 Verify whether an owner is a current or former senior foreign
political figure
 Understand the purpose and use of the account, and the source of
the funds
 Monitor the account to ensure the use is in line with expectations,
reporting any suspicions
 Section 313 of the Act prohibited correspondent accounts for shell
banks
 Section 319(a) allows forfeit of funds from a US correspondent
account of the same amount as those deposited in a foreign
correspondent account
 Section 319(b) records relating to correspondent accounts at foreign
banks should be available within 120 hours (5 days)
OFAC: Office of Foreign Assets Control
 OFAC enforces foreign policy and national security goals by

imposing economic and trade sanctions. They prohibit transactions
and require blocking of assets that belong to people on their lists.
They can apply significant sanctions for violations. The rules apply
to all US citizens, no matter where they are located, all people in the
United States, all US-incorporated entities and their foreign
branches.
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Key Groups
Group Description Key Documents
Financial  Intergovernmental  40 Recommendations on

Action Task body with 34 Money Laundering and
Force on member countries Terrorist Financing (Last
Money
and two updated February 2012).
Laundering
international
organizations.
 Sets money
laundering and
terrorist financing
standards.
Basel  Established by the  Customer Due Diligence

Committee central bank for Banks Paper (2001).
on Banking governors of the  Sharing of financial
Supervision
G-10. records between
 Promotes sound jurisdictions in connection
supervisory with the fight against
standards terrorist financing (2002).
worldwide.  General Guide to Account
Opening and Customer
Identification (2003).
 Consolidated KYC Risk
Management Paper
(2004).
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European  The EU Directives  1st EU Directive on

Union on anti-money Prevention of the Use of
laundering require the Financial System for
the EU member the Purpose of Money
states to issue Laundering (1991).
legislation to  2nd Directive (2001).
prevent their  3rd Directive (2005).
domestic financial
systems being used
for money
laundering.
Wolfsburg  Association of 11  Wolfsburg Anti-Money

Group global banks. Laundering Principles for
 Aims to develop Private Banking (last
standards on money updated 2002).
laundering controls  The Suppression of the
for banks. Financing of Terrorism
Guidelines (2002).
 Anti-Money Laundering
Principles for
Correspondent Banking
(2002).
APG,  FAFT-style  Typologies exercises

GAFISUD, regional bodies. (methods of money
CFATF, laundering)
MENAFATF,
Eurasian
Group,
Eastern and
South African
AML Group
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Egmont  Informal  Statement of Purpose (last

Group networking group updated 2004).
for Financial  Principles for Information
Intelligence Units. Exchange between
Financial Intelligence
Units for Money
Laundering Cases (2001).
 Best Practices for the
Exchange of Information
Between Financial
Intelligence Units (2004).
CICAD  Commission  Model Regulations

within the
Organization of
American
States that deals
with drug-
related issues,
including
money
laundering.
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World  These  Reference Guide to

Bank and organizations Anti-Money
International work together Laundering and
Monetary and in Combating the
Fund conjunction Financing of
with FATF in Terrorism: A Manual
encouraging for Countries to
countries to Establish and Improve
have adequate Their Institutional
anti money Framework 2002
laundering laws (revised 2007).
and reviewing
the laws and
procedures of
FATF member
countries.
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Chronological AML Developments
Year Developments
1986  U.S. enacts its Money Laundering Control Act, codified at 18

U.S.C. Section 1956 and 1957, the first law in the world to make
money laundering a crime.
1988  Vienna Convention (UN Convention against Illicit Traffic in

Narcotic Drugs and Psychotropic Substances) is agreed.
 Statement of principles is issued by Basel Committee on
Banking Regulations and Supervisory Practices.
 Anti-Drug Abuse Act was enacted including car dealerships
and real estate closing personnel within the definition of
financial institutions, requiring them to report large currency
transactions.
1989  Financial Action Task Force established at G-7 economic

summit in Paris.
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1990  FATF issues its 40 Recommendations on Money Laundering.
 Caribbean Financial Action Task Force is established and
issues CFATF 19 Recommendations on Money Laundering.
 Council of Europe Convention on Laundering, Search,
Seizure and Confiscation of the Proceeds from Crime is
issued.
1991  FATF members agree on “mutual assessment” process.

 Council of Europe Directive on Prevention of the Use of the
Financial System for the Purpose of Money Laundering
(91/308/EEC) is issued.
1992  Organization of American States (OAS) model anti-money

laundering regulations and legislation are adopted.
 Kingston (Jamaica) Declaration on Money Laundering of the
CFATF is issued.
 Annunzio-Wylie Anti-Money Laundering Act requires
Suspicious Activity Reports (SARs) to be completed in the US.
1993  UN model law on Money Laundering, Confiscation and

International Cooperation in Relation to Drugs is proposed.
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1994  Money Laundering Suppression Act enacted in the US

requiring financial institutions to review and improve training,
develop anti-money laundering examinations, ensure cases are
referred to law enforcement agencies, streamlined
the Currency transaction report, and introduced new
requirements for money service businesses (MSBs).
1995  Egmont Group of Financial Intelligence Units is formed.
1996  The FATF 40 Recommendations are revised to extend

predicate offenses beyond drugs to other serious crimes.
 The first FATF Typologies Report is released.
1997  Asia/Pacific Group on Money Laundering (APG) is

established.
 PC-R-EV (now MONEYVAL) is established, which
conducts self-assessments of AML measures in European
countries that are not FATF members.
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1998  OAS Model Regulations Concerning Laundering Offenses
Connected to Illicit Drug Trafficking and Other Serious
Offenses are amended.
 Money Laundering and Financial Crimes Strategy Act
enacted in the US. Included the requirement for banking
agencies to conduct anti-money laundering training
required the development of the “National Money
Laundering Strategy”, and created the “High Intensity
Money Laundering and Related Financial Crime Area”
(HIFCA) Task Forces.
2001  South African Financial Intelligence Center Act and

subsequent amendments added responsibilities to the
Financial Services Board (FSB) to combat money
laundering.
2003  Money Laundering Regulations 2003 published in UK
2004  Intelligence Reform & Terrorism Prevention Act updated

the Bank Secrecy Act to require certain financial
institutions to report cross-border electronic transmittals
of funds if necessary to prevent money laundering.
2007  Money Laundering Regulations published in UK,

replacing the 2003 version.
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2010  Financial Crimes Enforcement Network issued an

advisory on “informal value transfer systems” in USA
2017  Money Laundering Regulation, Terrorist Financing and

Transfer of Funds (Information on the Payer) Regulations
published in the UK
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Chapter 5
Compliance
93
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Anti-Money Laundering Compliance Program
An effective compliance program covers:

 What to consider when setting up an AML compliance program
 Assessing risk
 Identifying, managing, documenting and following-up any
suspicions
 Knowing your customer and employee
 Auditing your program
 Training and screening employees
The main aim is to protect the organization from money laundering &
terrorist financing, plus ensure compliance with all relevant laws and
regulations by setting standards and policies for the organization.
The program should be risk based – not all products and services,
geographic regions, and customer types, and thus not all areas of the
business pose the same risk of money laundering.
Greater risks require greater controls. New products and services should
be evaluated for risk and any necessary controls implemented prior to
launch.
The AML function can be stand-alone, or combined with other

compliance duties, but must have a centralized aspect to ensure
consistency. It should also address corporate governance and overall
oversight.
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Assessing Risk and Developing a Risk Scoring Model
Identify legal requirements, and supplement with FATF risk-based

controls. Controls should be strong enough to counter the risk – low
risks can be managed with minimal controls, high risk areas need robust
controls. Controls include: verifying the identity of customers (KYC),
customer due diligence (CDD), suspicious activity monitoring and
economic sanctions screening.
Risk based approaches are more:

 Flexible: useful because risks vary across geographical areas,
customers, products and delivery mechanisms, and over time.
 Effective: because companies know better than regulators how to
mitigate money laundering risk.
 Proportionate: because risk based approaches allow a common sense
and intelligent rather than check-box approach.
Levels of risk
 Prohibited: where the risk is so high, no dealings of this type will be

performed by the company. Examples include shell bank customers,
or sanctioned geographic regions e.g. Sudan or Iran.
 High Risk: significant risk exists, so enhanced controls are required
e.g. enhanced monitoring and customer due diligence. Countries
noted for drug trafficking, or corruption for example might be high
risks, as might customers who are PEPs, and products such as
correspondent and private banking.
 Medium Risk: more than just a standard risk of money laundering,
and so merits additional controls.
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 Low (or Standard) Risk: normal business rules apply, often

domestic customers and FATF member countries are considered
low risk.
 The risk of the geography, customer type, and products/services are

each assigned a risk score e.g. 1-10 with 10 being high risk. These
could then be aggregated, or weighted then aggregated. Certain
combinations could also be assigned a higher significance if that
leads to a higher perception of risk. The risk ranking should be re-
evaluated periodically.
 Note that any ‘prohibited’ items would cause the relationship to be

rejected.
 High risk relationships should warrant more attention, so the

organization should be careful to ensure that there is sufficient
oversight if there are a lot of high risk customers as a proportion.
Geographical Location
 Both the residence and the citizenship of customers are important.

Corporate headquarters and locations they carry out their business
are also key. Check if any pose and increased risk of money
laundering.
 Organizations need to develop and document a methodology for

assessing geographical risk, including whether the county has
FATF-style membership, high levels of corruption (Transparency
International publish these each year), drug production or transit
history, or is in a secrecy haven.
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Customer Type
 There are various classes of clients, such as individuals, and

different types of companies such as listed, private, partnerships,
joint ventures, as well as various types of financial institutions.
 A history of involvement in criminal activity would warrant the

highest level of risk. Political figures and those in political
organizations are high as they may have access to corrupt funds.
Directors of multinationals may be lower risk than directors of
private companies due to the level of due diligence that is possible
for a listed company.
 Company structures that offer some level of privacy (known as the

‘Corporate Veil’), such as charities, limited companies, trusts, or
other structures where it is difficult to identify the beneficial
owners.
The following types of companies pose an increased level of money

laundering risk:
 Casinos
 Companies and banks in tax and banking havens
 Leather goods stores
 Currency exchanges, money remitters, check cashers
 Car, boat and plane dealerships
 Used car and truck dealers, machine parts
 Travel agencies
 Brokers/dealers in securities
 Precious metal and stones dealers
 Import/export companies
 Cash-intensive businesses – restaurants, retail, parking, car wash
 Telemarketing – which is linked to ‘Boiler Room’ scams
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Products and Services Risk
Review your products and services to determine how they might be used
to launder money or finance terrorism. Key risk factors might include
the ability to pay third parties, complexity or anonymity, or minimal
oversight.
The following specific banking products are considered high-risk:

 Private banking
 Offshore international activity
 Deposit taking facilities
 Wire transfer and cash management functions
 Transactions where the beneficiary is hidden
 Loan guarantee schemes (where some or all of the loan is guaranteed
by a third party)
 Travelers cheques, bank checks, money orders
 Foreign exchange
 Trade financing with unusual pricing features
 Payable through accounts (PTAs)
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The Elements of an AML Program
An organization must address the following:
 Internal policies, procedures and controls

 Designated compliance officer with day to day oversight of the
program
 On-going employee training
 Independent audit function to test the program
Internal policies, procedures and controls
 Polices are a high-level statement of principles. Procedures and

controls translate this into the details of how to execute and validate
success in implementation of those principles. Controls might
include dual controls such as secondary review, or technology
controls that prevent or detect certain incidents.
 Check what laws and regulations apply, this will set the minimum
compliance level. Then based on the risk assessment, and risk
appetite, you should prohibit anything the organization deems too
risky i.e. regions, company types or customer types. You also need to
monitor laws and regulations for changes. The policies should be
approved by upper management or the board of directors.
Key aspects of the policies, procedures and controls:

 Identify high risk products, services, customers and geographic
regions
 Be tailored to organization risk
 Inform the board and senior management of key initiatives,
deficiencies, details of suspicious reports filed, and actions taken
 Clear accountability for all duties undertaken under the program
 Ensure continuity despite staff changes
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 Meet all regulatory requirements and recommendations

 Annually review the program, and update timely in response to
changes in regulations
 Include risk-based customer due diligence
 Include controls and monitoring systems to detect and report
suspicions. The reporting should be centralized for consistency.
 Dual controls/segregation of duties: those who complete forms
should not submit them or grant exceptions
 Comply with record keeping requirements
 Include supervision of employees engaged in any AML activity
 Train employees on their obligations
 Include AML in job descriptions
 Screen new employees, and provide sanctions for employees who
fail in their AML duties
 Test the effectiveness of AML controls, policies and procedures,
separate from internal audit
Designated compliance officer with day-to-day oversight of the

program
Responsible for:
 Designing, implementing, and changing the AML program
 Communicating successes and failures to management
 Creating training
 Staying current with regulatory & legal changes
 Some departments are just one person, others are split into strategic
and operational (i.e. monitoring and reporting) aspects
Possible subgroups in the department could include:

 Investigations – which monitor automated alerts and referrals from
other staff, files SARs
 Business Support – performs CDD on higher risk clients, acts as a
point of contact for queries
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 Oversight – reviews and updates the program and associated
procedures, monitors the legal and regulatory environment.
Coordinates regulatory exams with the business. May also prepare
training and provide guidance on complex AML issues.
 In addition, within the business, there are AML activities where
there is customer contact e.g. CDD.
On-going employee training
 Can include formal training, as well as emails, newsletters and team

meetings with AML content. Most areas of the business should have
AML training, and it should include most staff. The training should
only cover items relevant for those staff, and include real life
examples. Attendance or performance should be tracked, with
failure to attend or achieve a minimum score addressed through
disciplinary procedures.
Key training by staff type:

 Customer-facing: this is the front line of defense; they need a deep
practical understanding of AML. Cash handing staff need to know
how to identify suspicious cash transactions, credit officers need an
understanding of how credit can be used for AML purposes.
 Back office: cash vault, wire transfers, trade finance all need
specialist training. Many back office roles may only require general
training.
 Audit and compliance: training on changes in regulation and law,
money laundering methods and enforcement.
 AML Compliance: training to stay on top of changes e.g. attending
conferences.
 Senior managers & board of directors: strong board support is
needed and AML should be regularly communicated, they need
understanding in line with their responsibility.
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Training topics:
 General information/background, importance of AML
 Legal framework & applicability to organisation and staff
 Penalties – disciplinary action, fines and jail
 How to deal with suspicions
 Internal policies & procedures
Independent audit function to test the program
 The audit must be carried out by people not involved in the AML
program. Audit must report directly to the board of directors or to a
designated board committee comprised of more than half outside
directors. Auditors should be qualified to perform the audit.
The audit should cover:

 Adequacy of risk assessment, CCD policies, procedures and
processes
 Adherence to the above
 Testing of high risk transactions (i.e. high risk
products/services/customers/locations)
 Adequacy of training
 Compliance with laws and regulations
 Integrity and accuracy of AML systems
Assess suspicious activity monitoring by:

 Evaluating policies and procedures
 Reviewing the system’s method for identifying suspicions
 Evaluating the reports produced
 Checking any filtering criteria
 Where systems are not used, a review of the manual transactions
should check that large or suspicious transactions were
appropriately dealt with
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 Evaluate how suspicious transaction reports (STRs) are researched
and evaluated
Compliance Culture
 Compliance should be everyone’s role, supported by top

management. The board should approve the AML program, and are
responsible for implementing any examiners or internal audit
recommendations.
 The AML officer has to ensure that management sees the cost of the
program as essential to mitigate reputational and financial risk.
 CDD information can be used to cross sell other products.
 Compliance staff should not have bonuses tied to the performance
of business units.
 Compliance staff can be close to the business, but must report
outside to ensure independence.
Customer Due Diligence
There are seven elements to CDD:

1) Identify the customer/beneficial owner & source of
funds/wealth
2) Profiles of expected activity
3) Approval for specific products/services
4) Assessment of the risks of the customer
5) Monitoring of account & transactions
6) Investigation of unusual activity
7) Document findings
CCD should be consolidated across all regions and all products sold to
the customer by an institution.
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Account opening guidelines from Basel 2003
 Legal name, and previous names

 Address
 Phone and email
 Date and place of birth
 Nationality
 Occupation, position, employer
 A unique identifier from a government issued document (passport,
driver license)
 Signature
 Verify this by checking the date of birth against a government ID,
the address using an official letter, contacting the customer using
phone, email and mail addresses. Check the official documentation
by physically inspecting it, or checking with a government agency.
 The source of wealth and funds should be validated, and any
deposits not in line with this should be investigated.
 The proximity of the customer to the branch should be checked and
if not close by, check why.
 Equally effective CDD should apply to non-face-to-face customers.
 For businesses, obtain the name, mailing address, business location,
contact people and phone/address details, official identification
number (e.g. tax number), the certificate of incorporation,
memorandum and articles of association, nature and purpose of the
business.
 Verify this by reviewing the latest accounts; use a business
information service or an undertaking from a lawyer or accountant.
 This should be codified in a Customer Identification Program (CIP).
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Name lists
All customers should be checked against lists of known undesirables

such as OFAC.
 There are difficulties identifying PEPs because although lists of

such people are kept, the information is incomplete (i.e. no date of
birth). This will likely cause issues with large retail bank, who may
find many matches.
Arabic Names
 All names are translated (transliterated) from Arabic script.

 Short vowels are often left out/altered e.g. Mohammed could be
Mohamad or Mohamed.
 Names are often long, with the second name being the father’s
name.
 If bin or ibn precedes the name, it means ‘son of’.
 If a family name is appended, it sometimes includes ‘al’.
 Common names are Mohammed, Ahmed, Ali and any name
beginning Abd- or Abdul which means ‘servant of’ which is then
followed by one of 99 suffixes which describe God.
 Many names begin ‘Abu’ meaning father of, followed by a noun
that may mean ‘freedom’ or ‘struggle’. If this is a first name, it is not
usually a given name. Only when Abu is a prefix of a surname
should it be accepted as a correct name.
Know Your Employee
Insiders can pose the same threat as a customer. Perform background

screening for criminal history. Contractors should be subject to the same
controls. Consider re-screening as circumstances change e.g. promotion.
The FDIC issued guidance on this in 2005.
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Suspicious/Unusual Transaction Monitoring and

Reporting
Any activity that is not consistent with a customer’s source of income or

regular business. The system should be risk based (as there are so many
transactions to monitor, they can’t all be monitored). Some items that
can be monitored:
 Daily cash in excess of reporting threshold

 Daily cash just under reporting threshold
 Cash activity over time to detect structuring
 Wire transfer reports per country and value
 Monetary instrument activity
 Check kiting/drawing on uncollected funds
 Significant change reports (i.e. beneficial owners, addresses, new
cards out to new addresses)
 Activity on new accounts
Typical reporting process is:

 Procedures to identify potential suspicious transactions
 Formal evaluation of the activity and any continuation
 Documentation of the decision
 Procedures to notify senior management/board of directors of
SARs
 Training on detecting suspicious transactions
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Red Flags
Customers
 International use of ATMs

 Customers who move frequently
 Opening deposits such as international wires, large cash sums
 Customers who are not local – ask why you won the business
 Credit balances – customers who over pay on credit line or card
accounts
 Common addresses, IP addresses, phone numbers – unrelated
customers who share data points could be suspicious. Customers
who change their information after opening an account to a shared
data point are particularly suspicious.
 Customer discusses record keeping requirements, or is nervous or
threatening
 Customer will not proceed with a transaction once they are
informed that it is reportable
 Customers who offer bribes
 Irrational behavior, such as turning down a better interest rate
Cash transactions
 Large cash deposits without counting the cash

 Exchanging small bills for large bills
 Cash deposits contain fake bills, musty or very dirty bills
 Students who have access to large sums of money
 Offshore institutions whose names resemble well known
institutions
 Transaction includes offshore islands or locations difficult to find
on a map
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 Customer performs foreign exchange without caring about spread

 Telephone number disconnected
 Customer does not want any mail
 Customer deposits cash wrapped in currency straps
Non-cash deposits
 Frequent purchase of monetary instruments

 Deposits travelers cheques in same denomination and serial number
sequence or consecutively numbered monetary instruments
 Deposits third party checks
Wires
 Incoming wire with instructions to convert to cashiers checks and to

mail them out
 Wire transfers to secrecy havens
 Customer moves ‘profits’ out of the country
Safe deposit activity
 Spending unusual amount of time in a safe deposit box area

(indicating the keeping of large cash amounts)
 Renting multiple safe deposit boxes
Credit transactions
 A transaction is made to appear more complex than it needs to be by

use of nonsensical terms such as emission rate, prime bank notes,
standby commitment, arbitrage or hedge contracts
 Customer requests loans made to offshore companies or secured by
obligations in offshore banks
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 Customer suddenly pays off large problem loan, without any
obvious source of funds
 Customer collateralizes loan with cash or certificates of deposit
Commercial account activity
 Check cashing business that does not withdraw cash indicating it

has another source of the cash
 Corporate account shows no periodic activity
Trade finance
 Import or export of items at prices above or below normal market

rates
 Changes to letter of credit beneficiary just before payment is made
 Change to the place of payment to an account in another country to
the beneficiaries stated location
 Letter Of Credit (LOC) is not in line with customer business
 LOC is for goods not in demand in the importing country
 LOC is for goods that are not produced in the exporting country
 Commodities are shipped through locations without an apparent
economic or logistical reason
Investment accounts
 Uses investment account as a pass-through vehicle for offshore

wires
 Customer not interested in usual decisions around fees or
investment vehicles
 Deposits of cash, money orders, travelers cheques, or cashiers
checks under the reporting threshold in order to fund the account
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 Customer cashes out investments such as annuities or life insurance

early
Employees
 Employee exaggerates the resources of a customer

 Employee involved in excessive number of unresolved exceptions
 Leads lavish lifestyle not in line with salary
 Overrides internal controls or circumvents policy
 Avoids taking periodic vacations
Money remitter/ currency exchange house
 Unusual use of money orders, travelers checks or funds transfers

 Two or more people working together on transactions
 Transactions under the reporting threshold
Insurance companies
 Cash payments on insurance policies

 Refunds requested during cancellation period
 Policy payments made from abroad
 Beneficiary of policy has no relation to the policy owner
 Unconcerned with penalties for early redemption
 Bonds sold in one jurisdiction that are redeemed by an entity in
another jurisdiction
Broker-Dealers
 The customer is acting as an agent for an undisclosed beneficiary

 Large number of accounts, with transactions between them,
without just cause
 Unexplained wire activity
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 Deposits made to fund an investment account that are then
withdrawn
 Penny stock, Regulation S stock and bearer bonds activity, which
have all been associated with money laundering
Black Market Peso Exchange Indicators
 Payments made in cash or by wire by a third party

 Use of third party checks, bank drafts or money orders
 Structured currency deposits under the reporting threshold
 Consumer checking accounts that become dormant
 Personal checking accounts opened by foreign nationals who come
into the bank together
 Multiple accounts opened the same day
 Increases in the amounts of currency deposits by US businesses that
export to Columbia
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Electronic AML Solutions

Examples:
 Transaction monitoring – scanning the transactions for laundering

activity
 Watch list filtering – screening new accounts, existing customers,
beneficiaries and counter-parties against lists of known criminals
and terrorists
 Automation of regulatory reporting – such as currency transaction
report (CTRs) or suspicious transaction reports (STRs)
 Maintenance of audit trail
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Chapter 6
Investigations
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Conducting and responding to an investigation
Law enforcement investigations
These are normally triggered by STRs, tip offs, or other cases. The
requests arrive in the form of a subpoena or search warrant. Subpoenas
are issued by grand juries and empower law enforcement to obtain
evidence (i.e. documents & testimony).
A search warrant allows law enforcement to enter a specific location and

seize specific categories of items of documents. It doesn’t force
testimony. In the US and other jurisdictions, banking regulators have
the power to inspect all bank books and records as they see fit.
The 10 steps law enforcement takes are as follows:
 Follow the money: either where the money originated or ended up to

understand the flow
 Identify the unlawful activity: i.e. what is the predicate offense
(could be widely defined as: “any proceeds from criminal activity”)
 Document activity and transactions: both the predicate offense and
the flow of money
 Review databases: financial intelligence unit (FIU) database and
commercial databases can provide very useful and extensive
financial information, plus other governmental databases such as
social security and tax records
 Review public information: court records, company filings, credit
reports can contain useful background
 Review licensing and registration files: e.g. vehicle registration
documents
 Analyze financial transactions: identify any unusual flows or
amounts
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 Review STRs for any linked activity
 Conduct computer-based searches
 Obtain international co-operation: for cross-border cases
Decision to prosecute the institution
This will be made based on whether the institution has a criminal

history, has cooperated, whether the institution identified and self-
reported, there was a comprehensive AML program in place, took timely
remedial action, whether civil or criminal procedures would be best
suited, whether a deterrent to others would warrant a prosecution.
Responding to a law enforcement investigation
Respond quickly and completely to all requests. If the request is overly

broad or intrusive, you can seek to narrow the request. First ensure
senior management is informed (include legal) and establish the point
person to respond. If the inquiry is aimed at the institution, not a
customer, the board of directors should be informed. Check all requests
for any risk to the institution. Do not provide information to anyone
who may be implicated in the proceedings.
The institution should conduct an inquiry of its own to establish the

facts; determine the institution’s exposure, and what steps may need to
be taken.
Summonses and Subpoenas
Senior management and/or legal counsel should review. If there are no

grounds for contesting, then take all possible measures to comply timely
and completely. Do not notify the customer. If there is a requirement to
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keep the account open, this must be obtained in writing on letterhead,

with the proper authority.
Search Warrants
These are not open-ended; agents can enter the premises, and look for
and seize certain documents. A warrant does not compel a testimony.
Take the following steps:

 Call legal counsel
 Review the warrant to understand the scope
 Obtain a copy of the warrant
 Ask for the affidavit that accompanies the warrant (if you are
allowed to see it, it will provide some context to the warrant)
 Watch the agents perform their search, make a record of any seized
items
 Ask for the agents inventory of items seized
 Note the names and agency affiliations of the agents
 Documents and computer records that are protected by attorney-
client privilege should be marked and retained in a separate area. If
agents wish to seize these, suggest that they be given to the court for
safe keeping.
Orders to restrain or freeze accounts or assets
 Only freeze once you have a copy of the warrant issued by a court
requiring the freezing of the funds or account.
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Dealing with Investigators and Prosecutors
 The most effective strategy is to cooperate. Provide them the

information that they need, even if they don’t have a warrant or
subpoena. Make staff available for interview. It may also include
releasing any management report into the matter. Maintain a good
working relationship which will allow the organization to conduct a
parallel investigation which will enable the institution to be
prepared for inquiries.
 Try to learn how the prosecutors view the facts, and correct those
that are inaccurate.
Obtaining Counsel for the Investigation
 If the investigation appears to have risks to the institution, counsel

should be sought. Internal counsel will have a better understanding
of the organization, however if the case appears to have criminal
implications, outside counsel may be better. Ensure that in-house or
external counsel is sufficiently experienced and knowledgeable with
regard to the legal and factual issues involved.
Notices to Employees
 For government investigations, ensure that staff know that
documents should be handed over to a central contact that can co-
ordinate handing documents over to investigators. The institution
can also determine what (if anything) can be contested.
120
Media Relations
 Public perception is vital to maintain trust of the institution and

their officers. If the facts are against the institution it may be best to
provide ‘no comment’ to the press, any false or misleading
statements will make the matter worse in the long run. False
statements by a publicly traded company could lead to an SEC
review or law enforcement action.
Internal Investigations
An internal investigation should be conducted when:

 A report of an examination is received from regulators
 Third-party information is received
 Surveillance of monitoring systems indicate issues
 Employee hotline tip-offs
 Government subpoenas or search warrants
 Government is asking questions about the institution, competitors,
customers or business practices
 A civil lawsuit is filed against the institution
Document the purpose, scope, method and conclusions of the

investigation.
Closing the Account
Consider the following attributes:

 What is the legal basis for closure?
 The policies and procedures and terms and conditions around
closure?
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 How serious is the conduct? If it is serious and is of the level where
you would normally close the account, then close the account.
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Conducting the Investigation

 Review documents, interview employees and issue a report.
 Decide whether to involve counsel.
 Keep senior management, and if necessary the Board informed of
the scope and progress.
Documents
 All documents should be kept in line with legal retention timescales

– US 5 years. Information can be useful from statements, signatures,
checks, loan documentation, correspondence etc. Ensure that
important documents are not lost, altered or destroyed. You can
send a memo informing staff of the retention requirement,
however, if this might prompt someone to destroy or alter
documents, deal with that separately.
 Ensure the document destruction policy does not destroy
documents that should be retained for law enforcement.
 It is acceptable to destroy documents in line with the destruction
policy prior to notification of a government investigation, but not
after.
Interviewing Employees
 This should be done as soon as possible while memories are still

fresh. Counsel should prepare staff prior to investigator interviews
to understand the process, and also debrief them afterward to
identify the line of questioning.
 Put people at their ease by asking general background questions at
the start, with contentious questions left to the end.
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Attorney-Client Issues
Attorneys represent the institution, not the individual employee. Any

report should be controlled – sending it into the public domain would
waive the attorney-client privilege. Document control includes a
statement on each page, numbered copies, and a log of who has received
it. All copies should be returned after a set period. Oral presentations
may be preferable to written documents.
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125
Chapter 7
International
Cooperation
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International Money Laundering Information Network
The International Money Laundering Information Network (IMoLIN)

– clearing house of money laundering information, created by the UN,
has five features:
 AMLID – anti-money laundering international database, lists laws
and regulations per country and contacts for each county. The
database is not publicly available.
 Reference Data – research, model laws, analysis
 Country Page – links to national FIUs and, full text of AML
legislation
 Calendar – training, conferences, seminars, workshops
 Current News
Mutual Legal Assistance Treaties
The first gateway for international cooperation is the MLAT (Mutual

Legal Assistance Treaty), a legal basis for transmitting evidence. The
following happens:
 A “commission rogatoire”, letter of request, or letters rogatory is

sent indicating the information requested, the nature of the request
and the charges, and the legal basis for the charge.
 The central authority receives this, and sends it to a financial
investigator to obtain the information (if possible).
 An investigator from the requesting country visits the country
where the information is, and accompanies the local investigator, to
obtain the information.
 Permission is then sought from the central authority to remove the
evidence back to the requesting country.
 The central authority sends the information to the requesting
country, satisfying the request for assistance.
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 Local witnesses may need to attend court in the requesting country.
Financial Intelligence Units
The second gateway is the communication between FIUs who receive

and analyze STRs. They then pass this information on to law
enforcement and other international FIUs. The Egmont Group is the
body of FIUs and has over 100 members. 2003 FATF recommendations
include specific recommendations as to setting up and running an FIU.
FIUs need to both recognize the international need for FIUs and also
work within their local law enforcement and policy framework, set their
own priorities, objectives, within their budgets.
FIUs share information internationally using an MOU (Memorandum

of Understanding) which allows them to share intelligence (rather than
evidence per se).
Key principles from the Egmont group:
 Free exchange of information, on the basis of reciprocity, including

spontaneous exchange of information.
 Definitions of offenses that differ among jurisdictions should not
be a barrier to information exchange.
 Privacy and confidentiality of the data should be assured.
 Information exchange should be informal and rapid, without red
tape, or intermediaries.
 Permission to disseminate to law enforcement should be granted,
provided it doesn’t jeopardize a criminal investigation, is
disproportionate to the legitimate interests of a person or company
in the providing country, or is not in accordance with national law.
Requesting countries should follow the Egmont principles:
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 Submit requests for information as soon as the precise need is

identified.
 When an FIU has information that could be useful to another FIU is
should be shared immediately.
 Communication should be secure (Egmont Secure Web can use
used)
 Use the standard form when requesting information, which
includes details of relevant facts.
 Recipients should reply within one week if they have the

information, or there is a legal reason why the information can’t be
provided. If external parties must be consulted (e.g. Banks) then the
reply should be within one month, containing all information
obtained to date, and an estimate of when it will be completely filled.
The Supervisory Channel
April 2002 “Report on Sharing Information between Jurisdictions in

connection with the fight against terrorism” indicates that the
supervisory channel is the third gateway. This relates to supervision of
financial institutions, and can be used to share general information
about financial activity, as well as specific information such as regarding
Politically Exposes Persons (PEPs). Information obtained this way
should only be used for supervisory purposes, not as evidence, and
should not be widely shared with government departments.
129

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Anti Money Laundering Exam Study Guide & Practice Exam

It is important to realize that you might find yourself experiencing

Structure Your Time

Don’t underestimate the usefulness of being able to ask questions to

Start by reading through all of your preparation material. At this point,

If you are struggling to memorize a particular list of set of features of a

This creates an index in your mind that can be used to retrieve

Your frame of mind is an important asset to your studies. If you

Meditation can be a great way to relax, put worries in perspective and

Any differences in your scores will be down to weaknesses in exam

Check the regulations to see if you are allowed water, if so bring in a

You will then be offered a set of possible combinations of those items.

Sometimes you might have various levels of confidence about whether

Another common mistake is to not carefully consider the best way to do

Always remember that a preventative control – one that prevents

It’s extremely easy to confuse your answer to these questions, so take

Take this example question:

What are the three objectives of FATF?

So the question could be rephrased as:

Which is NOT an objective of FATF?

Risks & Methods of Money Laundering and

Money laundering requires knowledge that the money is the proceeds of

Classic Money Laundering Process

Layering This distances the dirty money from its source by

L the source, ownership, and location of the funds is

Integration Placing clean money into the economy using an

Effects of Money Laundering

Money laundering techniques

Wires, ACH, ATMs and credit/debit cards. Indicators of money

 This is where one bank (the correspondent) provides services to

Payable Through Accounts (PTAs)

These are accounts, similar to respondent accounts, but where the

The PTA account has a number of sub-accounts that can be offered to

Aspects of PTAs that could impact AML efforts:

 Also known as special use, omnibus, settlement, suspense, intra-day,

Good practices include:

 Offered to wealthy customers who seek confidentiality and

Key factors in private banking:

 Organizing a transaction in such a way as to avoid triggering a

It is very difficult to detect, but some signs might be:

This requires an insider in a financial institution, often a money

The first step is when a customer provides money to an alternative

Employees can pose a significant money laundering risk. Background

Credit Unions/Building Societies

Money Remitters & Money Exchange Houses

 Investment products such as life insurance, which can be canceled

Securities & Futures Broker-Dealers

 The industry runs on electronic transfers not cash, so is usually part

Key risk areas:

Casinos & Gaming

Dealers in High Value Items

 Susceptible to money laundering where an expensive ticket or hotel

 You can often make multiple part payments, allowing you to

Gatekeepers: Accountants, Auditors, Lawyers, Notaries,

Accounts for commodities futures and options can be used for

Trust & Company Service Providers

These create and administer companies.

 Act as a nominee shareholder on behalf of another person

Real Estate Industry