KYC/AML 2016

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KYC/AML2016

Roger Claessens, Prof. UBI

AML Compliance Governance Corp. soc.

The context

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The right strategy?

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+/- 750.000 $ per minute

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FATF (Financial Action Task Force)

Founded in 1989 by the G740 + 9 recommendations = international norms

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Wolfsberg Questionnaire

The Wolfsberg questionnaire related to the prevention of money laundering and the financing of terrorism – level playing field

(October 2000 / revised in June 2012)

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1. Policy, guidelines and procedures2. Risk analysis3. Customer knowledge, Due diligence4. Transactions analysis5. Transactions monitoring6. Training re: KYC/AML

Wolfsberg Questionnaire

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Financial Action Task Force

20122003

20011989

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The European Directives

20152005

20031991

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The law in Luxembourg

20122010

20082004

19971993

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INSECURITY

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LEGISLATION

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1. A brief reminder of the laws2. The 2015/849 Directive 3. Cases 4. Reputational risk management

The structure of the presentation

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•1993The professionals of the financial sector (PFS)

•2012(PFS)NotariesCasinosExternal auditorsLawyersMerchants of luxury goodsConsultants AccountantsUCITS

The laws in Luxembourg

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•19931.The obligation of due diligence related to the customers2.Obligation of an adequate internal organisation3.Obligation to cooperate with the authorities

• 20121.Risk based approach

Know your customer Verification Origin of the funds Transaction analysis Coherence between

transaction and customer profile

Actions in case of suspicion

2.Compliance function (2004)3.Cooperation

The laws in Luxembourg

Image – risk of loss of reputationThe reputation of a financial institution - the same goes for a country - is its most important asset.Legal Money Laundering is a criminal offence in many countries, punished by imprisonment and fines. Money Laundering is considered a severe regulatory breach in many countriesEconomical: Earnings shortfall

Related risks

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Money Laundering = The transformation of illicit money in

licit money

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• Money laundering entails a predicate offence of which revenues can lead to the offence of money laundering

The offence

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The predicate crimes:• A) Drug trade • B) Terrorism, including its financing

– Criminal organisations– Trade of people and traffic of illegal migrants– Sexual exploitation (children)– Misuse of subventions, indemnities or allocation

of funds– Corruption

The predicate crimes

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The predicate crimes:• B)

– Trade of arms and ammunitions– Forgery, counterfeit money, disclosure of

business secrets– Fraudulent bankruptcies– Breach of trust, exploitation of minor of age,– Swindle – Illicit traffic of stolen goods and properties


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• B) – Imitation and the hacking of products – Crimes and offences against the environment – Murders and infliction of grave physical wounds – Kidnapping – Smuggling– Extortion– Piracy – Insider trading and market manipulation


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• B) – Theft of substances of human origin – Trade of human beings– Malpractices on copyright – Environmental damage– Damage to buildings of historical value– Water pollution– Waste mismanagement – Non respect of customs and excises


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• B) – Any other crime or malpractice sanctioned

with an imprisonment sentence of a minimum of six months or more

– for example: the forgery of balance sheets, falsification of statements

• C)– Misuse of corporate assets


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The material element• Money laundering entails an act or an object that

provides an economic advantage, as a result of a predicate crime.

The material component

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The intentional element • The intentional and deliberate element is an

essential feature of the money laundering process.

The intentional component

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The concept of the prevention of the financing of terrorism is different from the AML concept as licit money

may be at the origin of the criminal activityIn reality it boils down to name checking

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The predicate offenceNumerous offences are no longer linked to

serious criminal activities but are interwoven with the economic activities !

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The obligation to co-operate with the authorities

1. General obligation to co-operate with authorities in charge of the enforcement of the law (art. 40 law 1993)

2. Obligation to co-operate with the responsible Luxemburg authority 1. Obligation to provide information to the prosecutor

on his demand2. Obligation to inform the prosecutor on the PFS’s

own initiative of any suspicion or certainty

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• Indices & suspicion (different per profession) • A suspicion / intuition as a result of:

The behaviour of an individual The evolution of the business relationship The origin of the funds The nature of the operation The ultimate goal of the operation The specificities related to an operation The unusual

The obligation to co-operate with the authorities

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The definition

of a business

relationship

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• The business relationship starts before the opening of an account or the signature of a contract

• Does not need to be translated into a contractual relationship, the identification of a counter party is to be assimilated to a relationship in this context

• A business relationship needs to be in line with well defined objectives for both the bank and the customer.

The definition of a business relationship

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The business relationship: consequences

• Requires a good understanding of the customer’s business very early on.

• Providing a service already qualifies for the group’s definition


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In this context a customer means• The individual who opened an account or

signed and account in his name or on behalf of an organisation but also all the co-signatories or individuals holding a mandate related to the account


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The concept

1. Identification & verification2. The origin of the funds3. The goals of the business relationship4. The ultimate beneficiary5. Documentation

A risk based approach


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Customer

KYC Goals of the relationship


Risk assessment

Sen./Non-sensitive

Enhanced Due Diligence

Simplified Due Diligence

Standard Due Diligence

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UnusualSituation Analysis

Marketing Profile

Real Profile

Compliance FIU//CSSF


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The obligation to know the customerCustomer Identification

Beneficial Owner / Economical beneficiary: 1°Is identified through a “declaration of beneficial ownership” on which the client declares whether he is acting or not on its own behalf.2°If the Beneficial owner is different form the client, the latter will have to sign the declaration and provide its identification documentation + mandate holders.3°In the case of a company, the main shareholders will have to be identified, even more so the “meaningful mind”.

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« Know your customer »

Client acceptance policy

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Market

Client acceptance policy

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The power of MARKETING

3060 DB in Rotterdam

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LONG TERM

SHORT TERM

NET WORTH Assets – Liabilities

to third parties

LONG TERM LIABILITIES

SHORT TERM LIABILITIES

Deductive segmentation

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• Pascale, owner of a dealership of a well known car brand. The company sells about 450 cars per year.

• She would like to make an investment with a portion of the retained earnings of the company.

Deductive segmentation

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The balance sheetEURO

Start periodEnd period

01/01/N-131/12/N-1

01/01/N31/12/N

ASSETS

Fixed (net)StocksDebtorsCash

3991.516

890975

10,6 %40,1 %23,5 %25,8 %

3971.3641.136

561

13,4 %46,1 %38,4 % 2,1 %

TOTAL ASSETS 3.780 100 % 3.458 100 %

LIABILITIESEquity & ReservesLT DebtST DebtST Bank Debt

592660

2.5280

15,7 %17,5 %66,9 % 0 %

673441

2,166178

22,8 %14,9 %56,3 % 6,0 %

TOTAL LIABILITIES 3.780 100 % 3.458 100 %

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EURO

01/01/N-131/12/N-1

01/01/N31/12/N

Turnover (1)Purchased goods- Inventory= Cost of goods sold (2)Gross margin (3)=(1)-(2)

14.10412.639

42212.2171.887 13,38 %

14.69012.573

-14112.7141.976 13,45 %

+ Other business related income= Income from operations (4)

3432.230

2,43 %15,81 %

5212.497

3,55 %17,00 %

- Goods and services (5)= Added Value (6)=(4)-(5)

8091.421

5,74 %10,08 %

1.0001.497

6,81 %10,19 %

- Personnel expense- Other operational expenses= Gross operating income

94223

456

6,68 %0,16 %3,23 %

97526

496

6,64 %0,18 %3,38 %

+ Financial revenues+ Exceptional results= Gross total revenue

1674

546

0,11 %0,52 %3,87 %

4-10

490

0,03 %0,07 %3,34 %

- Amort (161)., provisions, depr.= EBIT

185361

1,31 %2,56 %

212278

1,44 %1,89 %

- Financial expenses- Taxes

23156

0,16 %1,11 %

30111

0,20 %0,76 %

= NET PROFIT 182 1,29 % 137 0,93 %

The income statement

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• Points of attention

– Aim = Integrity, stability and reputation of the financial sector

– Complete integration of the FATF recommendations

– 10,000 Euro limit for cash transactions– AML law applicable to rental offices

The 2015/849 Directive

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– Predicate crimes include fiscal fraud subject to penal sanctions with a minimum of six months

– Moral persons the 25% benchmark is only indicative

– Improved access to FIU data base– 2,000 Euro for games


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– Classification of countries , esp. non cooperative– PEP requires a special procedure, not exclusion– Responsibility in case of outsourcing



– Execution of transactions should be possible before mentioning – No commercial use of information – Honourability of persons in exchange bureaus, service

providers, trusts– FIU.NET European platform


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– Effective administrative sanctions– Harmonisation of deposit insurance schemes – Exchange of information on persons subject to penal sanctions– More detailed definitions – Introduction of various limits (art.11 & 12)– Insurance linked to investments – economic beneficiary – Effective beneficiary


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A CASE from the FIU – The facts (1/3)

• Existing business relationship– Opening of a numbered account in order to

transfer money from an account held by a company with another bank in Luxemburg.

– The spouse of the account holder, pretends that her husband has disappeared. Therefore, a transfer is required to make sure money is in a safe place.

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The facts (2/3)

– A new account is opened with an offshore company as account holder.

– The money is transferred from one account to the other by means of transfers and of cash withdrawals.

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The facts (3/3)

– Subsequently, the money was transferred to a third bank in Luxembourg held by an offshore company.

– A few weeks later, it became clear that the husband had been arrested abroad and convicted for fraud related to subventions of a foreign state.

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Analysis

• The customer’s assets are the result of a crime, i.e. the misuse of subventions (= a predicate crime of ML), and fake invoices (= a predicate crime of ML)

• Holding stolen assets: possessing goods whereby one knows the fact they were stolen

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•The bankers’ responsibilities:

– Absence of due diligence related to the customer’s activities, despite the fact he was classified by the bank as a customer with a risk profile.

– Absence of verification of the origin of the funds

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•The bankers’ responsibilities:– Cooperation in allowing the opening of accounts for

the sole purpose of transfers between companies, incorporated with the sole purpose to allow for these transfers, i.e. absence of an underlying economic transaction

– The unusual and secret nature of the transactions, aiming at preventing the clear identification of the origin of the funds, and this despite the clear objection of the bank’s operations 'officer.

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•The lawyer’s responsibilities– The set up of a sophisticated structure with off-

shore screen companies in the British Virgin Islands (companies created for various purposes whereas there is no underlying economic activity)

– Various accounts opened with several financial institutions in Luxembourg of which the economic beneficiaries were different people.

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•The lawyer’s responsibilities (continued)– Providing assistance, in his capacity as a

business lawyer, to the author of a fraud, the assistance with the opening of various accounts and the transfer of the moneys ;

– The unusual and secret nature of these operations.

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Sanctions

•The bankers (the account manager as well as his supervisor):

– Cooperation to disguise the origin of the funds

– Use of false documents– An administrative sanction due to the fact

the transactions were mentioned to the FIU far too late after the facts, whereas it was clear, that the transactions were due for immediate reporting as suspicious.

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WHY? WHY? WHY?

An investor was introduced by a well known distributor in Austria.

• The latter is subject to the same professional obligations as we are in Luxembourg.

• The investor is a resident in a Baltic state.• He has a liberal profession and invests in

shares of a UCIT. • The « application form » has been completed.

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WHY? WHY? WHY?

• The investors transfers 100.000 € at the occasion of the subscription via the agent, in 2012

• Subsequently, he transfers 500.000 € to be invested in shares

• Requests the transfer of the securities to an institution in Liechtenstein

• New subscription of 850.000 €• Follows two subscriptions, one of 89.879 €

and one in the tune of 42.800 €

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WHY? WHY? WHY?

• New demand to transfer 450.000 € to Liechtenstein • Thanks to the vigilance of a compliance officer, who

noticed the sequence of transfers and above all the transfers to Liechtenstein, the case was analysed.

• Why these transfers? Why through Luxembourg? What might be the origin of funds be?

• A request for additional information was sent to the intermediary. No reaction. A request was sent to the investor (as can be done on the ground of the legal documentation). No reaction.

• Reported to the Prosecutor with a copy to the CSSF

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Conclusion

•In the field of analysis three components are essential: 1. The people 2. The documents3. The story

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MISUSE of

Subventions !

KYC/AML

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Example

s of c

ases

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The unusual – beyond the standard deviation

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The 2013 report of the CRF mentions following points of attention:

- Information contained in press releases related to penal issues or legal cases abroad, - Intra group information related to suspicious transactions- fraud, use of fake documents and counter fake money

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The 2013 report of the CRF mention(continued)

• Operations not in line with customers’ profile, without economic justification, with a lack of transparency

• Fraudulent transactions by means of electronic trade

• Unusual customer behaviour (for instance, lack of cooperation, lack of credibility related to presented documents, false statements

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Cash

• Remember the 10,000 European Directive on trans- border transportation of cash

• The limit of cash for commercial transactions in certain countries – not yet the case in Luxembourg

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A situation may be quite different from the one

perceived at first glance!

KYC/AML

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The major asset of a financial organisation is its REPUTATION

Reputation: management & risks

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• « The risk of loss of reputation, means the decrease or loss of confidence by the stakeholders, i.e. customers, suppliers, counterparties, shareholders, regulators or any other third party, in the organisation, putting thus into question the long term survival of the organisation…»


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1992

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1998

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2001

2002

0100020003000400050006000700080009000

10000

The consequences of Arthur Andersen’s loss of reputation (auditors of ENRON)


Revenues in ‘000,000

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What objectives need to be reached in order to be recognised as a great BRAND with a great

REPUTATION?


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A culture of MOTIVATION


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A Culture of listening


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The PC is the result of a constant process of questions related to performance improvement and a search for excellence: BETTER PERFORMANCE FASTER CHEAPER SMALLER MORE SIMPLE

A Culture of excellence


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A Culture of trust


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A Culture of compliance

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Companies with a strong brand have a DNA

It is a way of doing things that differentiates them

from the others.

(Acide DésoxyriboNucléique)


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Organisations as well as individuals working for

those organisations

can be prosecuted.


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• Lloyds Banking Group PLC settled to pay $ 350,000,000 in 2009

• Crédit Suisse Group AG $ 536,000,000 the same year.

• Barclays PLC paid $ 298,000,000 in 2010 • ABN Amro: $ 500,000,000 • JPMorgan Chase paid two years

$ 88,000,000


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What should I remember from this presentation?.

Conclusions

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Never transmit information directly to the authorities. It is the responsibility of compliance.

KYC & a strict follow up on transactions are certainly the most appropriate tools to protect

the organisation.

In case of suspicion, report it immediately to compliance after a meeting with the

hierarchy.

Conclusions

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• In the final analysis, prevention of money laundering is a matter of your personal reputation, the reputation of the organisation you are working for and the financial centre.

• Films to see ENRON, INSIDE JOB, ROGUE TRADER,TOO BIG TO FAIL, MARGIN CALL

Conclusion

[email protected]

It was nice being with you !

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Economy & Finance

KYC/AML 2016