Challenge of Money Laundry

1. Challenge of Money Laundry By:Dr.Gholamhossein Davani • Chairman of Dayarayan auditing & Financial Services Firm (Member of RSMi ) • Member of High Council Of Iranian Association Of Certified Public Accountants(IACPA) • IACPA,IICA,IMA,AAA,IIA,BAA,EAA, • AIA,ACFE,CAAA,FMA

2. The Origin of Money Laundering Theory 2: Coined due to the laundering of dirty money in a process of numerous transfer Theory 1:The term "Money laundering" is often said to have originated at the time of the famous American gangsters that arose originally out of Prohibition - the banning of alcoholic drinks. Several mechanisms were used to disguise the origins of the large amounts of money generated by the import and sale of alcohol and other "rackets" such as gambling, some of which was illegal. Ironically, one of the methods of concealing the source of the money was legal gambling. The major headache that gangsters faced was that the money was in cash, often in small denomination coins. If the coins were put into the bank, the questions would be asked. But the storage of large amounts of money in low value coins is a storage nightmare. So they created businesses, one of which was slot machines, and another of which was laundries - so, it is said, that the term "Money laundry" was born. Theory 3: Used first time after Watergate scandal in 1970s and then was recognized internationally Money laundering is a set of measures taken for transfer of the money generated from illicit transactions such as drug traffic, terrorist activities, and organized crime arrival at the transformation of origin, currency unit, beneficiaries, or the final destination of the money.

3. Money Laundering Methods • Money Laundering Methods How the basic steps mentioned in the Stages of The Process are used depends on the available laundering mechanisms and the requirements of the criminal organizations. The table below provides some typical examples. • Placement Stage LayeringStage IntegrationStage Cash paid into bank (sometimes with staff complicity or mixed with proceeds of legitimate business). Wire transfers abroad (often using shell companies or funds disguised as proceeds of legitimate business). False loan repayments or forged invoices used as cover for laundered money. Cash exported. Cash deposited in overseas banking system. Complex web of transfers (both domestic and international) makes tracing original source of funds virtually impossible. Cash used to buy high value goods, property or business assets. Resale of goods/assets. Income from property or legitimate business assets appears "clean". 

4. Background Of Money Laundry Money laundering as a crime only attracted interest in the 1980s, essentially within a drug trafficking context. It was from an increasing awareness of the huge profits generated from this criminal activity and a concern at the massive drug abuse problem in western society which created the impetus for governments to act against the drug dealers by creating legislation that would deprive them of their illicit gains. Governments also recognized that criminal organizations, through the huge profits they earned from drugs, could contaminate and corrupt the structures of the state at all levels. Money laundering is a truly global phenomenon, helped by the International financial community which is a 24hrs a day business. When one financial centre closes business for the day, another one is opening or open for business. As a 1993 UN Report noted: The basic characteristics of the laundering of the proceeds of crime, which to a large extent also mark the operations of organized and transnational crime, are its global nature, the flexibility and adaptability of its operations, the use of the latest technological means and professional assistance, the ingenuity of its operators and the vast resources at their disposal.

5. Evolutionary trend of money laundering Corruption Drug traffic Shadow Economy Underground Economy Organized Terrorism Shadow economy is a set of economic activities – whether in manufacturing or in services- by the citizens who want to earn more money beyond the frame of formal economy. Bribery, embezzlement, tax evasion, nepotism, illicit production, black market of rare, exchange transactions, and fraud.

6. The history of Anti-Money Laundry Laws Only drug traffic and its proceeds were criminalized Ark, Paris (July 1989) The proceeds of all Illicit transactions and original activities were considered “Dirty”. 1990 The proceeds of drug traffic or all criminal activities are “Dirty” 1995 Anti-Money laundering law 2003

7. Feature of Money Laundering An organized crime, an organized gang empowered by electronic devices A long-term, continuous crime Cross-border activities like those in the capital market Its proceeds are used in Illicit activities such as fraud in elections International money laundering is not often done by those involved in illicit activities but by the experts who are familiar with the mechanism of international money and capital market. They are able to distinguish the differences in national laws and use them.

8. The process of Money Laundering Access to illicit financial resources Deposits Purchase of domestic or int’l bonds Purchase of stocks Involvement in housing market Purchase and resale of antipodes Physical movement of financial resources Contributing the religion centers and charities Contributing the religion government Banks with int’l legal entity Trying to cancel the financial resources layering Building a sophisticated network for money transfers and using the electronic transactions and attending tax heavens Establishment of specialized banks Regional financial-credit institutions Establishment of anonymous companies in the countries where the right of secrecy is guaranteed Issuance of forged export-import notes and bills for money transfer Attending the precious goods exchanges such as oil, gold and jewelry Integration

9. The process of Money Transfer A New York or any other bank opens an L/C for a group of gold buyers with dollar-denominated cheques. American broker himself delivers the cheques to the render from Rio de Janeiro or Sao Paolo. He or she in turn buys gold using the real-denominate cheques and then sends the dollars-denominated cheques to New York. The gold deliverer send it to a city on the border of Brazil and Uruguay. Here after, it is a smuggled good. The gold is delivered to a Monte Video Bank The gold receiver (trustee) informs the New York bank. The latter pays the money in dollars in the deliverer’s account in New York. Then the money goes to a bank account in Monte Video. So the gold is exported legally from Uruguay to USA and will be supplied there as Uruguay gold.

10. Critical points in Money Laundering The stage of entering cash money into the financial system At this stage, money laundering is vulnerable most because the money can not be easily inserted in a bank account due to high opuantity at cash Report the suspicious transaction to the officials is a powerful instrument against money laundering Special attention to depositories through verifying the customer’s identity The stage of cash transfer into or out of financial system (Conversion) The stage of international cash flows (integration) Most responsibility for prevention of going out cash amounts undertake of Iran Customs but Customs hasn’t any experience and authority in this case.

11. The ways for preventing the Money Laundering The authority of government should be high (through using proper financial and tax mechanisms e.g. the cost and risk of tax penalties) so that the incensories for crime are lowered and the report of any unusual money transfers are encouraged. A proper mechanism should be devised for money and capital market so that a sophisticated supervision is established. Control of corruption in public sector Expansion of auditing and financial control over economic activities aimed at transparency and preventing the tax evasion. Creating a financial task force against money laundering (Financial Interpol)

12. The way of Money Laundering Money launderers clean their proceeds with the help of lawyers, attorneys, auditors and top bank executives. Money filtering= converting the small notes to big ones Money transfer Using the bank system

13. The bulk of shadow economy activities in different countries in relation to GDP (%) USA 10-23 Australia 4-12 Russia 25 Germany 25 Italy 10-33 Japan 4-15 UK 3-15 Iran 25-45 The cost of money laundering in the world accounts for 20 to 30 percent of the money to be laundered Currently the US trade deficit is $bn 500. It is said that without “dirty money” in foreign accounts, us economy will be diminished, the living standards will collapse, dollar will be weakened, its capital and borrowing sources will decrease, and Washington will be no longer the emperor of the world.

14. The impact of money laundering on economics The bulk of money laundering in 1995 was $ Billion 500-1500 (2% of world’s gross product, 6% of USA GNP and equal to France’s GDP) At the beginning, higher crime led to higher demand for money Currently higher crime leads to lower demand for money Money laundering and economic crime cause a shift in the direction of proceeds from long-term investments to short-term, risky and profit-making ones. Tax evasion is one of the main incentives for money laundering Government’s income sources decrease. Government’s budget system becomes inefficient Money laundering would lead to the exit of huge amounts of foreign exchange reserves from the country, giving rise to financial corruption, inflation and price hikes. Conclusion: change in method of money laundry and going out of banking system, and moving award parallel markets and sophisticated non-monetary tools The annual turnover of global drug traffic and its net profit are estimated to be $bn5000 and $bn500 respectively

15. The suitable tools for money laundering Banking activities especially in the banks with international legal entity which are hard to be controlled. The parallel institutions banking system such as financial-credit ones Futures markets which cooperate with stock exchange agents Involvement in informal economic sectors such as precious metals, oil deals, artistic works and antipodes Tax heavens: Free trade zones with no control over them Religions centers which perform economic activities. Charities and the like, foundations and special cooperation funds While converting money, countries become the hosts for converting the dirty money to clean money. As a special example, when Euro was introduced, a great bulk of dirty money was converted into clean money

16. Legal Requirement of financial institutions for combating the money laundering Creating the methods for authenticating the customers’ identity Creating the proper methods for account keeping aimed at the accurate identification of the bulk of transactions Creating the internal reporting methods for suspicious transactions Teaching the legal repair to employees Teaching the above-mentioned methods to employees Creating the financial police

17. The impact of money laundering of financial institute Financial institutions are at the front line of combating the money laundering. On the one hand, the money laundering. In the one hand, the money launderers put these institutions under scrutiny and on the other hand these institutions are obliged to carefully supervise the financial transactions. For example, in UK, the financial organizations are obliged to report any suspicious transactions as well as all transactions with a value of over £10,000. Therefore, the financial institutions are affected by money laundering from two aspect: Legally due to the obligations imposed by the exiting laws; financially due to the compliance with supervisors, the financial institutions are obliged to create the systems which present the money laundering and help officials combat it.

18. Finance& Refinance from Middle East bank especial UAEThe Letter of credit without transfer moneyOver-invoice in Foreign transactionTehran Stock exchange transactionReal state transactionDrug Non-bank financial institute (Gharzal-hasaneh funds)Religious CharitiesReligious societies &MissionIran Free Industrial &Commercial Zones Gun transaction (Iran-Contra) Simple Money Laundry in Iran

19. Iran new law & regulation • Regulations on Avoidance of Money Laundering(2003) • The Law of Electronic Commerce (2003) • The Law of Using the Professional Services of the Certified Public Accountants (1993) • Bill Text of VAT in Iran (In approval process)

20. World’s famous persons involved in Money laundering

21. Some statistics on global criminal trade

22. World Mafia US Mafia Russian and Chechnya Mafia Italian Mafia Eastern Europe Mafia (National China, Hong Kong) Medeline Cartel (Colombia) (Jamaica) Gray Wolves (Turkey) Golden Triangle Japanese Yakuza

23. Composition of Global Mafia Proceeds • Human Smuggling and prostitution • Credit card (mainly in the field of Hong Kong’s activities) • Casinos, Betting and Lottery (Soccer matches, boxing, horse back riding etc. • Illicit arms sales • Drugs and Alcohol Beverly's Sales ($bn 120-300 Per year) • Attending the international tenders (Brokerage) • Bribery and Brokerage • Profit of legal investment • Organized terrors Production or sales of illicit products such as pornographic items • Foreign exchange transactions • Nepotism • Others

25. Performance of Charity Foundations,2000

26. Anti-money laundering instructions for ICAEW Accountants • Provisional Guide for Accounts, published on 12 May 2003 • Criminal proceeds law (2003) • Money laundering in Criminal proceeds law: • “Any deals with criminal proceeds is criminalized”. • Accounts must report any information and /or suspicions on money laundering (whether regarding customers or the third parties) to criminal financial information service. Otherwise they will face penal actions. • Suspicion means any sensible awareness and belief in the existence of money laundering.

27. Money laundering Money laundering is the term used for several crimes which deal with criminal proceeds or terrorist funds. Currently it involves the acquisition of criminal proceeds of concealing them in all manners. This guide contains the similar activities related to terrorist funds. These funds involve those which may be used for terrorism or those earned from terrorism.

28. Criminal action is that which is criminalized in all parts of UK Criminal property includes the following (but not limited to them): • Proceeds of tax evasion • Proceeds earned from corruption and bribery • Proceeds earned through a cartel’s activities • Proceeds (as saved costs) from failure in meeting the repairements in • which the failure is a criminal action.

29. Responsibilities of auditing Firms • They must assign an employee to receive the reports on money laundering from his or her collages and submit them to relevant bodies. • They must familiarize their employees with specialized applied instructions about the legal repairments of money laundering including how to identify and encounter the potential money laundering, how to report it and how to identify the customers. • They must authenticate the identity of new customers. • They must established the paper internal practice for preventing the money laundering

30. Awareness and suspicion Certain Awareness Fin countering the obvious matter Awareness of the conditions which show the realities to sensible and honest people Awareness of the conditions which expose the sensible and honest people to questioning but fail to perform sensible questionings. Suspicion has not been defined in law. It is beyond the doubt but it can not be proved or ascertained. It is subjective but takes the form of an objective matter.

31. If companies and auditors are not aware of suspicious of money laundering but commit it, it mean that the auditors who have not reported it, may have committed it.

32. The principle of importance does not exist in revealing the cases suspicious of money laundering. In other words, the reports on money laundering should be issued without may considerations to the gained interests. The repairement for issuing the money laundering reports governs the principle of confidentiality of customer’s documents. Auditing agencies are not allowed to warn their customers so that they are exposed to prosecution. Tax evasion is also classified in the field of money laundering.

33. Those covered by anti-money laundering • All accountant regardless of the commercial nature of their clients • People involved in monetary and banking services • Housing agencies • Cash commodity transactions with a value of 15,000 or more • Casinos • Tax service agencies • Management consultancy service agencies • Legal service agencies • Firms registration bureau

34. Money laundering To conceal “The criminal property (to conceal or to charge the nature, source, place, mode, movement, possession or the rights thereof; to convert, transfer or taking it out of any part of great Britain) “To arrange” (entering or involving in an arrangement in which a person or a company is enabled to facilitate the acquisition, maintenance, use or control of a criminal property Obtaining, using or acquiring a criminal property Trying to deceive someone to commit such crime

35. Money laundering penalties Depend on the crime Crimes may be heard by district or supreme courts Penalties by district courts • Cash fines up to £5000 or six month of imprisonment • Imprisonment or both penalties Penalties by supreme courts • Cash fines (no limits) • Imprisonment up to 14 years or both penalties • Cash fines (no limits) or imprisonment up to 5 years or both penalties for failure in reporting the crime • Final notice and warning

36. Companies’ tasks regarding Anti-money laundering laws They must assign one of their experienced and top employees as anti-money laundering officer and implement the internal reporting practices They must determine the substitute for the officers in case of leaves They must familiarize the concerned employees with the implementation of anti-money laundering law and how to identity the customers on (encounter the potential money laundering) Instructions at work or attending the conferences Computerized instruction Customer acceptance procedure Controlling the customers’ money Proper internal controls Computerized instructions They must establish the proper written internal practices for avoiding and preventing the money laundering and make their employees of this procedure They must authenticate the identity of new customers and records their documents They must report the suspicious cases to national anti-money laundering organization

37. Natural persons • A copy of ID card • Passport • Driving license • Legal persons • Company’s registration ad • Place of institutions • Company managers’ names Investigating the accounts of those who deal with foreign exchanges To check the customers’ names with the black list published by anti-money laundering organization

38. Tasks of auditors and companies Sending a typical report to anti-money laundering organization on suspicious cases Within seven days after sending such a report, no measures should be taken by the person or the company In emergencies, the anti-money laundering organization may be contacted through phone or fax If no response is received from NCIS within 7 working days, the firm can do process transaction If NCIS announces its dissatisfaction, there will be a 31 day deadline period in which no transactions will be made. After this period, transactions are allowed.

39. Money laundering chain from IFAC’s Perspective Lack of a strong supervisory environment and lack of honesty among the chief executives (meritocracy) Lack of a relevant, independent and internal program for acceptance of auditing

40. Extent of risks Risk of acceptance: Identification and authentication of customers Operational risk: The risk due to the problems in manufacturing or service transfers threatening a commercial unit. This risk is a function of internal controls of information systems, honesty of employees and many other operational process. In the field of combating the money laundering, it is the most important challenge of banking system. The more sophisticated and more devise the activities, the greater the operational risk. Credit Risk : Failure in acceptance- Risk of acceptance Money laundry hurts the reputation of a commercial unit Improving the internal control system is needed to remove it. strategic risk: the risk that a business is unable to effectively plan, implement and respond to changes and developments within an industry.

41. Signs of money laundering • Introducing the special customers by a colleague or a foreign financial institution in a country known for production and traffic of drugs and arms and banking security • Occurrence of usual changes in conventional accounts and patterns of transactions • The transactions made through brokers with no commercial reasons • The transactions in which identifying the two sides is difficult. • False order in transactions in order to evade the repairement of identification or keeping the documents for supervisory affairs. • Exchange transaction in high volumes and in usual forms • Illicit transactions or those which have not been registered correctly (improper and inadequate auditing) • Extensive cash transactions inconsistent with a person’s profession

42. Institutions targeted by money launderers Banks and credit institutions Vendors and brokers of vehicles and artic rafts Agents or brokers of stocks and goods Holding Investment companies Money- changers Casinos Travel agencies Converters of travel cheques, money bills and credit papers in cash Housing agencies Money shippers mailing systems Federal government companies Insurance companies Brokers of precious metals, stores and jewelry Loan Bank Loan-rendering and financing companies

43. Five supervisory factors in money laundering • Supervisory • Risk evaluation • Supervisory activities • Continuous supervision • Information and communication

44. Basel committee’s supervisory rules on money laundering • Using risk-centered supervision • Know your customer (KYC)

45. 1986 United States enacts Money Laundering Controls Act, (First Money Laundering Law in the World) Global institutions and laws for combating the money laundering (1) • 1988 • Basel Committee on Banking Supervision- Prevention of criminal use of the banking system for the purpose of Money- Laundering • United Nations- Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (“Vienna Convention”) 1989 Financial Action Task Force (FATF)- Established by G-7 • 1990 • Financial Action Task Force (FATF)- 40 Recommendations • Caribbean Financial Action Task Force (CFATF)- Established • Caribbean Financial Action Task Force (CFATF)- 19 Recommendations • Council of Europe: Convention on Laundering, Search, Seizure and Confiscation of Proceeds of Crime (ETS N0 141)(“Stasburg Convention”)

46. 1991 • Financial Action Task Force (FATF)- Mutual Assessment Process Agreed • European Union (EU)- Council Directive on prevention of the use of the financial system for the purpose of money laundering (91/308/EEC) Global institutions and laws for combating the money laundering (2) • 1992 • Organization of the American States/ Inter-American Drug Abuse Control Commission (OAS/CICAD)- Model Regulations Concerning Laundering Offenses Connected to Illicit Drug Trafficking • 1995 • Edgemont Group- Established • Organization of the American States/ Inter-American Drug Abuse Control Commission (OAS/CICAD)- Summit of the Americas Ministerial Conference Concerning the Laundering of Proceeds and Instrumentalities of Crime- Ministerial Communiqué • 1996 • Financial Action Task Force (FATF)- 40 Recommendations (First Revision) • Financial Action Task Force (FATF)- First Typology Report Issued

47. 1997 • Asia /Pacific Group on Money Laundering (APG)-Established • Council of Europe (COE)-Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures (PC-R-EV) – Established • Basel Committee on Banking Supervision (BCBS)- Core principles for Effective Banking Supervision • Organization for Cooperation and Economic Development (OECD)- Combating Bribery of Foreign Public Officials in International Business Transactions Global institutions and laws for combating the money laundering (3) • 1998 • United Nations (UN) – Political Declaration and action plan against Money Laundering Adopted at the Twentieth Special Session of the United Nations General Assembly • Organization of the American States/Inter-American Drug control Commission (OAS/CICAD)- Model Regulations Concerning Laundering Offenses Connected to Illicit Drug Trafficking and Other Serious Offenses (Amended) • International Organization of Securities Commissions (IOSCO)- Regulation on the Adoption of the objectives and principles of Securities Regulation • United Kingdom (UK)- Regulation of the Financial Services in the Crown Dependencies (“Edwards Report”)

48. 1999 • United Nations- International Convention for the Suppression of the Financing of Terrorism • United Nations (UN) office on Drugs and Crime- Model Legislation on Laundering, Confiscation and International Co-operation on Relation to the Proceeds of Crime [for civil law jurisdictions] • Organization for Cooperation and Economic Development (OECD)- Principles of Corporate Governance • Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG)- Established • United Kingdom (UK)- Review of Financial Regulation in the Caribbean Overseas Territories and Bermuda (“KPMG Report”) Global institutions and laws for combating the money laundering (4) • 2000 • Financial Action Task Force (FATF)- Establishes Criteria for Non-Cooperative Countries and Territories (NCCT) list • Financial Action Task Force (FATF)- First NCCT List Issued • Financial Action Task Force of South America Against Money Laundering (GAFISUD)-Established • United Nations (UN) office on Drugs and Crime- Model Money Laundering and Proceeds of Crime Bill [For law jurisdictions] • United Nations (UN)- Convention Against Transnational Organized Crime (“Palermo Convention”) • International Association of Insurance Supervisor (IAIS)- Insurance Core Principles and Methodology • Wolfsburg Group- Private Banking Principles (Original Release- “Wolfsburg Principles”)

49. 2001 • United Nations (UN)- Security Council Resolution 1373 (2001) [S/RES/1373 (2001)] • Basel Committee on Banking Supervision- Customer Due Diligence for Banks • International Monetary Fund (IMF)- Public Information Notice (PIN) 01/41- money laundering poses an threat to financial system integrity, and may undermine the sound functioning of financial systems, good governance, and the fight against corruption. • Financial Action Task Force (FATF)- Special Recommendations on Terrorist Financing • Financial Action Task Force (FATF)- Behind the Corporate Veil, November 2001 • US Government- Guidance on the Proceeds of Foreign Corruption • Uniting and Strengthening America by providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) – Enacted • European Union (EU)- Directive (2001/97/EC) of the European Parliament and of the Council of 4 December 2001 amending Council Directive (91/308/EEC) on the prevention of the financial system for the money laundering Global institutions and laws for combating the money laundering (5)

50. 2002 • Basel Committee on Banking Supervision- Sharing of Financial Records Between Jurisdictions in Connection with the Fight Against Terrorist Financing • Council of Europe (COE)- Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures- Changes name to (MONEYVAL) (formerly PC-R-EV) • European Union (EU)- Final Declaration Against Money Laundering (“Paris Convention”) • Financial Action Task Force (FATF)- Guidance on Terrorist Financing • Financial Action Task Force (FATF)- Guidance on Terrorist Financing, SR VIII: Combating the Abuse of Non-Profit Organization- International Best Practices • International Association of Insurance Supervisors (IAIS)- Anti-Money Laundering Guidance Notes for Insurance Supervisors and Insurance Entities • International Organization of Securities Commissions (IOSCO)- Objectives and Principles of Securities Regulation (Second Revision) • International Monetary Fund (IMF)- Report on the Outcome of the FATF Plenary Meeting and Proposal for the Endorsement of the Methodology for Assessing Compliance with Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) Standard Global institutions and laws for combating the money laundering (6)