Management of Financial Institutions

Financial Crimes:Process of Money Laundering, Terrorist Financing

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Management of Financial Institutions - MGT 604
Lecture # 40
Financial Crimes
What is Money Laundering?
Defined in non-technical terms, money laundering is the conversion of 'dirty' money into -
seemingly - 'clean' money. Dirty money is money that meets the following conditions: (1) it
has been derived by illegal means and (2) for an outside observer it is possible to identify
that condition (1) applies. Money laundering is the practice of engaging in financial
transactions in order to conceal the identity, source, and/or destination of money, and is a
main operation of the underground economy. In the past, the term "money laundering" was
applied only to financial transactions related to organized crime. Today its definition is
often expanded by government regulators to encompass any financial transaction which
generates an asset or a value as the result of an illegal act, which may involve actions such
as tax evasion or false accounting. As a result, the illegal activity of money laundering is
now recognized as potentially practiced by individuals, small and large businesses, corrupt
officials, members of organized crime (such as drug dealers or the Mafia) or of cults, and
even corrupt states, through a complex network of shell companies and trusts based in
offshore tax havens. The increasing complexity of financial crime, the increasing
recognized value of so-called "financial intelligence" in combating transnational crime and
terrorism, and the speculated impact of capital extracted from the legitimate economy has
led to an increased prominence of money laundering in political, economic, and legal
Process of Money Laundering
Money laundering is often described as occurring in three stages: placement, layering, and
Placement: refers to the initial point of entry for funds derived from criminal
Layering: refers to the creation of complex networks of transactions which attempt
to obscure the link between the initial entry point, and the end of the laundering
Integration: refers to the return of funds to the legitimate economy for later
The Anti Money Laundering Network Recommends the Terms
1. Hide: to reflect the fact that cash is often introduced to the economy via commercial
concerns which may knowingly or not knowingly be part of the laundering scheme,
and it is these which ultimately prove to be the interface between the criminal and
the financial sector.
2. Move: clearly explains that the money launderer uses transfers, sales and purchase
of assets, and changes the shape and size of the lump of money so as to obfuscate
the trail between money and crime or money and criminal.
3. Invest: the criminal spends the money: he/she may invest it in assets, or in his/her
Management of Financial Institutions - MGT 604
Can Legal Considerations Stop Money Laundering?
Many jurisdictions adopt a list of specific predicate crimes for money laundering
prosecutions as a "self launderer". In addition, laws typically have other offences such as
"tipping off," "willful blindness," not reporting suspicious activity, and conscious
facilitation of a money launderer/terrorist financier to move his/her monies.
Financial Institutions & Fight Against Money Laundering
The prime method of anti-money laundering is the requirement on financial intermediaries
to know their customers - usually termed KYC (know your customer) requirements. With
good knowledge of their customers, financial intermediaries will often be able to identify
unusual or suspicious behavior, including false identities, unusual transactions, changing
behavior, or other indicators that laundering may be occurring. But for institutions with
millions of customers and thousands of customer-contact employees, traditional ways of
knowing their customers must be supplemented by technology.
Why Launder Dirty Money at All?
Basically there are two motives for laundering money: avoiding suspicion and avoiding
detection. Avoiding suspicion refers to the need to remove all traces that may indicate a
crime has been committed - such as dirty money. Avoiding detection refers to the need to
shield the money from attempts to confiscate it. If you are not entitled to own or dispose of
money or assets someone may take it away!
What do to against money laundering?
Usually one distinguishes between preventive and repressive measures which are
complementary rather than mutually exclusive. Preventive measures aim at denying
criminals the access to the financial system and tend to rely heavily on the private sector's
cooperation. The international standard model envisages that financial institutions identify
their customers and keep records, maintain internal compliance programmes and actively
cooperate with the designated authorities by reporting suspicions of money laundering. The
idea of course is that vital information is thereby transmitted from the private sector players
that are being 'misused' for money-laundering purposes to the law enforcement agencies.
Repressive measures on the other hand are instituted to facilitate prosecution or to have
more effective sanctions at hand. Thus, among the repressive measures we find attempts to
facilitate international legal cooperation and asset forfeiture or money laundering provisions
in the penal code.
Terrorist Financing
Terrorist financing is a topic that shot into the limelight after the events of September 11,
2001. The US passed the USA PATRIOT Act, among other reasons, to ensure that both
combating the financing of terrorism and anti-money laundering was given adequate focus
by US financial institutions.
The act also had extra-territorial impact and non-US banks having correspondent banking
accounts or doing business with US banks had to upgrade their Anti-Money Laundering
processes. Although efforts have brought about a huge change to global regulations and
have ushered in a new era of information sharing. According to US Government, Islamic
charities, which were prime sponsors of terrorist groups around the world, are now under
much tighter controls albeit there is still a lot to do in the Middle East and specially
Pakistan. Terrorist groups are on the run albeit they are also innovating ­ in making/moving
Management of Financial Institutions - MGT 604
monies and in hiring of their key operatives - the new terrorist is a western educated middle
class technology savvy person and the source for getting information on a do-it-yourself
bomb is the internet.
The future of terrorist financing in Pakistan
Looking into the near future, if terrorist groups are replaced by smaller, decentralized
groups, the premise that terrorists need a financial support network may become outdated.
Moreover, some terrorist operations do not rely on outside sources of money and may now
be self-funding, either through legitimate employment or low-level criminal activity, for
example, the 7/7 London 9/11 US terrorists .
How we can trapped Terrorist Finances
Bilateral and multilateral diplomacy;
Law enforcement and intelligence cooperation;
Public designations of terrorists and their supporters for asset-freeze actions;
Technical assistance; and
Concerted international action through multilateral organizations and groups,
notably the anti-money Laundering departments and the United Nations.
US assistance to control Money Laundering in Pakistan
South Asia, and especially Pakistan, is a priority region for counterterrorist financing, due to
the presence of terrorist groups, porous borders, and cash-based economies that often
operate through informal mechanisms. All countries in the region need to improve their
terrorist financing regimes to meet international standards, including the establishment of
functioning Financial Intelligence Units. And Both political will and technical assistance are
needed to make this region a more effective partner of established countries. Pakistan,
specifically, US welcome the concrete actions it has taken to implement its obligations
under UN Security Council Resolutions, including the freezing of over $10 assets. Pakistan
has also apprehended terrorists, including big names of operational leaders. US, European
Union are encouraged by Pakistan's concern about the money laundering & infiltration of
terrorist groups into charitable organizations, and would welcome the opportunity to
provide technical assistance to help Pakistan meet international standards on preventing
abuse of its non-profit sector. US has provided Pakistan assistance on drafting an anti-
money laundering/ counterterrorist financing (AML) law that meets international standards,
but this legislation is still awaiting parliamentary consideration. In the absence of an anti-
money laundering and counterterrorism financing law, the State Bank of Pakistan has
introduced FATF-compliant regulations in know-your- customer policy, record retention,
due diligence of correspondent banks, and reporting suspicious transactions. Also in
compliance with FATF recommendations, the Securities and Exchange Commission of
Pakistan has applied know-your-customer regulations to stock exchanges, trusts, and other
non-bank financial institutions. All settlements exceeding Rs 50,000 ($840) must be
performed by check or bank draft, as opposed to cash. Speaking generally, South Asian
countries lack sophisticated tools to combat the money laundering. Anti-money laundering
programs also tend to be absent or not up to international standards. Nonetheless, there is a
degree of interest in all countries of the region, and we have seen some progress.
Management of Financial Institutions - MGT 604
Know Your Customer (KYC) Guidelines ­ Anti Money Laundering Standards
The objective of KYC guidelines is to prevent banks from being used, intentionally or
unintentionally, by criminal elements for money laundering activities. KYC procedures also
enable banks to know/understand their customers and their financial dealings better which
in turn help them manage their risks prudently.
Table of Contents:
  1. Financial Environment & Role of Financial Institutions:FINANCIAL MARKETS &INSTITUTIONS
  2. FINANCIAL INSTITUTIONS:Non Banking Financial Companies
  3. CENTRAL BANK:Activities and responsibilities, Interest Rate Interventions
  4. POLICY INSTRUMENTS:Open Market Operations, Capital Requirements
  5. BALANCE OF TRADE:Balance of Payments Equilibrium, Public Policy and Financial Stability
  6. STATE BANK OF PAKISTAN:History, Regulation of Liquidity, Departments
  10. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS (Contd.):Human Resources Department
  13. PAKISTAN ECONOMIC AID & DEBT:Macroeconomic Stability, Strengthening Institutions
  14. INCREASING FOREIGN DIRECT INVESTMENT:Industrial Sector, Managing the Debt
  15. ROLE OF COMMERCIAL BANKS:Services Typically Offered by Banks, Types of banks
  16. ROLE OF COMMERCIAL BANKS:Types of investment banks, The Management of the Banks
  17. ROLE OF COMMERCIAL BANKS:Public perceptions of banks, Capital adequacy, Liquidity
  19. ROLE OF COMMERCIAL BANKING:Private Deposit Insurance,
  20. BRANCH BANKING IN PAKISTAN:Remittances, Online Fund Transfer
  22. Mutual funds:Types of international mutual funds, Mutual funds vs. other investments
  23. Mutual Funds:Criticism of managed mutual funds, Money Market Fund
  24. Mutual Funds:Balanced Funds, Growth Funds, Specialized Funds, Measuring Risks
  25. Mutual Funds:Cost of Ownership, Redemption Fee, Reports to Shareholders
  26. Mutual Funds:Internet Fraud, The Pyramid Scheme, How to Avoid Investment Fraud
  27. Mutual Funds:Investing In International Mutual Funds, How to Pre-Select a Mutual Fund
  28. Role of Investment Banks:Recent evolution of the business, Possible conflicts of interest
  29. Letter of Credit:Elements of a Letter of Credit, Commercial Invoice, Tips for Exporters
  30. Letter of Credit and International Trade:Terminology, Risks in International Trade
  31. Foreign Exchange & Financial Institutions:Investment management firms, Exchange Traded Fund
  32. Foreign Exchange:Factors affecting currency trading, Economic conditions include
  33. Leasing Companies:Basic Purpose of Leasing, Technological Benefits
  34. The Leasing Sector in Pakistan and its Role in Capital Investment
  35. Role of Insurance Companies:Indemnification, Insurer’s business model
  36. Role of Insurance Companies:Life insurance and saving
  37. Role of financial Institutions in Agriculture Sector:What is “Revolving Credit Scheme”?
  38. Agriculture Sector and Financial Institutions of Pakistan:What is SMEs
  39. Can Government of Pakistan Lay a Pivotal Role in this Sector?:Business Environment
  40. Financial Crimes:Process of Money Laundering, Terrorist Financing
  41. DFIs & Risk Management:Managing Credit Risk, Managing Operational Risk
  42. Banking Fraud & Misleading Activities:Rogue Traders, Uninsured Deposits
  43. The Collapse of ENRON:Auditing Issues, Corporate Governance Issues, Corrective Actions
  44. Classic Financial Scandals:Corruption, Discovery, Black Wednesday