Anti Money Laundering Blog

The process of money laundering has been discussed and it has been also indicated that the process of money laundering can be divided into basic 3 steps – placement, layering and integration. These steps can happen either one by one or simultaneously, or separately.

Below is one of the notorious cases of money laundering that clearly illustrates the three steps.

In the 1980s, Eddie Antar skimmed millions of dollars from the company to hide it from the IRS. He was the owner of Crazy Eddie’s Electronics who had a very original plan, anyway. But, eventually, he and his co-conspirators decided to make better use of the money if to send it back to the company disguised as revenue. This move would inflate the reported assets of the company in preparation for its IPO.

Having travelled to Israel a number of times, he carried millions of US dollars strapped to his body and in his suitcase.

The money laundering scheme worked out by Antar worked the following way:

PLACEMENT – Antar made a series of separate deposits to an Israeli bank. Once, “Crazy Eddie” made 12 deposits in a single day.
LAYERING – Before US or Israeli authorities noticed the unexpectedly huge balance in the account, he had transfered all the money from the Israeli bank to Panama, where bank secrecy laws are in force. From the account in Panama, Eddie Antar made anonymous transfers to numerous offshore accounts.
INTEGRATION – Antar slowly wired the money from the offshore accounts to the legitimate Crazy Eddie’s Electronics bank account, and in the account of the company the money mixed in with legitimate US dollars and documented as revenue.

All in all, “Crazy Eddie” laundered more than USD 8 million. Antar’s scheme boosted the initial offering stock price so that his company ended up worth USD 40 million more than it if the revenue would have not been added. When Eddie Antar sold his stock, he had USD 30 million in profit. In 1992, he was found by the authorities in Israel and extradited to the US to stand trial, where he received an 8-year prison sentence.

A US risk consultant based in North Carolina, Brendan Hewson, says that, in his opinion, the more financial industry rules and regulations are implemented by big countries, the better it is for offshore financial centers.

Hewson says that the greatest threat to established offshore centres like the British Virgin Islands, the Cayman Islands, the Bahamas and Bermuda is not the USA but competition among themselves as well as the threat posed by emerging financial centers like Singapore and Dubai. He suggests that, of the newer jurisdictions, Singapore and Dubai are the best-positioned to make changes in the offshore world at the expense of jurisdictions have some reputational problems.

Hewson suggests that the offshore center “with the biggest bulls-eye on its proverbial chest” currently is Bermuda. It is phenomenally financially successful and has peaked economically. However, according to Hewson, it will face a future decline caused by rampant political corruption and the real prospect of independence in the not-too-distant future. “There are striking similarities between what is currently taking place in Bermuda and what took place in the Bahamas in the 1960s and 1970s, when corruption, independence, and a lack of concern for the needs of international businesses contributed to a wave of insurers moving to Bermuda and banks to the Cayman Islands.”

Hewson thinks that the rival offshore centre that stands to benefit from Bermuda’s problems is Cayman that has professional expertise and intellectual capacity to compete with Bermuda, but its legislation is not good enough yet.

On January 1, 2008, US Securities and Exchange Commission published Anti-Money Laundering (AML) Source Tool, which represents a research guide. The guide compiles key AML laws, rules, and guidance that are applicable to broker-dealers.

As far as there is a great variety of related anti-money laundering guidance materials that assist broker-dealers, AML Source Tool summarizes and points out key anti-money laundering compliance materials and provides related source information.

The guide prepared by staff in the Office of Compliance Inspections and Examinations (OCIE), Securities and Exchange Commission includes the following topics:
- the Bank Secrecy Act;
- the USA PATRIOT Act;
- AML compliance programs;
- customer identification programs;
- Correspondent Accounts: prohibition on Foreign Shell Banks and Due Diligence Programs;
- Due Diligence programs for Private Banking Accounts;
- suspicious activity monitoring and reporting;
- other BSA reports;
- records of funds transfers;
- information sharing with law enforcement and financial institutions;
- special measures imposed by the Secretary of the Treasury;
- Office of Foreign Asset Control (OFAC) Sanctions Programs and other lists;
- selected additional AML resources;
- useful contact information.

It goes without saying that anti-money laundering regulations, rules and orders are subject to change and often they can change rapidly. Therefore, it is to be taken into account that the information summarized in the compilation is current as of January 1, 2008.

An insight into anti-money laundering is provided by A Preventive Guide for Small Business & Currency Exchanges in Canada published by the Royal Canadian Mounted Police, which is the Canadian national police service and an agency of the Ministry of Public Safety Canada.

The Guide indicates that one of the roles of the RCMP within Canada’s Initiative to combat money laundering is informing the public. Therefore it describes money laundering as something that can happen anywhere, anytime, and one may not even be aware of having been involved in it.

While defining money laundering is clear and similar to what has been repeatedly discussed previously, some issues related to money laundering discussed in the Preventive Guide have not been discussed yet. For example, the Guide provides a term “willful blindness” as a situation when a person who has become aware of the need for some inquiry does not make the inquiry as he/she does not wish to know the truth and prefers to remain ignorant. There is also an example of willful blindness in the Guide. It is as follows: “A salesperson encounters a customer who wants to buy a consumer good or service with $25,000 cash. The customer produces a gym bag containing $25,000 in $20 and $50 bills. In the vast majority of modern Canadian commerce, this is not a normal business transaction, and this method of payment is highly unusual. Though the salesperson instantly suspects something is out of the ordinary, they chose to ignore their suspicion so as not to jeopardize an easy sale.”

Terrorist financing may often be carried out through charitable organisations, therefore compliance officers should be cautious as regards some tips to identify terrorist financing.

Below is the list of “red flags” of terrorist Financing carried out through charities:

- the name is very similar to the name of a well-known or long-established existing charitable organisation;
- the activities of the charity are regulated on a limited basis, or even are not regulated by local authorities;
- the entity has not been officially registered with regulators as a charity;
-Â the objective of the charity is either unknown or unclear from published materials;
- the charity has frequently changed physical address, mailing addresses, or often replaced staff;
- the extremely limited amount of information that can be obtained on the charity through the Internet or from other public source;
- trustees, officers and directors also hold similar positions in other charities;
- the charity is closely connected with a political or religious organisation or party;
- funds transfers to other countries;
- cash transfers to other non-charitable organisations;
- an attempt at an audit of charity funds fails;
- the end recipients of the funding as well as their aims and activities are unknown.

The presence of at least several of the points indicated above should be a reason good enough to initiate an immediate investigation of the charity.

The threat of terrorist financing in India is considerable as this country is the world’s largest recipient of inward remittances. It is obvious that remittances from non-resident Indians have a positive affect on the country’s economy. Nowadays non-resident Indians transfer about USD 25 billion a year to their families residing in India. Now Mexico and China have become ex-leaders as regards remittances.

While positively affecting India’s economy, such amounts also increase the risk of exploiting India’s inward remittance system for terrorist financing.

According to the statistics provided by the US National Counterterrorism Centre, since 2001 terrorist attacks in India have claimed more lives than anywhere else. Therefore, to fight international terrorism, it is important to reduce the flow of funds and money to terrorist organizations.

Indian intelligence officials state that terrorists ore and more often use regular banking channels and wire transfers to send money. Inward remittances are send to India by varied means, the most common of them are electronic wire/ swift, personal cheques, traveler’s cheques and hawala.

The modern inward remittance system is vulnerable to terrorist activities, and that is why many Indian banks are implementing systems that increase the scrutiny of remittances, identify suspicious transactions and comply with anti-money laundering standards.

 

E-fencing is a relatively new term in the world of financial crime. This new type of crime has emerged on online auction sites like eBay and definitely involves money laundering.

How it works? The numbers from stolen credit cards are taken by criminals take and spent to buy gift cards online. After that, Then the gift cards are immediately offered for sale at a large discount on the websites. Many people find such offer to be a great bargain and therefore buy gift cards and use them or sell to other unsuspecting people. So, the mechanism is just as simple as that.

Such a simple scheme is very effective and the problem is growing fast as the stolen credit card number can be easily converted into an item that can be easily sold. Even after the card is canceled, the gift card purchase is usually neither discovered, nor canceled. So, by this method the usable life of the stolen credit card number is extended past its cancellation by the owner.

This type of crime is evolving fast for a number of simple reasons – it is anonymous, safe, profitable and less risky than other similar types of crime.

This is why people should be extremely cautious when something offered is too good to be true, because it can be connected with a fraud, a counterfeit, or other criminal act. So, buying something obviously below cost is dangerous and could lead to serious circumstances.

Second Life is a land created in 2003 by a San Francisco-based technology company Linden Lab. It is a planet of 6 million citizens with no police, no courts, no taxes, just slightly controlled fast-growing economy is lightly, banks and the stock exchange with no basic regulation.

Thanks God, it’s not the real world, as this is a haven for money launderers, fraudsters and terrorists where they can easily hide and move assets.

While Second Life is a virtual online world, it seems obvious that the criminal networks are a great threat to move from the cyberspace into our world.

A study for Britain’s Fraud Advisory Panel (FAP), a watchdog established by the Institute of Chartered Accountants in England and Wales, is advising that the Government should extend financial regulation of the real world into Second Life and some analogical games. The report warns that those who play these games could transfer large amounts of money all over the world without restriction and much risk of being detected. According to the FAP, criminals and terrorists could use the game for moving funds and avoiding surveillance as well as for money laundering, tax evasion, credit card fraud and identity theft.

The number of players of Second Life has increased from 700 000 in autumn 2006 to 6.2 million.

Users create their online characters called avatars to mingle with others all around the world. They use a pretend currency called Linden dollars to buy and sell any virtual items for fun or leaving impressions as well as to start up businesses. What is crucial, Linden dollars can be freely exchanged for real USD. In average, about GBP 750 000 changes hands a day.

In May, German prosecutors have launched a probe into allegations that child pornography was sold on Second Life.

In April, Linden Lab asked the FBI to assess whether its virtual casinos break US laws against online gambling.

A solicitor and chairman of the FAP’s cybercrime working group, Steven Phillipsohn suggests that thereis nothing virtual about online crime as it is all too real and advised the government to approach this issue seriously. According to him, the risk of money laundering is obvious and “there will be a migration of fraudsters into these sites when they see all of the opportunities”. While commerce, relationships and criminal activity are hidden in virtual online communities, the money is real and it is a real loss in case of tax evasion, fraud, or theft.

In 2006, a Chinese-born teacher living in Germany, Ailin Graef claimed to have been the 1st one to make USD 1 million on Second Life, through her avatar developing virtual properties and selling or renting them to other avatars.

A world-famous Internet search company, Google, intends to compile psychological profiles of web users by means of monitoring the way they play online games. Google expects to get information about the personalities and preferences of users by observing their online behaviour. The details on users could be sold to advertisers.

On May 27-28, 2007, the 2nd Annual Middle East Anti-Money Laundering Forum took place in Bahrain, UAE to highlight the need to ensure pursuing more efforts for eliminating money laundering by financial institutions.

Annual Middle East Anti-Money Laundering Forum aims at maintaining successful anti-money laundering strategies using knowledge, teamwork and greater transparency and understanding changes in regulatory guidelines.

The 2nd Middle East Ant-Money Laundering Forum was a good opportunity for professionals to learn decisive and effective anti-money laundering strategies. The Forum offered unique information on the latest changes to guidelines and best practices on anti-money laundering strategies all over the world. The review of evolving technological solutions and training methods for financial institutions was also on the list.

The event was attended by some 60 specialists from the GCC and Middle East countries.

Head of Compliance of Oman International Bank (OIB), Hany Abou-El-Fotouh, has presented his speech at the forum. He told the delegation, that it has been agreed that Know Your Customer (KYC) procedure was very important and that this due diligence and bank regulation must be observed by financial institutions in order to identify their customers and do financial business with them.

Abou-El-Fotouh emphasized the importance of adequate staffing the compliance units of financial institutions. Also, he stressed the importance of on-going training on all aspects of money laundering control to ensure employees’ being up-to-date regarding money laundering and suspicious transactions and their identification.

Money laundering is often conceptually linked with offshore, therefore the term “offshore” itself is worth discussion. This has already been discussed, indeed, however, new valuable information regarding this has recently emerged.

When talking about offshore companies and onshore companies, business, bank accounts, transactions, whatever else, for some reason “offshore”often has a negative connotation, while “onshore” – a positive one. Does this have any grounds? Probably not, as the International Trade and Investment Organisation (ITIO) commissioned a report with quite a peculiar statement.

On May 1, 2007, the ITIO, which is a group of small countries with international financial centres across Europe, the Caribbean, Latin America, the Pacific and Asia. I, released a report entitled “Assessing the Playing Field“ stating that there is no big difference between offshore and onshore financial centres and disproving that offshore centres have weaker regulation standards than onshore ones. The report is based on an analysis of objective data compiled by the Organisation for Economic Cooperation and Development.

Based on the conclusions made in the report, ITIO Deputy Chair Malcolm Couch says that “it’s time to stop treating small countries with finance centres as different” adding that “big countries have no moral or legal edge over small ones”. He also suggests that ”large countries should stop stigmatising small and developing ones”, because there is no factual basis for that. According to Couch, both large and small countries should continue “to work on a cooperative and fair basis” as well as to participate in the OECD’s Global Tax Forum aimed at helping each other tackle tax evasion and criminal and terrorist financing.

The report suggests that large countries should open up access to the international network of double taxation treaties to small ones.