CISI – Financial Products, Markets & Services Topic – Financial Services Regulation and Professional Integrity Lesson: 8.2 Financial Crime

What is Money Laundering? “The goal of a large number of criminal acts is to generate a profit for the individual or group that carries out the act. Money laundering is the processing of these criminal proceeds to disguise their illegal origin. This process is of critical importance, as it enables the criminal to enjoy these profits without jeopardising their source.” Financial Action Task Force (FATF), 2016 During the prohibition era, notorious gangster, Al Capone allegedly bought ‘Laundromats’ to mix proceeds from criminal activity with legitimate business sales

3 Stages of money laundering The Three Stages of Money Laundering 3 Stages of money laundering Placement Placing dirty money into a bank or building society account dirty money clean money Cash generated through crime e.g. drugs, arms, stolen goods Money which appears to have been legitimately required – more easily invested and spent The cash gained through illegitimate needs to be ‘laundered’ from ‘dirty’ to ‘clean’ money - as large transactions are not normally made using cash Layering Moving money around so that authorities cannot trace it e.g. buying and selling currency, shares or bonds Integration Dirty money is now clean – the ultimate beneficiary is holding legitimate funds that can be integrated back into the financial system.

Financial Action Task Force (FATF) The Legal and Regulatory Framework The cross-border nature of money laundering has led to international co-ordination to combat money laundering Inter-governmental body , based at the OECD in Paris, developing and promoting international policies to combat money laundering. Financial Action Task Force (FATF) http://www.fatf-gafi.org/home/ Issued recommended minimum standards for countries: Expect staff and firms to be able to identify suspicions of money laundering and report them. Reporting made to a central point in the firm – Money Laundering reporting Officer (MLRO)

The Legal and Regulatory Framework - UK Main laws and regulations relating to money laundering in the UK The proceeds of crime act Money Laundering Regulations Extended UK legislation – main offences: Knowingly assisting in concealing, or arranging for the acquisition, use or possession of criminal property. Failing to report knowledge or suspicions of possible money laundering. Tipping off another person that a money laundering report has been made. Impeding an investigation e.g. Destroying documents. These regulations were brought in to implement the EU directive on money laundering. They specify the arrangements a firm must have in place to cover areas such as: Record-keeping Internal Controls Reporting requirements Up to 14-years for the offence Up to 5-years for failing to report or destroying relevant documents 2-years for tipping off POCA and the Money Laundering Regulations require a court to take account of industry guidance when considering whether a person has committed an offence. This guidance is provided by the Joint Money Laundering Steering Group (JMLSG – 17 financial sector trade bodies.)

The Joint Money Laundering Steering Group (JMLSG) JMLSG provides guidance to UK firms on the following Internal Controls Money Laundering Reporting Officer (MLRO) Risk-Based Approach Customer Due Diligence (CDD) Staff Awareness/ Training Record-Keeping Controls and systems must be in place to manage risk. Must assess and decide how to manage the risks. Firms must confirm and verify information about their customers depending on their level of risk. Money laundering training needs to be provided for staff in the causes, issues, laws, regulations and procedures. Firms must have the right systems and keep the appropriate records – 5-years of customer identity evidence, transactions, actions and information. Establish and maintain risk-based policies (appropriate to the firm) and procedures to prevent money laundering Director or Senior Manager oversees the firm’s compliance with the regulator’s rules. They report to the National Crime Agency (NCA). http://www.jmlsg.org.uk/

What is Bribery? “Bribery is the giving or receiving of a financial or other advantage in connection with the "improper performance" of a position of trust, or a function that is expected to be performed impartially or in good faith.” The Bribery Act 2010 Bribery does not have to involve cash or an actual payment exchanging hands and can take many forms such as a gift, lavish treatment during a business trip or tickets to an event.

A firm must have adequate Bribery A firm must have adequate procedures in place…. Offences Came into force July 2011 Develop well-designed policies, procedures and controls to ensure compliance. Offering , promising or giving an advantage Requesting , agreeing to receive or accepting an advantage Top-level commitment with the board and senior management committing to conducting business in a fair, honest and ethical manner. Bribery of a foreign public official to obtain or retain business or an advantage Bribery risks should be monitored, evaluated and reassessed regularly along with undertaking staff surveys. Failure by a commercial organisation to prevent a bribe being paid for or on its behalf. (Makes it easier for the Serious Fraud Office to prosecute companies when bribery has occurred) Ongoing risk assessments carried out (external and internal risks) Penalties Include: Max 10-Years in prison Unlimited fines Confiscation of proceeds Debarment from public sector contracts Director disqualification Policies and Procedures communicated internally along with training (Code of conduct) Only defence for a corporate entity is that they can show adequate procedures were put in place to prevent bribery Due Diligence undertaken on suppliers carrying out services on behalf of the company. http://www.thebriberyact2010.co.uk/

Identity Fraud Firms need… Identity Theft Identity Fraud All firms may find themselves targeted by criminals. Staff working in financial services firms need to be aware that of theft of customer data to facilitate identity fraud Identity Theft Impersonation fraud Using the identity of an other person without their knowledge or consent to obtain goods and services in that person’s name Could be use of a person’s date of birth, date of birth, current or previous addresses Identity Fraud Use of a misappropriated identity in criminal activity. Obtaining goods or services by deception Using forged identity documents e.g. Passport or driving licence Firms need… Robust Customer Due Diligence (CDD) procedures To verify the identity of a person applying for credit/Investment services/a new account/access to an existing account