mdm (2)
TRANSCRIPT
1. Introduction
2. Compliance, AML and CFT
3. The AML/CFT decision model
4. The AML/CFT decision model in a
changing environment
5. Conclusion
6. Questions
Table of Contents
Aldrich Hazen Ames (1941), former CIA
● Arrested in 1994, lifelong prison
sentence
● Espionage for Russia/USSR, one of the
biggest “moles” in CIA history
● Caught because expenses (>USD 700k)
did not match income (USD 60k)
● Thus criminals must conceal origin of
wealth
1.Introduction
● Money launderingo Concealing criminal origin of money via the financial system
o Dirty money is made clean
● Financing of terrorismo Providing funds, assets or goods with intention they will be used to carry out
acts of terrorism
o Clean money is made dirty
o Sometimes funds also obtained in illegal way (theft, extortion, e.g. Tamil
Tigers, IS)
● Crime should not payo Assistance in money laundering and terrorism financing facilitates crime and
terrorism
o Criminalization of ML/TF - preventive effect
o Crime no longer attractive if it can not be financed or benefits not reaped
1.Introduction
1.IntroductionCash from criminal
act
Money
laundering
Financing of
terrorism
Legitimate asset or
cash from criminal
act
Bank
Securities
firm
Integration: funds
used to acquire
legitimate assets
Other financial
professionals
Insurance
company
Corporate Services
Provider
SPV / Trust
/ Fund
Integration: funds
distributed to fund
terrorist activities
Money
mules
I. Placement
II. Layering
III. Integration
Hawala
Sanctions● Criminal sanctions
o Fine
o Prison
● Loss of reputation
● Criminal record
● Civil damage claims
● Crime description objectivated, facts
proven already assumes guilt
● Not only the directors or only
compliance officer, but everybody is
responsible!
● “I did not know” or “I only did what I
was told to do” are no excuses!
1.Introduction
● Compliance = management of all
regulatory risk, wider than AML and CFT
● AML = Anti money-laundering
● CFT = Combating Financing of Terrorism
2. Compliance, AML and CFT
2. Compliance, AML and CFT
Corporate norms and procedures
National lower legislation
National higher legislation
Int. treaties /
standards
2. Compliance, AML and CFT
Principles
from treaties,
standards and
law
Customer Due Diligence (KYC)
Risk-based approach
Suspicious/cash transaction
reporting
Record keeping
Cooperation with authorities
Internal controls, regulations,
audit
Corporate
decision
making
Step 1 - Data collection
3. The AML/CFT Decision Model
New client accepted
conditions
AML
request
Sufficient
information
received?
no
yes
Refuse client
and inform
authorities
suspicion and/or
non-cooperation
To the
next
step
Step 2 - Risk
analysis,
PEP/
blacklist
screening,
acceptance
3. The AML/CFT Decision ModelRisk-indicator Answer Score Explanation
Introduced business No, existing client 0 0 -5 points = low (accept)
6 -10 points = medium
(accept)
11 -15 points = high (reject
unless mitigating factor)
16 + = unacceptable
(reject)
Type of services provided Full-service 0
Relation with client Never face-to-face contact 1
Client country analysis Non-FATF member, high
level of corruption
6
The purpose of the
business
Securitization 0
Completeness of KYC
documentation
No structure chart but
remaining information
complete
3 Date and signature
compliance team
member
(date, signature)High- or low-risk business Low-risk (financial
business)
0
Blacklist screening result Negative 0 Date and signature
compliance officer
(date, signature)Involvement of PEP Negative 0
UBO Identified 0 Remarks
Try to obtain a signed
structure chart.Result 10 (medium, accept)
Step 2 - Risk analysis and PEP/
blacklist screening
3. The AML/CFT Decision Model
Client to be screened
Screening
and risk
analysis
Unacceptable
Reject unless
mitigating
factor
Enhanced
vigilance
Accept
AcceptNormal
vigilance
Low vigilance
Reject client
and inform
authorities
Step 2 - Risk analysis, PEP/
blacklist screening,
acceptance
● Final decision on approval or
rejection with decision on Due
Diligence (simplified, normal,
enhanced).
● Only now business can start!
3. The AML/CFT Decision Model
3. The AML/CFT Decision Model
Ongoing
monitoring
Event
Rescreening AML
request
Sufficient
information
received?
Investigate
no No action
Suspicion Inform
authorities (no
tipping off!)
Risk
reclassification
uncooperativ
e
behavior
Risk
reclassification
No action
Step 3
Ongoing monitoring
Should we be strict or flexible?
3. The AML/CFT Decision Model
Strictness of
AML/KYC
Loose criteria
Fees +500k
Strict criteria
Fees +200k
Adverse
cons.
Damage 5 M
10%
No issues
Damage 0
-4.5M
90%
+ 500k
Adverse
cons.
Damage 500k
No issues
Damage 0
- 300k
+ 200k
1 %
99%
Loose:
0.1 x -4.5M = -450k
0.9 x 500k = 450k
Total: nil
Strict
0.01 x -300k=-3k
0.99 x 200k=198k
Total: 195k
Depends on input
but strict AML/CFT
is preferred!(*) This model assumes that every type of
damage (including reputation or personal
damage) can be monetarily valued
3. The AML/CFT Decision Model
0
Risk
Utility
Willing participation in
criminal activitiesno longer
economic
Costs
Grey
ZoneNormal business
A
3. The AML/CFT Decision Model
Beginning
of the
relationship
Step 1
(CDD/KYC)
Step 2 (Risk
cat)
Step 3
(Ongoing
monitoring)
Risk analysis
End
Inform
authoriti
es
Uncooperativ
e behavior or
suspicion
Willing
participati
on in
criminal
activities
no
lon
ger
ec
on
om
ic
C
os
ts
G
r
e
y
Z
o
n
e
Normal
business
A
3. The AML/CFT Decision Model
AM
FM
Risk
switchLow
High
Output
(decision /
music)
Input
(info /
electricity/
signals)
4. The AML/CFT decision model in a
changing environment
Company
Management
Decisions
New rules and legislation
Client behavior
Political developments
Client changes
● Rescreening
● Events, appearance on updated blacklist
Consequences
● Change risk profile of client
● If necessary inform authorities
● Included in robustness of model (step 3,
ongoing monitoring)
4. The AML/CFT decision model in a
changing environment
4. The AML/CFT decision model in a
changing environment
0
Risk
Utility
Willing participation in
criminal activities
Costs
Grey
ZoneNormal business
A
A’ (risk profile of client increased)
A’’ (risk profile increased
to unacceptable level)
A’’’ (risk profile increased
to unacceptable level or
client appears on
blacklist)
no longer
economic
Legislative changes
● Higher legislation (formal legislation)
o Parliamentary approval, takes longer
o Wider scope
o Possibly change risk criteria or model
● Lower legislation (circular, regulation)
o No parliamentary approval
o Narrower scope
o Possibly change criteria (not likely the whole
model)
4. The AML/CFT decision model in a
changing environment
4. The AML/CFT decision model in a
changing environmentStricter requirements
(e.g. more or earlier
requirement to inform
authorities or more
CDD/KYC
New
requirementsDifferent (stricter) criteria in risk analysis
1
6
3 6
0 5
Result 10 (medium, accept) 18
4. The AML/CFT decision model in a
changing environment
0
Risk
Utility
Willing participation in
criminal activities
Costs
Grey
ZoneNormal business
A
A’
B
B’
no longer
economic
Political changes
Example: Libya
● Before 2001:
‘mad dog’ of the
Middle East
● 2001-2011: OK
● 2011 - : Chaos
4. The AML/CFT decision model in a
changing environment
Muammar Muhammad Abu Minyar al-Gaddafi
(1942-2011)
Consequences:
● Increase of risk - higher risk in risk analysis - possibility
authorities need to be informed or client relations
need to be ended
● Clients in that country might appear on blacklist -
possibility authorities need to be informed or client
relations need to be ended
● Embargo from government - no choice but to obey
(even if it has adverse effects to the enterprise)
4. The AML/CFT decision model in a
changing environment
4. The AML/CFT decision model in a
changing environment
Different (stricter) score in risk analysis
1
6
3 6
0 5
Result 10 (medium, accept) 18
0
C
os
A
● Models proposed for
o Data collection (CDD/KYC) - normative
o Risk analysis, screening, acceptance - normative
o Ongoing monitoring - normative
o Strictness of procedures - descriptive
● Decision on strictness is most crucial decision
● Changes can affect decision model
o Changes in the client - should be captured in robustness of the
model
o Legislative changes - likely change in model
o Political changes - should be captured in robustness of the model. Be
aware of high country-exposure and concentration risk (companies
dealing with Russia)
5. Conclusion
● Anticipate on changes (“small signals”, literature, news(letters)).
● Strict is better than flexible. High fees = High risk!
● Shortcomingso Models are a simplification of reality
o Garbage in = Garbage out
● Remember:o Everybody is responsible
o Sanctions not only for knowingly or unknowingly assisting in money
laundering or terrorist financing, also for having inadequate procedures!
o Thus a suitable risk- and company tailored AML/CFT decision model is
needed, flexible and robust to changes
o Environment must be constantly monitored
o Be sure to have legal assistance at hand
5. Conclusion
5. Conclusion
Beginning
of the
relationship
Step 1
(CDD/KYC)
Step 2 (Risk
cat)
Step 3
(Ongoing
monitoring)
Risk analysis
End
Inform
authoriti
es
Uncooperativ
e behavior or
suspicion
Crime
C
os
ts
Normal
business
A
5. Conclusion
0
Risk
Utility
Willing participation in
criminal activities
Costs
Grey
ZoneNormal business
Decision entrepreneur
Behavior client
Political changes
no longer
economic
When the government tells you to jump…
… your only choice will be how high…
...but it will be a crucial choice!
5. Conclusion