Anti-Money Laundering & Terrorist Financing Training Enhancement Seminar GFX PARTNERS INC. April 27, 2010
Every year, significant amounts of funds are generated from illegal activities such as drug trafficking, tax evasion, people smuggling, theft, arms trafficking and corrupt practices. These funds are mostly in the form of cash. 3
Money Laundering: What Is It? Definition: Money laundering (proceeds of crime) is the method by which “dirty money” received from criminal activities is processed through legitimate businesses and converted into “clean money”. Once cleaned, the money cannot be easily traced to the person originating the transaction or to the criminal origin of the funds. Hence, the criminal can now do what they like with their money! • In addition to cleaning dirty money, there are five other key reasons why criminals launder money: • Avoid seizure of wealth • Avoid prosecution • Tax evasion that would be imposed on earnings - to enjoy the ill-gotten gains • Increasing profits by reinvesting in criminal activities • Appear legitimate 4
Three Stages of Money Laundering: In general, themoney laundering cycle takes place in three stages: 1 Placement • Entry of illegal funds into the financial system 2 3 Layering Integration • Exit of clean funds from the financial system without attracting suspicion • Hiding the origin of the funds through multiple and/or complicated transactions 5
Money Laundering Cycle: It should be noted that not all money laundering transactions go through this three-stage process. Transactions designed to launder funds can also be effected in one or two stages, depending on the money laundering technique being used. 6
1 Placement: What Is It? Purpose of the stage: • Placement is the initial entry of the proceeds of crime into the financial system. This stage serves two purposes: • Relieves the criminal of holding and guarding their dirty money; • AND • 2. Places the money in the legal financial system The initial deposit of cash into the banking system (placement) is the riskiest part of the process because the money is in cash form and still close to its illegal origins. 7
1 Placement: Some Common Methods 8
2 Layering: What Is It? Purpose of the stage: The purpose of the layering stage is to further separate the dirty money from its source by structuring different types of financial transactions to hide the money trail and disguise any link with the original crime that generated the dirty money; and if necessary the owner of the illegal funds. For example: 9
2 Layering:Wire Transfers Typically, layers are created by moving money through electronic funds transfers into and out of domestic and offshore bank accounts of fictitious individuals and shell companies. Given the large number of electronic funds transfers daily and the sometimes limited information disclosed about each transfer, it is often difficult for authorities to distinguish between clean and dirty money. 10
2 Layering: Some Common Methods 11
3 Integration: What Is It? Purpose of the stage: The purpose of the integration stage is to return the illegal funds to the criminal in what appears to be a legitimate format. For example: Money that is remitted or wired from Canada to Country X where it is delivered to a criminal. Now it can be used for any purpose (e.g., build a house, buy land, pay for illegal drugs, etc.). 12
3 Integration: Some Common Methods 13
Terrorist Financing: What Is It? • Definition: • Terrorist financing (proceeds for crime) is the process by which funds are provided for terrorist activity. A terrorist, or terrorist group, is one that has a purpose or activity to facilitate or carry out any terrorist action, and can involve: • Individuals; • Groups; • Trusts; • Partnerships; • Organizations. Suspected or known terrorists, terrorist groups or listed persons: In Canada, these groups are monitored by the Office of the Superintendent of Financial Institutions (OSFI). Lists of these offenders or groups are posted on both the OSFI and the United Nations web sites and should be consulted regularly. 15
Terrorist Financing: The Need for Money • Terrorist organizations need money to: • recruit and sustain: money is needed to recruit, support, train, transport, house, compensate and equip terrorist agents • acquire influence: money is needed to sustain media campaigns and win political support • build the support base: money is needed for educational and social programs to win members and create a support base • carry out terrorist activity. 16
Terrorist Financing: Methods To Move Funds • Terrorists use a wide variety of methods to move money within and between organizations, including: • the financial sector, • the physical movement of cash by couriers, and • the movement of goods through the trade system. • Charities and alternative remittance systems have also been used to disguise terrorist movement of funds. • The adaptability and opportunism shown by terrorist organizations suggests that all the methods that exist to move money around the globe are to some extent at risk. 17
Terrorist Financing: Sources There are three common sources of terrorist financing: I.State Sponsored Terrorism II.Criminal Revenue Generated Support III. Legal Sources 18
Methods Used by Terrorists to Move Money: • The methods used by terrorists to move money are substantially the same as those used by other criminals, such as: • Traditional financial institutions: Often, individual accounts are opened and small withdrawals and deposits of less than $10,000 are made in order to avoid the reporting requirements of Canadian anti-money laundering and counter-terrorism financing legislation. • Alternative remittance systems: Unregulated remittance systems such as 'Hawala' and 'Hundi' are extensively used to transfer funds without any documentation. • Currency transfers: Cash is smuggled across borders, particularly through land crossings and sea shipments. • Trade financing: With the growth of terrorist-owned commercial firms, trade finance is increasingly being used. 19
The Proceeds of Crime (Money Laundering) and Terrorist Financing Act(PC(ML)TFA) 1
The Legislation The Act is comprised of 6 separate Parts
Suspicious Transaction Reporting Regulations Cross-Border Currency and Monetary Instruments Reporting Regulations Proceeds of Crime (Money Laundering) & Terrorist Financing Regulations Proceeds of Crime (Money Laundering) & Terrorist Financing Registration Regulations Proceeds of Crime (Money Laundering) & Terrorist Financing Administrative Monetary Penalty Regulations The Legislation The Act is supported by 5 sets of Regulations:
Financial Entities Life Insurance Securities Dealers Real Estate Brokers and Agents Money Service Businesses Accountants and Accounting Firms Agents of the Crown for Money Orders Casinos Dealers in Precious Metals and Stones Real Estate Developers BC Notaries Sectors Impacted By The Legislation A total of 11 Business Sectors are impacted:
In Excess of 500,000 Reporting Entities! How Big Is The Compliance Net?
To facilitate the detection, prevention and deterrence of money laundering, terrorist activity financing and other threats to the security of Canada. FINTRAC’s Mandate
Gather and analyze information on suspect financial activities. Ensure those subject to the PCMLTFA comply with reporting, record keeping and other obligations. Make case disclosures of financial intelligence to the appropriate law enforcement agency, CSIS, or other agencies designated by legislation in support of investigations and prosecutions. Enhance public awareness and understanding of matters related to money laundering. FINTRAC’s Primary Activities
Day One – Module Five The Compliance Regime 1
Compliance Regime The organizations and professionals (reporting entities) set out to comply with the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PC(ML)TFA) and its supporting Regulations must ensure that an internal Compliance Regime is in place. The Compliance Regime, requires and provides reporting entities with implementation requirements comprising fivemain components:
Compliance Regime FINTRAC. Guideline 4: Implementation of a Compliance Regime, December 2008
86% of deficiencies fell under one of four categories: Compliance Regime 47% Client Identification 19% Record Keeping 23% Reporting 11% Common Obligation Deficiencies: 2009-2010 1
FINTRAC may disclose cases of non-compliance to law enforcement when there is extensive non-compliance or little expectation of immediate or future compliance. Criminal Penalties
Failure to report suspicious transactions: up to $2 million and/or 5 years imprisonment. Failure to report a large cash transaction or an electronic funds transfer: up to $500,000 for the first offence, $1 million for subsequent offences. Failure to meet record keeping requirements: up to $500,000 and/or 5 years imprisonment. Criminal Penalties
Failure to provide assistance or provide information during compliance examination: up to $500,000 and/or 5 years imprisonment. Disclosing the fact that a suspicious transaction report was made, or disclosing the contents of such a report, with the intent to prejudice a criminal investigation: up to 2 years imprisonment. --- “Tipping Off” Criminal Penalties
Administrative monetary penalties (AMPs) are an additional tool to criminal sanctions with the objective of supporting and enhancing efforts to ensure compliance on the part of reporting entities. AMPs allow for a measured and proportionate response to particular instances of non-compliance. Administrative Monetary Penalties
Violations are classified by the PCMLTF Regulations as “Minor”, “Serious” or “Very Serious”, and carry maximum penalties of $1,000, $100,000 and $500,000 respectively. The AMPs program also has maximum penalties for individuals and entities (e.g. corporations), as reflected in the list below: Minor (individual / entity):$1 to $1,000 Serious (individual / entity):$1 to $100,000 Very Serious (individual):$1 to $100,000 Very Serious (entity):$1 to $500,000 The limits above apply to each violation, and multiple violations can result in total fines that exceed these limits. Administrative Monetary Penalties
62(2) Failure to give reasonable assistance and information reasonably required to an authorized person. Serious 9(1)2 Failure to convert foreign currency transactions into Canadian dollars based on the prescribed rate. Minor 9(1) 5(2) Failure to report a transaction for which a large transaction record must be kept within 15 days after the disbursement or transaction. Minor 9.6(1) 71(1)(b) Failure of a person or entity to develop and apply written compliance policies and procedures that are kept up to date and, in the case of an entity, are approved by a senior officer. Serious 7 9(1) Failure of a person or entity to include prescribed information in a report. Very Serious Administrative Monetary Penalties
The Reports Electronic Funds Transfers (EFTs)
The Reports Terrorist Property
The Reports: Terrorist Property When to report: Immediately A Terrorist Property Report must be completed if you have property in your possession or control that you know is owned or controlled by or on behalf of a terrorist or terrorist group. This includes information about any transaction or proposed transaction relating to that property. Property meansany type of real or personal property in your possession or control. This includes any deed or instrument giving title or right to property, or giving right to money or goods.
The Reports: Terrorist Property • Property in these cases can include: • Cash • Casino accounts for clients • Insurance policies • Money orders • Real estate • Securities • Traveler’s cheques In cases where you only suspect that the designated property is owned or controlled by a terrorist or terrorist group, a Suspicious Transaction Report should be completed.
The Reports: Terrorist Property Who to report to and how: The report must be sent to FINTRAC in paper format (not electronically) either by registered mail or by fax. • Information in a Terrorist Property Report: • The Terrorist Property Report will require information regarding: • the property • the suspected terrorist or terrorist group • anyone who owns or controls the property on their behalf • any transactions or proposed transactions related to the property • Penalty for not reporting: • Up to five years imprisonment, and/or a • Fine of up to $2,000,000.
The Reports: Terrorist Property • Who else to report to and how: • In addition to making a terrorist property report to FINTRAC, there is also a requirement under the Criminal Code to report. It is an offence under the Criminal Code to deal with any property if you know that it is owned or controlled by or on behalf of a terrorist or a terrorist group. It is also an offence to be involved in any transactions in respect of such property. • You must disclose to the RCMP and CSIS, the existence of property in your possession or control that you know is owned or controlled by or on behalf of a terrorist or a terrorist group. This includes information about any transaction or proposed transaction relating to that property. Information is to be provided to them, without delay, as follows: • RCMP, Anti-Terrorist Financing Team, unclassified fax: (613) 949-3113 • CSIS Financing Unit, unclassified fax: (613) 231-0266
The Reports Suspicious Transactions (completed or attempted)
The Reports: Suspicious Transactions (Completed or Attempted) When to Report:Money Laundering You must complete aSuspicious Transaction (Completed or Attempted) Reportonce you have reasonable grounds to suspect a transaction or attempted transaction is related to a money laundering or a terrorist financing offence. A reasonable ground to suspect depends on the various suspicious transaction criteria identified for your industry.
The Reports: Suspicious Transactions (Completed or Attempted) When to Report:Terrorist Financing
The Reports: Suspicious Transactions (Completed or Attempted) Important Note: Remember that when reporting a suspicious transaction or considering to report: • the better you know your client, the better position you’ll be in to decide whether the transaction is suspicious. • transactions (completed or attempted) are suspicious, not people. • rarely will one factor alone make a transaction suspicious. Usually, it’s a combination of two or more factors that will make a transaction suspicious.
The Reports: Suspicious Transactions (Completed or Attempted) Who to report to and how: A Suspicious Transaction Report has been developed by FINTRAC and are accessible through their web site. You must keep a copy of either report. Reporting timeframes: A Suspicious Transaction Report must be sent to FINTRAC within 30 calendar days ofwhen you first detected a fact that leads you to have reasonable grounds to suspect the transaction or attempted transaction is related to a money laundering or terrorist financing offence. In other words, if it was not until six months later that further client activity made you suspect that possible money laundering or a terrorist financing offence had taken place earlier --- it is from that point six months later that the 30 calendar day reporting time frame begins.