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Assignment I

Question 1
Alliance Bank (Bahamas Ltd) is an established offshore bank with an international presence, through a network of subsidiaries, branches and representative offices in over 15 locations. The referenced branch is located in jurisdiction of The Bahamas. A full range of banking and related financial products and services are offered to clients including but not limited to, bank accounts, wire transfers, cash deposits, and credit cards.
Money laundering can be defined as the process of disguising or concealing illicit funds to make them appear legitimate. This is achieved by the launders disguising their identity and or distancing themselves from the illicit activity that would have produced his property. It is imperative then that MLROs fully appreciate the vulnerabilities of their Bank’s particular products and services in order to be able to implement systems to prevent exploitation, and be able to properly evaluate unusual and potentially suspicious activity. The core characteristics and vulnerability of the products and services previously mentioned, from the perspective of anti-money laundering are as follows:
Bank Accounts:
Bank accounts are the entry point into the financial system. Once this is achieved the launderer has access to a wider network of vehicles with which to carry out his objectives. These accounts and services become highly vulnerable in facilitating money laundering. Particularly at risk would be dormant accounts once they are reactivated.
Wire Transfers:
Wire transfers are the electronic transferring of funds from one entity to another across a network administered by banks around the world. Because of the quick and effective facilitation that wire transfers lend to the laundering process, they are popular with money launderers. It provides launders immediate, convenient, secure and potentially anonymous means by which to transfer value.
Cash Deposits:
This is one of the many services open to customer once an account is open. Thorough a process known as ‘smurfing’ the launderer can break up large amounts of money into smaller, less suspicious amounts. The small amount will vary from jurisdiction to jurisdiction in line with local requirements to report the transaction. The money is then deposited into one or more bank accounts either by multiple e people or by a single person over an extended period of time. Another case cited in FIU guidelines show how a customer held two bank accounts at branches of the same financial intuitions which were used to make daily cash deposits although he was unemployed. As a result of further investigations he was later convicted of drug trafficking offences. Credit Cards: credit card accounts might be used in the layering or integration stages of money laundering. For example, by using illicit funds already placed in a bank account to pay a credit card bill for goods purchased, a money launderer has integrated his illicit funds into the financial system. In addition credit cards can be easily obtained without any need for verification in many countries. Due to the ease with which one can be given, an individual may be able to fraudulently obtain a number of them using different names. These cards may then be used to assist and support money laundering networks.
An institution’s specific risk based policies should be determined by an assessment of the institution’s operation. Such risk based policies should allow the institution to identify and assess the potential of its money laundering risks associated with customers and transactions thus facilitating more focus on those customers and transactions which represent the highest degree of risk.
Taking into account the international and local standards and best practices of a risk based approach for customers and transactions as per the Central Bank and Financial Intelligence Unit of The Bahamas’, Anti-Money Laundering Guidelines, Alliance has issued and implemented its own set of directives to minimize the risk of money laundering. These directives include firstly the appointment of a Money Laundering Reporting Officer with responsibility for managing internal controls and process. Enhanced KYC documentation and due diligence information requirements appropriate for each risk category and risk factor are also standard. In addition to verifying the contracting party’s identity and beneficial owner on account opening, those clients considered to be higher risk customers, for example PEP’s, Alliance has procedures and reports in place that will differentiate client relationships by risk categories (low, medium, high). Clients are further rated by such risk factors as their products, client type, country of domicile, type of business, type of assets, size and volume of transactions, type of transactions and cash transactions. The reports facilitate knowing and understanding the economic background and purpose of higher-risk transactions and knowing the origin of funds and ensuring that the documents relating to these various controls and, more generally, to the transactions processed are produced and retained. Consistent with further requirements and guidelines, Alliance has in place the education and training of all employees in their legal obligations, internal policies and procedures with respect to the reporting of money laundering and the financing of terrorism. Directives are also in place for the ongoing monitoring of policies and procedures and review of accounts to determine whether a client’s risk rating should be adjusted. Further Alliance has established the principle of managing legal and reputational risk globally by requiring all banking groups that operate abroad to ensure that their internal control bodies being Internal Audit Department and Compliance Department as well as external auditors have access to all information on business relationships in all group companies.
Financial institutions will continue to be faced with new challenges as business and products expand but the key in dealing with the challenges and mitigating the risk it presents involve identifying and assessing the risk, developing and implementing appropriate policies and procedures, training the relevant employees who would be affected by the policy and ensuring the policy is adhered to and adequate by conducting independent reviews of the same on a periodic basis.

Question 2

The Basel Committee on Banking Supervision: Compliance and the Compliance function in banks, effectively holds senior management, including the Board of Directors, responsible for maintaining a culture of compliance within the organization. In The Bahamas, Regulation 5 of The Financial Intelligence (Transactions Reporting) Regulations 2001 also provides for the appointment and registration of a Money Laundering and a Compliance Officer, with criminal penalties for non compliance. The status of the role of the MLRO as a controlled function requiring the registration of a particular individual is indicative of the seriousness with which the role is viewed by the regulatory authorities. The role therefore needs to be viewed with equal seriousness internally.
The appointed MLRO, in their inter relationship with Senior Management, must have the trust, respect and support of the Board and of top management. In order to be successful he/she must also have a good understanding of money laundering techniques and the vulnerabilities of the bank’s products and services, and a good understanding of international standards as they relate to money laundering prevention and procedures, legislation and regulations in other jurisdictions. In The Bahamas banks are highly regulated under the Banks & Trust Companies Act 2000 and Senior Management should be able to rely on the expertise of the MLRO in Bahamian Laws and Regulations as they apply to the responsibilities and liabilities of the MLRO. The MLRO has the personal and ultimate responsibility of deciding whether or not to make a disclosure. Such requirements predicate that the MLRO is a senior, experienced member of management. The relationship with Senior Management should be one of mutual respect and the MLRO should be afforded the proper deputy-support and access to all information needed to perform his/her function. The MLRO should have access to Senior Management at all times and engage on an ongoing basis of informing on all important AML/CFT linked SAR’s by the MLRO at least on a monthly basis and immediately where warranted.
The MLRO’s function should be independent of the business of the organization. This would allow him/her to be objective when analyzing compliance related issues. Such person’s function should not create a conflict of interest within the organization. For example, as a matter of best practice, the MLRO should not also be the CEO of the organization as the CEO would be concerned about the overall business and profitability of the organization as opposed to making a decision which takes into account the risk involved. Their objectivity in decision making may be prejudiced.
There are several common problem scenarios however that the MLRO constantly deals with. One of them is ongoing staff training. In line with best practices banks must engage in continuous staff training in the identification and prevention of money laundering for employees who have client contact and other staff involved in AML. All employees should be kept informed about any major changes in AML laws. The reporting layers for internal SAR filing should be minimal to reach the MLRO. If this is not the case, there is the risk of line managers whose job it is to generate funds and income for the institution, dismissing an internal STR filing based on business considerations. This is a sign of poor awareness of their role and responsibilities to report and more commonly seen in institutions that pay commissions or bonuses on new business brought in. Other problem scenarios arise in, the evaluation of STR’s by MLRO’s having to balance the somewhat conflicting requirements of the legal obligation to report suspicion of money laundering in a voluntary and timely manner, while continuing to meet the basic obligation to customers/client not to breach confidentiality rashly, irresponsibly and without considered just cause of suspicion. Also challenging is avoiding ‘tipping off’ while assisting to preserve funds and assets held on behalf of “suspect” clients, knowing of an investigation, an arrest or impending arrest, and imminent Restraint Order, while meeting the basic contractual obligation to respond promptly to a customer/client’s instructions.
All financial institutions as per the Financial Transactions Reporting Act, 2000 have a mandatory duty to report any transaction where the financial institution knows, suspects or has reasonable grounds to suspect that such transaction involves the proceeds of criminal conduct under the Proceeds of Crime Act (Section 14, FTRA).
A financial institution may find itself involved in an investigation either as the reporting entity or as a result of a disclosure made by another institution concerning a customer or transaction the two institutions have in common; or it may become involved as part of a general investigation process initiated by law enforcement authorities. How the MLRO conducts themselves during an investigation is extremely important to the reputation of the institution as they are the main point of contact between the institution and law enforcement authorities. In The Bahamas, part of MLRO’s principal activity is to arrange for further information in respect of the disclosure to be supplied to the office of the Financial Intelligence Unit or the Attorney General’s office on request, or on receipt of a Production Order. The MLRO would be responsible for coordinating the collection of evidence internally. In order to respond effectively, the MLRO must have a thorough understanding of the investigative process and should be familiar with how disclosures are processed through law enforcement agencies. They should be able to respond to subpoenas, court orders, search warrants, restraining orders, or orders to freeze an account. MLRO’s need to have a good understanding of how international investigations are conducted, and of the importance of maintaining good and confidential relationships between law enforcement agencies and the financial institution.
The MLRO is critical in enabling an organization to achieve compliance with its statutory and regulatory obligations. It is essential that the internal reporting procedure be communicated and is accessible by all staff to ensure the good maintenance of files of internal registers of internal and external STR’s, and logs of suspicious reports for Central Bank inspection purposes. Institutions are also required to carry out regular assessments of the adequacy of its systems and controls to ensure that they manage the money laundering/terrorist financing risk effectively. Oversight and implementation of a firm’s AML/CFT policies and procedures, is the responsibility of the MLRO, thereby ensuring that appropriate monitoring processes and procedures across the firm are established and maintained.
Quarterly reports to management should be provided from the MLRO which assesses the operation and effectiveness of the firm’s systems of control in relation to managing money laundering/terrorist financing risk. Internal reports should reflect; * The numbers and types of internal suspicious transaction reports that have been made internally and the number of, and reasons why, these have or have not been passed on to the FIU; * Bringing to the attention of senior management areas where the operation of AML/CFT controls should be improved, and proposals for making appropriate improvements; * The outcome of any relevant quality assurance or internal audit reviews of the institution’s AML/CFT processes. * That appropriate measures to ensure that money laundering risk is taken into account in the day-to-day operation of the firm, including in relation to: i. the development of new products; ii. the taking-on of new customers; and iii. changes in the firm’s business profile
Generally, as expressed within the FATF’s Guidance on the Risk-Based Approach to Combating Money Laundering and Terrorist Financing, “Money Launderers and terrorist organizations have considerable knowledge of the financial sector and take extreme measures to hide their financial activities and make them indistinguishable from legitimate transactions.” The increased sophistication and expansion of global financial markets coupled with criminals becoming adept to this sophistication will make it increasingly challenging to differentiate legitimate from suspicious activity. From both a legal and reputational risk management perspective banks must then continually develop and maintain high AML standards.

References:

(1) ICA International Diploma in Anti-Money Laundering (Course Manual) (2) www.int-comp.com (3) www.centralbankbahamas.com (4) Bahamas Association of Compliance Officers community Paper June 2008.

BAHAMIAN LAW

The Proceeds of Crime Act, 2000
The Financial Transactions Reporting Act 2000
The Financial Intelligence Unit Act 2001
The Financial Intelligence (Transactions Reporting) Regulations, 2001