Chinese Anti Money Laundering Efforts - a Review

An interesting paper here which reviews the state of Chinese Anti Money Laundering (AML) efforts. Generally the author finds there has been a considerable progress made but still a long way to go.

The Chinese Financial System is a very strange beast. Whenever I supervise any Chinese students in their dissertation or ask them to express normal financial terms, frameworks, principles, theories and structures with respect to China, it always surprises me to listen to how the Party gets involved all the time in almost every angle and structure.

Given the huge issues around corruption in China, I would rate the anti money laundering situation within China as dreadful, far too little. After all, given the huge amount of state control over the economy, if they implement a transparent AML system with teeth, a huge amount of party functionaries will either be behind bars or will have an unfortunate government sponsored accident relating to their lives.

Technorati Tags: Anti Money Laundering , Corruption , China

Another take on Anti Money Laundering in Iran

A different take on what I reported earlier. Seems like this author seems to be referring to possibility of government sponsored illegal and drug money. Knowing the Revolutionary Guards and their bludgeoning industrial empire and the Baazari's (merchants), I would say that this is quite possible indeed.

Technorati Tags: Iran , Anti Money Laundering , Crime

SWIFT moves most of its data outside American control

SWIFT announced that they will setup a data centre in Switzerland to make sure that European and Asian messages stay outside the control of USA.

If you recall, there was a huge argument some time back when the US Government requested SWIFT to present huge amounts of data to check terrorism related financial transactions. This made the European leaders go up in smoke such as here and here. Poor SWIFT was caught in the middle.

I am not sure that this will be sufficient as the Americans have shown very clearly that if they wish to have data related to terrorism, they will get it. Even if SWIFT move the data to Switzerland, they will have to release it if asked for it. Will just take a bit longer as it will have to go through the Swiss authorities. But the Swiss move very fast as well when criminal evidence is presented. They do not want the squeaky clean privacy / secrecy oriented banking image sullied either.

Technorati Tags: anti Money Laundering , counter-terrorism , terrorism , financial institutions , Switzerland

Another new angle against Iran

The Financial Action Task Force (FATF) is an inter-governmental body whose purpose is the development and promotion of policies, both at the national and international levels, to combat money laundering and terrorist financing.

The thirty-four members of the FATF are: Argentina; Australia; Austria; Belgium; Brazil; Canada; China; Denmark; the European Commission; Finland; France; Germany; Greece; the Gulf Cooperation Council; Hong Kong, China; Iceland; Ireland; Italy; Japan; Luxembourg; Mexico; the Kingdom of the Netherlands; New Zealand; Norway; Portugal; the Russian Federation; Singapore; South Africa; Spain; Sweden; Switzerland; Turkey; the United Kingdom; and the United States.

The FATF has teeth, this body can and does ask all the financial institutions under its ambit and coverage to follow its requirements.

So now see what the chairman is saying:

The Financial Action Task Force (FATF) is concerned that the Islamic Republic of Iran’s lack of a comprehensive anti-money laundering / combating the financing of terrorism (AML/CFT) regime represents a significant vulnerability within the international financial system. FATF calls upon Iran to address on an urgent basis its AML/CFT deficiencies, including those identified in the 2006 International Monetary Fund Article IV Consultation Report for Iran. FATF members are advising their financial institutions to take the risk arising from the deficiencies in Iran’s AML/CFT regime into account for enhanced due diligence. FATF looks forward to engaging with Iran to address these deficiencies.

You know what this means? this means that most risk and compliance managers within any FATF country will now pull down the shutters on almost every transaction to do with any kind of exposure to any Iranian financial institution. And if you are frozen out of these 34 countries (and the observer countries along with the associate countries), you can effectively wave goodbye to any kind of international transactions.

Barter system, anybody? Who is going to hump the big barrels of oil?

Technorati Tags: Anti Money Laundering , Central Banks , Regulation , Iran , terrorism , counter-terrorism , financial Institutions

Kenya Looted and Raped by Daniel Arap Moi

The Guardian is reporting an amazing and gobsmacking amount of corruption in Kenya, one of the posterboys of western aid and financial institutions. It is absolutely amazing that Daniel Arap Moi and his family/friends have managed to amass a billion pounds of corrupt money and assets in more than 28 countries.

All this from a report that was commissioned by the successor government to Mr. Kleptocrat Moi. And once the report was commissioned and submitted, it disappeared into the morass which is the local government. Guess what they are now saying? The report is not good, it was based upon hearsay and it is incompetently done. Ok, so I am fine with it. So how much money have you managed to get out of the estate, friends and family of Moi? Let me guess, Zero!

And the worst part is that my tax pounds as well as charity pounds are going to support these kleptocrats. Why? Why are the friends and family of these corrupt bastards allowed to purchase property and assets in the UK? And why is the UK prominent in every large corruption case whether it be Ferdinand Marcos of Philippines, Sani Abacha of Nigeria, Mobutu of Congo? Remember BCCI? We seem to have a regular progression of the great and good of crime flushing through the UK, and doing white collar crime.

But we all need to fight back. Here is a site which the Guardian suggested:

http://wikileaks.org/wiki/Wikileaks

I have already suggested checking and using this site.

https://www.bribeline.org/bribelineHome.jsp

Let us fight this cancer of corruption and ask each of our parliamentary representatives as to what they are doing about it? Mind you, given how the British Government treated the corruption allegations about British Aerospace, I do not have much hope. Disgusting. Criminal.

All this to be taken with a grain of piquant salt!!!

Anti Money Laundering - a long way to go yet

KPMG, a member of the Big 5 global accounting firms, recently ran a survey of Anti Money Laundering requirements and the challenges that it imposes on banking institutions. The survey addressed the following items

1 The role of senior management in AML issues agency based in the United Kingdom,
2 The costs of AML compliance
3 AML policies and procedures
4 Formal monitoring of AML systems and controls
5 Taking a risk-based approach to ‘Know Your Customer’ activity
6 Politically Exposed Persons
7 Transaction monitoring
8 Training
9 Attitudes towards regulation
10 Sanctions compliance

While senior management were considerably more engaged in AML, the costs of AML compliance are shooting up (with greater investment in transaction monitoring and training), partially because of the fact that AML is being applied globally rather than regionally/country wise. The increased senior management attention is causing greater testing and monitoring but because of hugely increased volumes, a risk based approach is being increased applied to KYC activity. Politically Exposed Persons were even more under the microscope (See here for my previous entry on an example of Politically exposed person, corruption, AML and banking). While there is greater acceptance of the regulations but the sanctions compliance is the biggest challenge for the banks.

That said, one should expect further challenges. I already talked about how there is a challenge in the private banking side and how no amount of automation will ever stop this. As I mentioned before, insofar as terrorist or crime financing is concerned, the problems arise from the following facts

1. that a terrorist incident requires funding which is generally too low to be trapped. Let me explain. Take the latest Glasgow bombing event. The total cost of the overall operation would be less than £1000. Now that amount of money will be almost impossible to be trapped on almost any measure of AML or KYC identification dimensions. I, obviously cannot go further than this, but this is very difficult to trap for a bank, if not impossible.

2. that it is still ridiculously easy to side step official channels. Even if we wanted to have an illegal source of funds, it will be far too easy to get this via the hawala or the tourist money changer channels (let me put it in this way, the ease of which you can setup a money changer firm in some areas of the world is frighteningly easy). If you are reasonably sophisticated and wanted to go for a larger sum of money, then you wouldn't mess around with these piddly money changer or hawala channels but you will use the grand-daddy of corrupt channels, the over/under invoicing of trade and services globally. And the beauty of that is that the excess money is usually fully whitewashed and clean. And if you are a bit smarter, you can even write off your losses against tax and get some more money from that. And there are an infinite number of variants to this one. Read my previous post to get a flavour of what you can do and get away with.

3. Electronic trails with cut-outs. For those who really want to flush big sums, once you have bounced your cash through several electronic cut-outs, through some rather dubious and not so dubious locations, it is clean. If you can covert cash to capital assets (such as plant, machinery, ships, etc.), then you are in clover because of the huge possibilities of importing and exporting, but this is far too complex for the common terrorist/criminal. This kind of stuff is reserved for the white collar criminal and the big corrupt chaps (very politely termed as Politically exposed people).

The really tough conclusion is that there is unfortunately very little else a financial institution can do. Financial Institutions are already or heading rapidly towards what I call as the Israeli defence. Which, very simply described, means that every transaction is monitored electronically or automatically with various mathematical, statistical, parametric and non-parametric methods. The training of the front office and control staff is given to spot the strange chaps, the curious incidents, the funny transactions, the sweaty submission. So you have concentric rings of security which progressively increase the level of evaluation till the person or the transaction hits the banking system. This is the equivalent of the X-Ray scanners added with the conversation and eyeball on the sweat glands on every passenger on an El Al Flight.

Long way to go, my friend, long way to go.


All this to be taken with a grain of piquant salt!!!

Private Banking and Money Laundering: A case study of opportunities and vulnerabilities

This is an old US congressional report, dated back to 1999. So I think I am reasonably safe in commenting upon this report and private banking per se'. There are three issues people need to remember because those structural issues have yet to be resolved across the world. The first is that private banking is generally a low volume business. In other words, the number of transactions per client is very low, can be about 10 transactions per year. And its a relationship based business. So when you are talking about this level of business, you cannot have automatic Anti-Money Laundering tools (too expensive per client or even for the complete private client / private banking / wealth management business.

Second is the number of people per country per business. This is a high contact business and generally, you wouldn't find large numbers of people in the private client business. So the amount of oversight is comparatively lower compared to say retail or investment banking. So slip-ups do happen. Furthermore, you have to recall that since it is a people business, it is highly localised and spotty. So a private banker in Guyana will have almost complete discretion and very little oversight over his business in Guyana. Who else will know about it?

The third issue is that the rich and the highly rich and the filthy rich are horrendously sensitive to data protection and privacy. So besides being absolutely anal about keeping data private, countries impose draconian data protection, transmission and privacy requirements. So if the private bank is headquartered in say Bermuda or Switzerland, then you had it, data will be sparse, patchy, hidden, and unconnected. So a compliance or a risk manager will find it extremely difficult to audit or track any wrong doing.

But the regulators are getting very very stroppy about any failures on the part of private banks on AML practises such as here, or here, so I am afraid there is simply no excuse. While there is no terrorist activities to my knowledge which has gone through a private bank, there have been far too many cases of drug money, crime and corruption monies which have flushed through these dark hidden channels of the financial markets. And this case study is a wake up call. Read and Reflect.


Only the introduction is appended below, for the full report, go to the report linked here.

MINORITY STAFF REPORTFORPERMANENT SUBCOMMITTEE ON INVESTIGATIONSHEARING ONPRIVATE BANKING AND MONEY LAUNDERING:A CASE STUDY OF OPPORTUNITIES AND VULNERABILITIESNovember 9, 1999


for indent & between paragraphs------------->
Because of their central role in drug trafficking and organized crime, money laundering activities have been the subject of eight prior investigations of the Permanent Subcommittee on Investigations. Despite increasing international attention and stronger anti-money laundering controls, some current estimates are that $500 billion to $1 trillion in criminal proceeds are laundered through banks worldwide each year, with about half of that amount moved through United States banks.
This report summarizes the Minority Subcommittee staff investigation to date into U.S. private banks and their vulnerability to money laundering. The investigation has found that the products, services and culture of the private banking industry present opportunities for money launderers, and that without sound controls and active enforcement, private banking services have been and will continue to be used by those intent on laundering money.
Subcommittee Investigation
To date in this investigation, the Subcommittee staff has conducted almost one hundred interviews and reviewed tens of thousands of pages of documents. The interviews have included meetings with almost 50 private bank personnel, including private bankers, their supervisors, compliance personnel, auditors, senior bank management and board members. The staff has interviewed and obtained information from more than two dozen government agencies and organizations, including the United States Departments of State, Treasury and Justice, the Federal Reserve, Securities and Exchange Commission, International Monetary Fund, World Bank, and law enforcement personnel in Mexico, France and other countries. The Subcommittee staff has also spoken with private bank clients, and with banking and anti-money laundering experts in academic, regulatory and law enforcement circles.
The documents reviewed by the Subcommittee staff include a wide range of materials, from reports on the private banking industry, to reports on money laundering trends, to SEC filings, legal pleadings, private bank audits, bank examination materials, and numerous documents related to specific private bank accounts and transactions. The Subcommittee has issued subpoenas to over half a dozen financial institutions and entities.
The information gathered by the Subcommittee's investigation falls into three categories: (1) the anti-money laundering obligations of all banks, including private banks; (2) the elements of private banking that make it vulnerable to money laundering; and (3) four case histories at the Citibank private bank illustrating a range of issues related to money laundering.