ILLEGAL CASH FLOWS FROM THE VIEW POINT OF FINANCIAL STABILITY Kemal Kozarić, Ph.D. The Governor of the Central Bank of BH Fojnica, March 22,

What is money laundering In Article 1 of the draft of the EU Directive from March 1990, money laundering is defined as: –The conversion or transfer of property, knowing that such property is acquired by committing a serious criminal offense, with the intent to conceal or diguise the origin of property, or to assist any individual who is involved in commiting of such offense to avoid legal consequences and concealing or disguise of the true nature, origin, location, disposition, movement, entitlement to, or ownership of property, knowing that such property is acquired through committing of a serious criminal misdeed. 2

The origin of term “money laundering” The first law on money laundering appeared in the USA in 80-ies, the last century, The term “money laundering” origins from the time of prohibition – The money from the illegal sale of alcohol and gambling was changed through a legal business of laundry machines, which operated on coins, which then interfered with illegaly gained profits It is estimated that from 2-5% world’s GDP is loundered annually. 3

The procedure of money laundering 1.Placing and injecting in – the placement action of the illegal profit, gained through a criminal misdeed, in the financial institutions through depositing, remittances and purchase of negotiable instruments 2.Layering – the procedure of layering the profit, gained through criminal acting, from its origin through the layers of complex financial transactions 3.Integration – the procedure of using seemingly legitimate transactions to conceal the illegaly gained profits, after gaining the legal ownership in the layering phase 4

Motives for money laundering 1.The origin and real ownership over funds being “washed” must be hidden 2.Control over processed funds must be maintained 3.The funds must change the form – deposits, shares, bonds, payments documents... 5

The offender seeks to take advantage of circumstances Insufficiently stricted enforcement of the customs procedure, or the procedure for determining the other side in the business Poor or ineffective systemic audit monitoring Secret agreements of employees in the financial system Ineffective training of employees in the financial system The volume of legal transactions within which one can mask the illegal transactions Unclear and uncoordinated proceedings, rules and standards of monitoring 6

The assessment of money laundering risk Only those clients who meet all the conditions prescribed by the Law on Money Laundering can be classified as clients who carry a slight risk for money laundering The clients defined in the guidelines of the competent monitoring authorities to bring a high risk are the high risk clients All other clients are middle risk clients Pending on a clients risk level, an obliger will carry out the simlified, regular or enhanced deep analisys of the client and apply the time schedule and volume of monitoring over the the clients business activities 7

Legislation The state level Law on money laundering is not aligned with the laws on criminal proceedings of the entities Financing of terrorist activity involves providing or collecting funds for the financing of the deeds aimed at causing the damage to the country or international organization and intimidating the population. The tax evasion is often considered to be the same item as money laundering 8

Procedures in financial institutions Potentiial clients dicrimination –The identification and monitoring of the client are neccessary if there is a doubt on the validity and adequacy of previously gathered information on the client or real owner Slowdown in transactions carrying out –The obligers are required to implement the enhanced measures of indentification and monitoring of the activities of branches and other organisational units abroad –The identification proceeding lasts longer if: the authorised representative performs transaction instead of the client; the client is an association, foundation, legal entity who does not perform the economic activity or a religious community; the client has the status of politically exposed foreign person, or he/she performs or performed an confided prominent public function, and his /her closest relatives. 9

The segments of the financial system in which the Law applies 10 Regulators Fiscal authorities Real sector Financial intermediators and markets Payments systems Currency Monetary authorities The international environment

The consequences for the stability of financial system The consequences of inadequate regulatory framework or its incosistent application to the country’s international credibility and stability of the financial system greatly exceed the effects of potential discomfort on the part of clients. –The reputational risk and the loss of the country’s international credibility –The exposure of the financial system and the country’s business cycle to the flows of the short- term capital 11

The activities of the institutions of Bosnia and Herzegovina SIPA (State Investigation and Protection Agency) Participation in the work of the Standing Committee MONEYVAL Fulfillment of the recommendations from the Action Plan The activities of the CBBH –Coordination with the banking agencies in this area –Opening of special accounts for the disposal of suspicious transactions (cca KM 3.9 millions on 31 December, 2011) –Establishment of a Single Registry of Transaction Accounts that are available to the public and to the majority of law enforcement institutions 12

The role of the media 13

The role of media The role of media and investigative journalism is unquestionable in discovering of money laundering cases and spreading the information about them Reporting in this cases should be in rational limits and can not be guided by the need for sensationalism The education of all stakeholders in this process is very important 14