Annual AML & CFT

training Program for Messrs.

Al Ansari Sept-Oct 2019
Pijush Das

Developed & Copyrighted by

Emirates Institute for Banking & Financial Studies
 Todays Agenda

•Risk-Based approach to AML& CFT

•Anti-Corruption and Anti-Bribery
initiatives
•Fraud Control Techniques
•Professional Money laundering( PML)
•Money Laundering Risks in new
Payment methods and virtual
Currencies
 Agenda for next Saturday

•Sanctions Screening and Transactions

monitoring-Reduction in False positives
•Money Laundering and Financing of
terrorism Investigations
•Concealment of beneficial ownership
•Corporate Governance in exchange
Companies
•Credit Card Frauds and ML through
Credit Cards
 Risk-Based
approach to AML&
CFT
 Risk Based Approach-Introduction

•A risk assessment is the first step before

developing an anti-money laundering and
countering the financing of terrorism program
• Involves identifying and assessing the risks the
business reasonably expects to face from money
laundering and financing of terrorism.
•Once a risk assessment is completed, a business
can then put in place a AML program that
minimizes or mitigates these risks
 Background

•Organized crime and terrorism are

global problems, with serious social,
economic and political impacts for every
country
• Money laundering (ML) allows criminals
to disguise the origins of their illicit
funds and then use these funds without
raising suspicion.
 Background

•. Generally ML is a three step process involving:

•Placement-introducing illegally obtained money
into the financial system
•Layering-disguising the audit trail so it is
difficult to identify the original source of the
funds. This is often achieved by breaking funds
up and moving them around in a series of
complex transactions
•Integration-transferring the now apparently
legitimate funds into a form which they can be
used
 Background

•The financing of terrorism (FT) involves

similar techniques to ML, to avoid
detection by authorities and to protect
the identity of those providing and
receiving the funds.
• Measures that deter and/or detect
ML/FT are an effective way to mitigate
the harm to society from crime and
terrorism.
 Background

• AML/CFT law is meant

•a)detect and deter ML/FT; and
•b) maintain and enhance the country’
international reputation by adopting, where
appropriate, recommendations issued by the
Financial Action Task Force (FATF); and
•c) contribute to public confidence in the financial
system
 Summary of Minimum Statutory
Obligations of Supervised Institutions
• To identify, assess, understand ML/TF risks
• Money laundering and terrorist financing risks must
be assessed at a minimum by considering the
following factors
a) Customer Risk
b) Counterparty Risk (i.e. foreign correspondent
banks, financial institutions, agents, etc.);
c) Product Risk;
d) Jurisdictional Risk or Country Risk; and
e) Delivery Channel Risk or Interface Risk
 Summary of Minimum Statutory
Obligations of Supervised Institutions

•ML/FT risks based on additional parameters

that may be relevant to the nature, size and
complexity of its business before entering
into any business relationships;
• Must take into account National Risk
Assessment carried out by the competent
authority in UAE in conducting own risk
assessment
 Summary of Minimum Statutory
Obligations of Supervised Institutions
• Must have the following documentation in place
• a)Documented risk assessment methodology, process and
findings
• b) Determine the level of overall risk, acceptable level of
risk and mitigating measures to be applied to minimize
the impact of risks
• c) Keep risk assessments up-to-date through periodic
reviews; and
• d) Establish appropriate mechanisms to provide
information on risk assessments to the Central Bank and
to Examiners, whenever required.
 Summary of Minimum Statutory
Obligations of Supervised Institutions
• Must identify and assess the ML/FT risks that may arise in
relation to the development of new products and services
including new delivery mechanisms and the use of new or
developing technologies for both new and existing
products, as follows:
 a)Undertake the risk assessment prior to the launch or
use of such products, services and technologies;
b) Take appropriate measures to manage and mitigate
risks;
 c) Notify the Banking Supervision Department of the
product and its risks, risk mitigation measures; and
d) Obtain a Letter of No Objection from the Banking
Supervision Department prior to launching the product
 Summary of Minimum Statutory
Obligations of Supervised Institutions

•Must introduce a comprehensive and

documented AML/CFT Policy, based on its
ML/FT risk assessment
•The AML/CFT Policy and Procedures must be
based on the UAE’s existing AML/CFT Laws,
Regulations, Notices and the Standards as
well as international best practices and
guidance notes from the FATF, MENAFATF,
EGMONT Group and other similar bodies
 Summary of Minimum Statutory
Obligations of Supervised Institutions

• Put in place indicators to identify

suspicious transactions
•Report suspicious activity and
cooperate with Competent
Authorities
•Maintain adequate records
 Why do Risk Assessment?

• identify gaps or opportunities for improvement in AML

policies, procedures and processes
• make informed decisions about risk appetite and
implementation of control efforts, allocation of resources,
technology spend
• assist management in understanding how the structure of
a business unit or business line’s AML compliance
programme aligns with its risk profile
• develop risk mitigation strategies including applicable
internal controls and therefore lower a business unit or
business line’s residual risk exposure
 Why do Risk Assessment?

•ensure senior management are made aware of the

key risks, control gaps and remediation efforts
•assist senior management with strategic decisions
in relation to commercial exits and disposals
•ensure regulators are made aware of the key risks,
control gaps and remediation efforts across the FI
•assist management in ensuring that resources and
priorities are aligned with its risks
 How often should an enterprise-wide
risk assessment take place?

•FIs should decide on the appropriate

frequency of the risk assessment in order to
maintain the relevance of their findings and
risk mitigation program
•Some FIs do it annually or less frequently
than that if risks have not increased
• FIs are usually required to report annually
on the status of the money laundering risk
environment.
 How often should an enterprise-wide
risk assessment take place?

•In exceptional circumstances, such as regulatory

intervention for example, a risk assessment may
be conducted more frequently than annually.
•One approach could be a trigger-based risk-
assessment. If there has been any change to the
previously identified risk environment. These
changes could stem from internal (e.g.
significant increase in suspicious activity
reports) or external (e.g. significant
enforcement action against a peer institution)
drivers.
 ML risk Assessment methodology

• Determine the Inherent Risk; Phase

•Assess the Internal Control
Environment (both design and
operating effectiveness); and
•Derive the Residual Risk
 Inherent Risks

• In order to identify a FI’s inherent risks,

assessment across the following five risk
categories is commonly undertaken, although
other factors may also be considered:
•1. Clients
•2. Products and Services
•3. Channels
•4. Geographies
•5. Other Qualitative Risk Factors
 Client Risks

• The following categories can be used to stratify the client

base and to identify aspects of client risk:
• client type
• Ownership
• Industry
• Activity
• profession and/or
• Business.
• Some, or all, of these categories may be relevant
depending upon the particular division, unit or business
line under review.
 Client Risks

•Each Client type is assigned a risk score,

depending upon the expected amount
of ML risk each type carries.
•low risk versus moderate, versus high
versus higher risk
 Other factors to consider regarding
clients

Target markets.
Retail vs HNW Vs Corporate
Size, homogeneity and growth rates of customer base
Small homogeneous customer base vs larger, more
diverse customer bases
 less aggressive growth targets vs high levels of market
share growth
Business model and strength of relationship
transactional, occasional, or one-off interactions vs
relationship-driven models
 Other factors to consider regarding
clients
Customer- or Business Relationship-Specific Risk
Complexity and transparency. Business relationships with complex legal,
ownership, or direct or indirect group or network structures, or with less
transparency with regard to Beneficial Ownership, effective control, or tax
residency, may pose different ML/FT risks than those with simpler
legal/ownership structures or with greater transparency.
Regulation/supervision. Supervised institutions may face different risks from
customers involved in highly regulated and supervised activities than from
those involved in activities that are unregulated.
Associations or linkages. Customers associated with higher-risk persons or
professions
(for example, foreign PEPs and/or their companies), or those linked to
sectors associated with higher ML/FT risks, may expose FIs to different levels
of risk than customers associated with lower-risk persons and professions.
 Example
Client
Inherent
Risk Ratings
 Inherent Risks Products and Services

•One of the other major risk components

can be found when considering Products
and Services Risks
• Identify its portfolio of main
products/account types and assign an
inherent score (for example, low,
moderate, high or higher) to each
 Inherent Risks Products and Services

• Some of the risk factors that FIs should

consider, among others, are:
•Typology-whether any association with any
established ML/FT typologies
•Product complexity
•Transparency and transferability
•Size/value. Products, services, or
transaction types with different size or
value parameters or limits may pose
different levels of ML/FT risk.
 Inherent Risks Products and Services

• Transparency and transferability

Situations that favour anonymity can often be exploited for the purpose
of ML/FT.
institutions should consider the level of transparency and transferability
of ownership or control of products, services, or transaction types,
particularly in respect of the ability to monitor the identities and the
roles/responsibilities of all parties involved at each stage.
Special attention should be given to products, services, or transaction
types in which funds can be pooled or co-mingled, or in which multiple or
anonymous parties can have authority over the disposition of funds, or for
which the transferability of Beneficial Ownership or control can be
accomplished with relative ease and/or with limited disclosure of
information.
Some of the factors which FIs should consider in this regard are market
size, registration or documentation requirements, operational controls,
and accessibility
 ML/FT Typologies

• Transfers through traditional payment/remittance systems;

• Transfers through alternative or non-traditional
payment/remittance systems;
• Physical transport, or “muling”, of cash and other stored-value
systems (e.g. prepaid cards, traveller’s cheques, bank drafts, bills of
exchange, or other negotiable bearer instruments);
• Purchase/sale of precious goods (for example, metals, stones,
antiques, artwork, vehicles, race horses);
• Real-estate-based ML;
• Trade-based ML;
• Use of business structures (for example, nominees, Legal
Arrangements, shell companies, third-party intermediaries, non-
profitable organisations)
Inherent risks in Products and Services
Inherent Risks Products and Services
 Inherent risks in Channels

•Some delivery channels/servicing methods can

increase money laundering risk because they
increase the risk that the division, unit or business
line does not truly know or understand the
identity and activities of the Client.
•Consequently it should be assessed whether, and
to what extent, the method of account origination
or account servicing, such as non face-to-face
account opening or the involvement of third
parties, including intermediaries, could increase
the inherent money laundering risk.
 Inherent risks in Channels

•Channels that favor anonymity should be given

higher risk scores
non-face-to-face channels, such as internet-,
phone-, or other remote-access services or
technologies;
the use of third-party business introducers,
intermediaries, agents or distributors; and
the use of third-party payment, money/value
transfer, or other transaction intermediaries
 Inherent Risks of Agents

• Agents representing more than one MVTS provider.

• Agents located in a higher-risk jurisdiction/country or serving high-risk
customers or transactions.
• Agents determined to have “politically exposed person” status.
• Agents conducting an unusually high number of transactions with another
agent location, particularly with an agent in a high risk geographic area or
corridor.
• The transaction volume of the agent is inconsistent with either overall or
relative to typical past transaction volume.
• Agents that have been the subject of negative attention from credible media
or law enforcement sanctions
• Agents that have failed to attend or complete the training programs.
Inherent risks in Channels
 Inherent risk in geographies

•Components of Geographic Risk

•Regulatory/supervisory framework. Countries
with stronger AML/CFT controls present a different
level of risk than countries with weaker regulatory
and supervisory frameworks.
• International Sanctions
•Reputation
FATF vs non-FATF country
corruption, and transparency ranking
Inherent risks in geographies
 Other Qualitative Risk Factors

• Client base stability

• Integration of IT systems
• Expected account/client growth
• Expected revenue growth
• Recent AML Compliance employee turnover
• Reliance on third party providers
• Recent/planned introductions of new products and/or services
• Recent/planned acquisitions
• Recent projects and initiatives related to AML Compliance matters (e.g.
remediation, elimination of backlogs, off-shoring)
• Recent relevant enforcement actions
• National Risk Assessments
Other Qualitative Risk Factors
Example Factor Weightings
Example Standard Inherent Risk Ratings (Major Bank/FI
Businesses)
 Assessment of Internal Controls

•Phase 1: Determine the Inherent Risk;

•Phase 2: Assess the Internal Control
Environment (both design and operating
•effectiveness); and
•Phase 3 Derive the Residual Risk
 Assessment of Internal Controls

•Once the inherent risks have been identified

and assessed, internal controls must be
evaluated to determine how effectively they
offset the overall risks.
•Controls are programs, policies or activities put
in place by the FI to protect against the
materialization of a ML risk, or to ensure that
potential risks are promptly identified. Controls
are also used to maintain compliance with
regulations governing an organization's
activities.
 Assessment of Internal Controls

• Controls will be executed by both the

Front Office (1st line) and Compliance
(2nd line).
•The controls in place are evaluated for
their effectiveness in mitigating the
inherent money laundering risk and to
determine the residual risk rating.
 Assessment of Internal Controls

• AML controls are usually assessed across the following control categories:
• AML Corporate Governance; Management Oversight and Accountability
• Policies and Procedures
• Know Your Client (“KYC”); Client Due Diligence (“CDD”); Enhanced Due Diligence
(“EDD”)
• Previous Other Risk Assessments (local and enterprise-wide)
• Management Information/Reporting
• Record Keeping and Retention
• Designated AML Compliance Officer/Unit
• Detection and SAR filing
• Monitoring and Controls
• Training
• Independent Testing and Oversight (including recent Internal Audit or Other
Material Findings)
• Other Controls/Others
 Assessment of Internal Controls

•Each area is assessed for overall design and

operating effectiveness.
• One way in which control effectiveness
may be assessed is by undertaking a
focused self-assessment by business
unit/business line.
•A self-assessment of this kind can be
challenged independently using subject
matter expertise
 Assessment of Internal Controls

•A specific control may be rated

according to a pre-defined rating scale
or based on qualitative factors, e.g.
‘satisfactory’, ‘needs improvement’ or
‘deficient’ for each of the above control
factors.
Control Factor Weighting Examples
 Phase 3 – Arriving at the Residual Risk

• Once both the inherent risk and the effectiveness of

the internal control environment have been
considered, the residual risk can be determined.
• Residual risk is the risk that remains after controls are
applied to the inherent risk.
• It is determined by balancing the level of inherent risk
with the overall strength of the risk management
activities/controls.
• The residual risk rating is used to indicate whether the
ML risks within the FI are being adequately managed.
 Phase 3 – Arriving at the Residual Risk

• A three-tier rating scale can be applied

• i) Low Residual Risk: The overall inherent risk of the FI/business
unit/business Line, based on the clients, products/services, channels,
geographies and other qualitative factors, is low-to moderate and the
mitigating controls are sufficient to manage this inherent risk;
• ii) Moderate Residual Risk: The overall inherent risk of the FI/business
unit/business line, based on the clients, products/services, channels,
geographies and other qualitative factors, is low-to moderate and the
mitigating controls are not adequate to manage this level of risk, OR the
overall inherent risk of the FI, based on the clients, products/services,
channels, geographies and other qualitative factors, is high and the mitigating
controls are adequate to manage this inherent risk
• iii) High Residual Risk: The overall inherent risk of the FI/business
unit/business line, based on the clients, products/services, channels,
geographies and other qualitative factors, is moderate to-high and the
mitigating controls are not sufficient to manage this inherent risk.
 Phase 3 – Arriving at the Residual Risk

• Certain rules can be adopted within a ML risk

assessment when finalizing risk ratings:
•i) A Strong control environment can lower the
residual ML risk in comparison to the inherent
risk;
•ii) If the FI/business unit/business line receives
a High rating of inherent ML risk, it can never
achieve a residual ML risk rating of Low; and
•iii) In order to improve its residual ML risk,
either the inherent ML risk can be reduced or
the AML controls can be strengthened.
 Reporting & Communication of Results

•The results of the ML risk Assessment should be

communicated by the AML Unit to relevant
stakeholders and business divisions, including but
not limited to the Group’s senior management and
Group Internal Audit.
• Regulatory and supervisory authorities should be
advised as appropriate.
 Impact of risk assessment on Risk
appetite

• It is necessary to determine whether the residual risk is

equal to the FI's risk appetite for ML risk or whether the
residual risk exceeds the FI’s risk appetite.
• In the latter case, measures will need to be agreed in
order either to reduce the inherent risk or strengthen the
control environment to ensure the residual risk comes
back into line with the FI's risk appetite.
• Alternatively, it may lead to discussion as to whether the
FI's risk appetite is correctly positioned.
• The importance of senior management’s involvement is
especially critical here, as a FI's risk appetite is a key
influence upon its strategic goals and drivers
 Risk appetite Evaluation

•Scenarios to be considered
Reputation Risk Damage:
Regulatory Risk Damage:
Civil Liability Risk Damage:
Criminal Liability Risk Damage:
Identify and
Evaluate Risk Develop :
Policies
Customers
Procedures
Products
Systems
Channels
Controls
Geographies
Other factors

AML Compliance
Program
Internal Controls
Compliance officer
Training
Independent Review
Anti-Bribery and
Corruption
Measures
 Corruption and Bribery

•What is corruption?
“The abuse of entrusted power for private
gain”
•What is bribery?
“The offering, promising, giving, accepting
or soliciting of an advantage as an
inducement for an action which is illegal,
unethical or a breach of trust.”
 Bribery and its consequences,

•For organizations and individuals

• Fines for organization
• Fines and prison for employees and
officers
• Incurring substantial legal and
professional fees
• Reputational damage
 Bribery and its consequences

•For countries and communities

Lack of money for communities and on-
going poverty
Destruction of industry
 Reduced Foreign Direct Investment
Loss of faith in public officials and
institutions
Civil unrest and political instability
 AB& C Framework

•The Wolfsburg Group provides an

overview of the key areas of an AB&C
program that must be in place (and
working effectively) to mitigate the risks:
Risk-Based approach
THE KEY ELEMENTS OF AN AB&C
PROGRAMME
 Risk-Based Approach

•Financial institutions should periodically

assess their products and services to identify
bribery and corruption risks.
• A risk-based approach will involve a
proportionate response to the risks a firm is
exposed to, and a focus on mitigating, in
priority order, those risks which will have the
greatest material impact to the firm and its
customers if left unmitigated.
 Risk-Based Approach

•Bribery risks generally are greater for FIs

when pursuing business opportunities from,
or providing benefits to, a government or
wholesale customer entity (wholesale
customer) rather than a customer in his/her
individual capacity (e.g. a private wealth
customer).
 Elements of an ABC Program

•Governance
•Firm-Wide Policy:
•Establishment of a Control Environment
•Risk Assessment
•Training and Awareness:
•Monitoring for Compliance with Controls:
•Customer-Related Corruption Risks:
 Governance

•Roles and responsibilities – central roles should be

allocated with AB&C responsibilities to tackle the
issue.
• Senior management should have overall
responsibility,
•A program lead should be assigned who is
independent from the business and has the
expertise and authority to oversee bribery and
corruption risk,
•All corporate functions should have primary
responsibility for compliance.
 Governance

• Internal reports
• Relevant data should be collected to assist Senior
Management in assessing the effectiveness of the
• Program Reporting should address the following:
Status updates on Program implementation and operation
including key performance indicators/metrics
Significant deviations from internal policies and procedures by
employees (e.g. on gifts and business hospitality)
Engagements of Intermediaries identified as presenting
increased risks
 Relevant legal and regulatory developments
 Internal reports

• Updates on any internal reviews of the Program (e.g.

audits, compliance testing)
• Any other significant issues such as regulatory reporting
or filings in relation to bribery and corruption committed
by officers, employees or third-party providers
• The status of material internal investigations into alleged
corruption
• Board of Directors or a Board committee should receive
periodic updates as to the effectiveness of the Program
and any material matters requiring Board’s attention.
 Governance

•Independent Review
•Any one of the following should test the
Program’s effectiveness and whether
controls are working
Internal Audit
Internal Controls dept( Independent
from Program Lead)
External Organizations
 Firm-wide Policy

• : A written ABC Policy (“Policy”) should be applicable firm-wide and reflect zero
tolerance for bribery and similarly prohibit facilitation payments
• o Prohibits the promising, offering, giving, solicitation or receiving of anything of
value, directly or indirectly through third parties, if improperly intended to influence
action or obtain an advantage
• o Prohibits falsifying or concealing any books, records or accounts that relate to the
business of the firm, its customers, suppliers or other business partners
• o Defines and identifies the heightened risk of interaction with Public Officials
• o Provides employees with the opportunity to report potential bribery in a
confidential manner and protects employees from retaliation for good faith reports
• o Notifies employees of potential consequences of non-compliance
• o Obtains strong and visible commitment from Senior Management and the Board of
Directors, including a public statement of such commitment by the firm( Tone at the
Top)
 Establishment of a Control
Environment:
• Risk-based controls should be designed to mitigate corruption risks
associated with:
• o Engagement of third-party providers, including Intermediaries
• o Principal investments and controlled fund acquisitions/joint ventures, i.e.
the FI or a controlled fund acting as a principal
• o Giving Anything of Value
Gifts and hospitality (e.g., meals, entertainment, transportation, lodging,
training and conferences)
Charitable giving and political contributions
 Marketing sponsorships, and
Employment and work experience (e.g., internships)
 RISK ASSESSMENT

• An effective AB&C program should be based on an ongoing (and periodically

updated) risk assessment.
• The assessment should be shared with senior management to address the
areas of risk the firm is exposed to, including exposure to bribery and
corruption.
• Some key factors to consider within the bribery and corruption area of the
risk assessment are
 intermediaries
country and industry risk
the setup of products and services
Subsidiaries & branches
political contributions and
 changes in business activities
 Training and Awareness

•Training should include definitions (e.g.

bribery and corruption, public officials
and intermediaries) and communicated
to the whole firm, including third
parties.
•Post-training assessments to determine
levels of understanding can be used to
help staff maintain a contemporary view
 MONITORING COMPLIANCE USING
CONTROLS

• FIs should review compliance with ABC controls through

ongoing monitoring and periodic testing.
• In order to do so effectively, firms should maintain and
comply with reasonable records retention policies.
• Risk-based monitoring or testing of employee activity to
detect instances of non-compliance with Policy and
procedural requirements should be part of the overall
control framework placed around bribery and corruption
(e.g. post-transaction monitoring of expense
reimbursement, business hospitality, sponsorships and
corporate events).
 Customer-Related Corruption Risks

• Facilitation and reputational risk-Where an FI raises

funds or makes funds available to a customer later
determined to be involved in bribery or corruption, it may
suffer reputational harm and, in some circumstances,
might incur liability for explicitly or implicitly facilitating or
aiding the customer’s illicit activity.
• Laundering the Proceeds of Bribery-FIs also face the risk
of being used by a customer to facilitate financial
transactions involving improper payments (e.g. by taking
deposits or transferring funds that are the proceeds of
bribes). These risks may be appropriately addressed
through the measures put in place to detect and prevent
money laundering.
 EXAMPLES OF CORRUPTION RED
FLAGS
• Little to no relevant experience regarding the services to be provided
• Flawed background or reputation (including, for example, prior corruption or a
negative reputation for integrity)
• Transaction or Intermediary suggested by a Public Official, particularly one connected
to the business or matter at issue
• Close business, personal or family relationship with a Public Official who has
discretionary authority over the business or transaction at issue
• Party to a transaction or contract makes unreasonable/unsupported objections to
ABC due diligence or representations or warranties being included in the agreement
• Party does not reside or have a significant business presence in the country where the
service is to be provided
• Use of a shell company or some other non-transparent corporate structure
• Requires payment of a commission, or a significant portion thereof, before or
immediately upon award of the contract
• Requests for unusual contract terms
 Remember

•Bribery is a crime. People go to jail,

and/or get fined, companies get fined.
•Document all understandings when
providing services.
•Ensure the client gets the disclaimer and
knows your position on reporting
bribery.
• Be alert for warning/danger signs.
Fraud Control
Techniques
 What is Fraud?

•A knowing misrepresentation of the

truth or concealment of a material
fact to induce another to act to his
or her detriment.
•A form of employee misconduct
where an employee uses deceit to
take (steal) or misuse an employer’s
resources.
 Fraud Triangle and Red Flags

Opportunity

Pressure Rationalization

14
 Fraud Diamond

Pressure

• Pressure
• Rationalization
• Opportunity
• Capability
Capability Opportunity

Rationalization
 Fraud Triangle and Red Flags

Pressure
Personal financial factors that may lead to fraud:
1. Financial difficulties (33%)
a. High personal debts or financial losses
b. Inadequate income
2. Living beyond one’s means (44%)
• Personal habits that may lead to fraud:
1. Extensive stock market or other types of speculation (starting a new
business)
2. Extensive gambling
3. Illicit affairs
4. Excessive use of alcohol or drugs (12%)

82
 Fraud Triangle and Red Flags
Opportunity:
1.Amount of fraud would decrease if the opportunity did not
exist
a.Reasons for increased fraud risk:
i. Crime requires a simple act
ii. Chances of being detected are very slim
iii. Punishment is very light
b.Mitigation factors:
i. What if security was tight?
ii. What if sound internal controls require an elaborate scheme?
iii. What if the likelihood of detection is high?
iv. What if punishment is severe?

83
 Fraud Triangle and Red Flags
Opportunity (Continued):
2. Personally Created Opportunities:
a.Familiarity with operations (including cover-up capabilities)
b.Close association with suppliers, vendors, and other key people
(22%)
c.Unwillingness to share duties (21%)
3. Organizational Characteristics:
a. Weak internal controls
b. Absence of periodic rotation in job duties
c. Constantly operating under a crisis environment
d. Little attention to details
e. Poor morale
4. Opportunity is the ONLY thing your organization can control!

84
 Fraud Triangle and Red Flags

Rationalization:
1. How can you be proactive and know who will rationalize fraudulent
behavior?
2. Embezzlers don’t fit the criminal stereotypes; they appear to be
trustworthy, sincere, likeable, sociable, etc.
3. Personal Emotions that may lead to fraud:
a. Strong community or social expectations to succeed (6%)
b. Perception of being treated unfairly by the organization (9%)
c. Resentment towards superiors
d. Frustration with job
e. Insatiable desire for self-enrichment or personal gain
f. Wheeler – dealer attitude (18%)

85
Red Flags
BEHAVIORAL RED FLAGS
Red Flag
REFUSAL TO TAKE PAID TIME OFF 7.8%
8.8%
COMPLAINED ABOUT INADEQUATE PAY 9.0%
10.0%
IRRITABILITY, SUSPICIOUSNESS, OR DEFENSIVNESS 12.3%
13.4%
CONTROL ISSUES 15.3%
15.3%
UNUSUALLY CLOSE VENDOR ASSOCIATION 20.1%
30.0%
LIVING BEYOND MEANS 45.8%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
Red Flag
Red Flags (continued)
LIFESTYLE CHANGES

Living
• Expensive/multiple vacations
Beyond • Upgraded/expensive vehicles
• Upgraded clothing or style
Means • New level of donations or
gifts
Red Flags (continued)
LIFESTYLE CHANGES

Living
• Multiple homes or
renovations
Beyond • Upgraded personal grooming
Means • New business/investment
• Recreational activities
Red Flags (continued)
COMMON PERSONALITY TRAITS

• Controlling/unwilling to share
duties
PERSONALITY
• Do not like their work being
TRAITS
reviewed
• Strong desire for personal gain
Red Flags (continued)
COMMON PERSONALITY TRAITS

•Unable to relax
PERSONALITY
TRAITS •"Beat the system"
attitude
Red Flags (continued)
COMMON BEHAVIOR CHANGES

•Brags about
purchases
BEHAVIOR •Unusual amounts of
CHANGES cash in possession
•Borrows money
from coworkers
Red Flags (continued)
COMMON BEHAVIOR CHANGES

• Collection calls at work

BEHAVIOR • Outside business calls at
CHANGES work
• Becomes irritable or moody
Red Flags (continued)
COMMON BEHAVIOR CHANGES

• Unreasonably upset when questioned

BEHAVIOR about work
• Starts coming in early or staying late
CHANGES • Discusses/mentions family or financial
problems
Red Flags (continued)
COMMON BEHAVIOR CHANGES

•Absenteeism
ADDICTION •Manipulative
FLAGS behavior
•Looks/acts ill
Red Flags (continued)
COMMON BEHAVIOR CHANGES

•Illogical/inconsistent
decisions and
ADDICTION actions
FLAGS
•Loss of sleep
•Loss of appetite
Red Flags (continued)
COMMON BEHAVIOR CHANGES

• Frequent work issue

complaints
DISSATISFACTION • Decreased productivity
• Change in attire/grooming
• Irregular schedules
Prevention
TONE AT THE TOP

Deeds
Transparency Openness Supportive Match
Words
 Prevention (continued)
SEPARATION OF DUTIES (Basic) – ROLES|1

Access/
Approval Recording Reconciliation
Custody
 Prevention (continued)
ACCOUNTABILITY

Enforces Structures, Establishes

Authorities, Performance Evaluates
Responsibilities Measures

Rewards or Evaluates Considers Excessive

Disciplines Performance Pressure
 SIGNIFICANT FRAUD RISK FACTORS

•Untimely preparation of financial statements

•Lack of employee vacations
• Lack of significant control over transaction
cycles
•Lack of management oversight
•Excessive employee addictions (gambling,
drugs)
•Incorrect, incomplete, or erroneous financial
reporting
 SIGNIFICANT FRAUD RISK FACTORS

•Lack of detailedformalwritten policies

and procedures
•Lack of segregation of duties
•Unreconciled accounts and review of
reconcilements
• Recurring audit findings
•Missing financial records
 SIGNIFICANT FRAUD RISK FACTORS

• Bonus or incentive plans

• Complex transactions
• Rapid growth
• Corporate credit cards
• Employee financial problems
• Inactive Supervisory Committee
• Lack of audit/verification
• High employee turnover
 Fraud Controls

• Management Review
• Employee support Programs
• Hotline
• Fraud Training for Managers and Executives
• Anti Fraud Policy
• Formal Fraud Risk Assessment
• Internal Audit/FE Department
• Job Rotation/Mandatory Vacation
• Surprise Audits
• Whistleblower program
• Code of Conduct
• Independent Audit Committee
 FRAUD
PREVENTION TIPS

•Evaluate management’s assessment of fraud

and mitigating controls.
•Evaluate the internal auditor’s testing of the
effectiveness of each fraud control.
•Evaluate how managementhas “set thetone at
the top” to promote ethical behavior.
•Communicate zero tolerance.
•Ensure that annual fraud policy (or code of
conduct) is signed by all employees.
 BASIC INTERNAL CONTROL
SAFEGUARDS

•Tone at the top

•Segregation of duties
•Whistleblower policy and hotline
•Rotation of personnel
• Mandatory vacations
• Reconciliation and review process
• Setting of accounting system privileges
•Access levels – review and adjust
Professional
Money
Laundering
 What is Professional ML

•PMLs provide services to criminals and

organized crime groups by laundering the
proceeds of their illegal activities.
•As the main purpose of PMLs is to facilitate
money laundering, they are rarely involved in
the proceeds-generating illegal activities.
•Instead, they provide expertise to disguise
the nature, source, location, ownership,
control, origin and/or destination of funds to
avoid detection.
 What is Professional ML

•They provide expertise to disguise the nature,

source, location, ownership, control, origin and/or
destination of funds to avoid detection.
• PMLs operate under a number of business models
and may be
individuals;
criminal organizations with a clear structure and
hierarchy;
networks of loosely affiliated members.
 Characteristics of PML

•PML is a subset of third-party ML.

•The FATF defines third-party ML as the laundering
of proceeds by a person who was not involved in
the commission of the predicate offence
• The main characteristic that makes PML unique is
the provision of ML services in exchange for a
commission, fee or other type of profit.
•While the specialization in providing ML services is
a key feature of PMLs, this does not mean that
PMLs are not also involved in other activities
(including legal businesses).
 Characteristics of PML

•PMLs also use specialized knowledge and

expertise to exploit legal loopholes; find
opportunities for criminals; and help criminals
retain and legitimize the proceeds of crime.
• The PML is concerned primarily with the
destination of the money and the process by
which it is moved
•PMLs are criminals, who often operate on a large
scale and conduct schemes that are transnational
in nature
 Characteristics of PML-Commission

• A number of different and overlapping factors affect the fee paid to

PMLs or the commission they receive for their services
the reputation of the individual PML;
the total amount of funds laundered;
the denomination (i.e. value) of the banknotes (in cases involving
cash);
the amount of time requested by a client to move or conceal funds
(for example, if the laundering needs to be done in a shorter time
period, the
commission will be higher); and
the imposition of new regulation(s) or law enforcement activities.
 Characteristics of PML-
AdvertizingAdvertising / Marketing

•PMLs actively market their services by ‘word-of-

mouth’ (through an informal criminal network).
•Authorities have also identified the use of posted
advertisements for PML services on the Dark Web
 Characteristics of PML-Record Keeping
(Shadow Accountancy)
• Law enforcement has reported that PMLs often keep a shadow
accounting system that contains detailed records with code names.
• These unique accounting systems may use detailed spreadsheets
that track clients (using code names); funds laundered; the origin
and destination of funds moved; relevant dates; and commissions
received.
• PMLs may either store their records electronically (e.g. a password-
protected Excel spreadsheet) or use paper records.
• These records represent an invaluable resource for investigators
 Individual PMLs :

• accountants, lawyers, notaries and/or other service providers;

• Trust and Company Service Providers (TCSPs);
• bankers;
• MVTS providers;
• brokers;
• tax advisors;
• dealers in precious metals or stones;
• bank owners or insiders;
• payment processor owners or insiders; and
• electronic and cryptocurrency exchanger owners or insiders.
 Specialized services provided by PMLs

• There are a number of specialized services that PMLs may provide. These include, but
are not limited to:
• consulting and advising;
• registering and maintaining companies or other legal entities;
• serving as nominees for companies and accounts;
• providing false documentation;
• comingling legal and illegal proceeds;
• placing and moving illicit cash;
• purchasing assets;
• obtaining financing;
• identifying investment opportunities;
• indirectly purchasing and holding assets;
• orchestrating lawsuits; and
• recruiting and managing money mules.
 Roles and Functions

•Leading and controlling:

•Introducing and promoting:
•Maintaining infrastructure:
•Managing documents
•Managing documents:
•Investing or purchasing assets:
•Transmitting monies for ML
•Collecting monies ML
 financial schemes executed by PMLs consist of
three stages:

•Stage 1: Criminal proceeds are

transferred to, or collected by, PMLs
•Stage 2: Layering stage executed by
individuals and/or networks
•Stage 3. Laundered funds are handed
back over to clients for investment or
asset acquisition
 TYPES OF DEDICATED ML
ORGANISATIONS AND NETWORKS

•(i) money transport and cash controller

networks;
• (ii) money mule networks;
•(iii) digital money and virtual currency
networks; and
•(iv) proxy networks
 SUPPORTING MECHANISMS USED BY PROFESSIONAL
MONEY
LAUNDERERS

•Trade-Based Money Laundering (TBML)

•account settlement mechanisms
•Underground Banking and Alternative
Banking Platforms
 COMPLICIT/CRIMINAL FINANCIAL SERVICE PROVIDERS AND
OTHER
PROFESSIONALS

•Money Value Transfer Services (MVTS)

Providers
•Financial Institutions
•Legal and Professional Services
•Payment Processing Companies
•Virtual Currency Payment Products and
Services (VCPPS)
 Thanks
End of Day 1