Notes

Outline

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WHAT IS MONEY LAUNDERING ?

process..." Money laundering is the process by which large amounts of illegally obtained money (from drug trafficking,terrorist activity or other serious crimes) is given the  appearance of having originated from a legitimate  source.

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"Lebanese Law 318 defines Money..." Lebanese Law 318 defines Money Laundering as an illegal action intended to conceal the source or use of illegally obtained money by converting the funds into untraceable transactions in banks.

"Money laundering plays a fundamental..." Money laundering plays a fundamental role in facilitating the  ambitions of the drug trafficker, the terrorist, the organized criminal, the insider dealer, as well as the many others who need to avoid the kind of attention from the authorities that sudden wealth brings from illegal activities.

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"Al Capone was prosecuted and..."  Al Capone was prosecuted and convicted in   October, 1931 for tax evasion, and sent to   prison as the US authorities could not convict   him on other criminal charges due to lack of   hard evidence.

"‘Money laundering’ as an..." ‘Money laundering’ as an expression is one of  fairly recent origin: The original sighting was in newspapers reporting the Watergate scandal in the United States in 1973.  The expression first appeared in a judicial or legal context in 1982 in America in the  case  US v $4,255,625.39 (1982) 551 F Supp.314.  Since then, the term has been widely accepted and is in popular usage throughout the world.

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"The basic characteristics of the..." The basic characteristics of the laundering of the proceeds of crime are: its global nature the flexibility and adaptability of its operations,  the use of the latest technological means professional assistance, the ingenuity of its operators the vast resources at their disposal

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How Big Is The Problem?

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The Money Laundering Process

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Stages Of The Process

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"Designed to disguise the audit..." Designed to disguise the audit trail and provide anonymity.

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"INTEGRATION" INTEGRATION It is this stage at which: The money is integrated into the legitimate economic and financial system Assimilated with all other assets in the system Integration is accomplished by making it appear to have been legally earned It is exceedingly difficult to distinguish legal and illegal wealth.

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Money Laundering Methods

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Business Areas Prone To Money Laundering

Banking Banking industry is one of the main domains where money laundering activities take place. Underground Banking Sometimes called ‘parallel’ banking These systems tend to mirror more conventional bank practices Highly efficient and not licensed methods of transferring money around the world

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Futures Because of the ‘anonymous’ nature of the trading strategies, all brokers trading as principals and not in their client's name, the true identity of the beneficial owner is not known. Commodities are a ‘zero sum’ game, which means you can only buy if someone is willing to sell, and vice versa. Launderers can take advantage by a strategy of buying and selling the same commodity, thereby taking a small hit for the commission charged by the broker.

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Casinos Casinos and gambling establishments are particularly attractive to money launderers. Cash can be deposited with a casino in exchange for chips or tokens. The player can cash in the remainder for a cashier’s cheque which can be deposited in their account (after a few turns at the table). Another method is to buy winning tickets from people in bookmakers and saying you have won making bookmakers vulnerable to being used.

Antique Dealers/Jeweler’s/Designer Goods Suppliers High value Great portability Cash transacted Anonymity   Insurance (Life) Coverage not commensurate with earnings Premium not commensurate with earnings Side funding KYC should apply

International Initiatives

"Money launderers are able to..." Money launderers are able to quickly move their criminally derived cash proceeds between national jurisdictions, complicating the task of tracing and confiscating these assets. It has been recognized by many governments that close international co-operation was needed to counter money laundering. A number of agreements have been reached internationally in order to counter this menace.

"These agreements have been reached..."  These agreements have been reached on two     fronts: - Financial - Legal

Financial   Basle Committee Statement of Principles For the purpose of money laundering, the Committee on Banking Regulation and supervisory Practices issued the Basle Statement of Principles on the prevention of criminal use of the banking system in December 1988. The Statement of Principles does not restrict itself to drug-related money laundering; It extends to all aspects of laundering through the banking system, (deposit, transfer and/or concealment of money derived from illicit activities whether robbery, terrorism, fraud or drugs).

"It seeks to deny the..." It seeks to deny the banking system to those involved in money laundering by the application of the following principles: Know your customer Banks should make reasonable efforts to determine the customer’s true identity; Banks have effective procedures for verifying the bona fides of new customers (whether on the asset or liability side of the balance sheet).

"Compliance with laws" Compliance with laws Banks management should ensure that business is conducted in conformity with high ethical standards, laws and regulations being adhered to and ensuring that a service is not provided where there is good reason to suppose that transactions are associated with laundering activities. Co-operation with law enforcement agencies Banks should co-operate fully with national law enforcement agencies including, where there are reasonable grounds for suspecting money laundering, taking appropriate measures which are consistent with the law.

"Adherence to the Statement" Adherence to the Statement All banks should formally adopt policies consistent with the principles set out in this Statement; Should ensure that all staff members are informed of the bank’s policy; Staff training; Banks should implement specific procedures for customer identification and for retaining internal records of transactions. Effective means of testing for general compliance with the Statement to be part of bank’s internal audit.

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EC Directive on the “Prevention of the Use of the     Financial System for the Purpose of Money     Laundering” (1991)  Issued in response to the new opportunities for    money laundering opened up by the    liberalization of capital movements and cross-    border financial services in the European    Union;  Obligates member states to outlaw money    laundering;

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Resolution of the International Organization    of Securities Commissions In October 1992, the IOSCO adopted a report and resolution encouraging its members to take necessary steps to combat money laundering in securities and futures markets. A working group of IOSCO Consultative Committee was set up to collect information from IOSCO members' self-regulatory organizations and exchanges on their efforts to encourage their own members to fight money laundering.

The Financial Action Task Force The Financial Action Task Force (FATF) is an international body engaged in defining policy and promoting adoption of countermeasures against money laundering. FATF has representatives from twenty-four OECD countries,Hong Kong, Singapore, the Gulf Cooperation Council, and the European Commission. Participants include representatives from members' financial regulatory authorities, law enforcement agencies, and ministries of finance, justice, and external affairs.

"Representatives of international and regional..." Representatives of international and regional organizations concerned with combating money laundering also attend FATF meetings as observers. The FATF has pursued four main tasks: Monitoring members' progress in applying measures to counter money laundering. Reviewing money laundering techniques and countermeasures.

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Risks Involved & Protection

Why do financial institutions need to Combat Money Laundering?  Risk:  Financial  Reputational  Other Can we eliminate Risk? No Can we manage Risk? Yes Can we control Risk? Yes

What are the Impacts of failing to combat Money Laundering? Reputational Financial (including Patriot Act) Stock value Ratings Loss of businesses Loss of quality employees candidates Litigation Costs Loss of productivity

Three Pillars of Protection Compliance Department Suspicious Activity Detection Reporting System KYC

Know Your Customer (KYC)

“Know Your Customer” Units Involved KYC committee Compliance unit Compliance officer at the branch Branch manager Internal audit department Operations division

“Know Your Customer” Members of the KYC Committee -General manager -Risk manager -Operations manager -Retail banking manager -Compliance unit manager

“Know Your Customer” Responsibilities of the KYC Committee    - Development & implementation of procedures - Training personnel to ensure adherence to      both KYC requirements & to prevailing      regulations - Review accounts with risky features - Approve both cash limit exceptions and      transactions related to tax haven centers      (exceeding certain limits)

“Know Your Customer” Compliance Unit To ensure adherence with local regulations and KYC committee guidelines Take corrective actions Report to the KYC committee serious suspicious transactions Daily review of IT department reports, dedicated to monitoring money laundering activities

“Know Your Customer” Compliance officer at the branch Operations manager could also be the compliance officer Liaises with compliance unit Ensures adherence to both local regulations and to  KYC policies and procedures

“Know Your Customer” Branch manager Monitors cash transactions , wire transfers and other account activity Reviews both account opening documentations and documentation exceptions Recommends customer visit Reports to compliance unit

“Know Your Customer” Internal audit department Ensures adherence to KYC procedures Monitors cash transactions and account performance Daily review of IT department reports, dedicated to monitoring money laundering activities Reports severe cases to the audit committee. Interacts with external auditors through periodic reports.

“Know Your Customer” Operations Division Review wire reports Report suspicious transactions (tax haven, numerous transfers, increased activity etc.)

“Know Your Customer” Cash Transactions CTS (single, multiple, multi-location & multi-currency) Non-clients (lower limits) Exempt clients (approved by KYC Committee)    -Client must be known to bank    -Cash activity exemption line & profile setting     for upper range limits (by currency & account).    -A one-time general declaration letter    -The identity of the beneficial owner    -Individual/corporate identification sheet.

“Know Your Customer” Cash Transactions Cash transaction procedures -Teller’s duties -Compliance officer’s duties -Branch manager’s duties -Regular and secret accounts -Compliance unit’s duties at head office    (Reconciliation of CTS against CTR etc.)

“Know Your Customer” Cash Transactions Monitoring cash transactions at head office -Daily report (equal or exceeds limit) -Weekly report (below limit) Cash withdrawals -Compliance officer should advise both      branch manager & compliance unit of:     (suspicious cash withdrawals by any means  including wire transfers) Cash exchanges (CTS)

“Know Your Customer” Check Transactions The following may give rise to suspicion Third party checks Quantities of cashier checks Travelers checks Money orders & checks issued in high risk geographic areas Checks that do not indicate the identity of the account holder

“Know Your Customer” Wire Transactions Volume of incoming & outgoing wire transfers should be consistent with the customer’s business. Wires over certain amounts and frequency must be examined on a regular basis by both the operations division and the KYC Committee. Staff at the head office/branch must report suspicious transactions to both the compliance unit and to the KYC Committee.

“Know Your Customer” Wire Transactions Weekly reports of incoming and outgoing transfer orders are to be reviewed by both the branch manager and the compliance officer. Same reports should be available to the operations division, the internal audit department and the compliance unit for review and control.

“Know Your Customer” Suspicious Transactions Provide warning signals of money laundering activities Employees should report to the compliance officer who in turn would communicate with the compliance unit.  The compliance unit would then report to the KYC committee. (Investigation is implied throughout the process) In case of doubt the compliance officer must re-verify the contracting party’s identification.

“Know Your Customer” Compliance with local regulations & authorities -The chairman-general manager should sign  the suspicious transaction report -The bank may contact its legal department Visitation policy -New customers are to be introduced to at least two officers at the branch (branch manager &   compliance officer) -Borrowers must be visited on a regular basis -Other clients in case suspicious activities are  detected

“Know Your Customer” External auditors, obligations to report   to competent authorities.

INDICATORS

"New customer attempting large transactions..." New customer attempting large transactions with no supporting rationale Large-scale cash transactions Rapid off shore transfer after funds deposited Unusually high rates of return for a low risk business activity Unrealistic explanation given by customer for account activity

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"Large and/or rapid movement..." Large and/or rapid movement of funds Unusual business activity Multiple amounts paid into personal account without explanation Unusual business activity – transfer into relatives account Re-activation of dormant account

"Early repayment of loans" Early repayment of loans Multiple transactions below threshold Multiple repeat movements of funds between accounts Multiple account openings within narrow timescale Unconnected parties channelling funds to a single account Change of account behaviour without explanation

"Use of company name designed..." Use of company name designed to resemble the name of an established company Unusual explanation for business/account activity Transactions structured to fall below mandatory reporting requirements (‘smurfing’) Use of ‘unofficial loan repayments’ as a cover story for funds Multiple transfers into a personal account

Lebanon, An Experience that Led to De-Listing

Introduction

"In 2000," In 2000, FATF reviewed the AML regimes of several countries and in June of the same year fifteen countries and jurisdictions, including Lebanon were placed on the list of Non-Cooperative Countries & Territories (NCCT).

Introduction Lebanon’s AML regulations prior to Law 318 on Fighting Money Laundering were considered to be deficient with respect to fifteen criteria, with its Banking Secrecy Law being an obstacle that hindered investigations of money laundering activities. FATF asked that NCCT listed countries take corrective measures and put in place adequate systems for fighting money laundering.

Prior to Law 318 Lebanon took significant steps regarding the issue of combating money laundering. In 1996, a “Due Diligence” convention was signed between the Lebanese Bankers Association and member banks. Procedures and specifics such as verifying the identity of customers and beneficial owners for the purpose of combating the laundering of proceeds related to illegal trade of narcotics were outlined.

Prior to Law 318 Banque du Liban and the Banking Control Commission officially adopted the Convention and required banks and financial institutions to comply with it.

"Since June 2000," Since June 2000, Governor Riad Salamé and his team from Banque du Liban have been meeting with the FATF Review Group and discussing further steps that need to be taken for the purpose of complying with the international standards & removing Lebanon from the NCCT list. The Chairman’s efforts were vital in preventing FATF sanctions on Lebanon.

Law 318 On April 20, 2001, the Lebanese Parliament passed Law 318.    This law is considered a major milestone in Lebanese legislation since it criminalizes money laundering. The law clearly defines money laundering operations and stipulates fines and penalties imposed on such operations.

"The law also established the..." The law also established the Special Investigation Commission (SIC) at BDL as an independent legal entity with judicial status. The Commission has the exclusive right to lift banking secrecy for use by the competent authorities including judicial authorities and the Higher Banking Commission in connection with money laundering crimes.

Pursuant to Law 318 BDL passed circular 83 that outlines the “Regulations on the Control of Financial & Banking Operation for Fighting Money Laundering”. Later  in May 2002, this Circular was amended to include additional control procedures. This Circular identifies various issues ranging from Knowing Your Customer to obliging control procedures on certain operations.

"SIC circulars (1&2)..." SIC circulars (1&2) addressed to all reporting entities covered by Law 318 require that they abide by Law 318 and instructs on how they file STRs. SIC circular 3 forwarded to reporting entities covered by Law 318 has superceded circular 1 by introducing a unified form to be used when filing STRs.

The  SIC

"The mission of the Special..." The mission of the Special Investigation Commission is to investigate operations that are suspected to be money-laundering offences and to decide on the seriousness of evidence and circumstantial evidence related to any such offence or offences. Law # 318 on Fighting Money Laundering established the SIC on April 20, 2001 .

"The SIC is the sole..." The SIC is the sole authority in Lebanon with the exclusive right to lift banking secrecy, with respect to the provisions of law 318. The SIC, secretary & staff are not bound by the banking secrecy in discharging their duties with respect to the provisions of law 318.

SIC Organizational Chart

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Main Functions of the SIC Units

Secretary - Main Functions Carries out the decisions of the  Commission. b) Suggests to commission ways and means     to fight money laundering in order to keep pace with most recent techniques. c) Communicates & cooperates with foreign      counterparts within the provisions of the law. Supervises directly 4 units.

Audit & Investigation Unit –Main Functions The examiners conduct field investigations on STRs submitted to them by the Secretary. This Unit is entrusted with tasks that include: - Gathering evidence on operations that may      constitute money laundering offences and      conducting transactional audits on      suspicious accounts. - Verifying and investigating information provided      by the FIAU. Findings are summarized and then forwarded to the Commission through the Secretary for final decision.

Financial Investigation Administrative Unit-Main Functions Collecting, receiving and analyzing information from various sources regarding suspicious activities. The collected data also includes the findings of the Audit & Investigation Unit and the Compliance Unit along with the decisions of the Commission.

"Establishing a database bank," Establishing a database bank, preparing the annual report, preparing periodic statistical reports and comparing STR results with examiners. The FIAU in coordination with the IT & security Unit, is responsible for building and maintaining the SIC web site.

Compliance Unit- Main Functions Compliance Unit examiners continuously audit & examine banks, finance companies and other reporting entities to ensure compliance with relevant Anti-Money Laundering regulations. This Unit is entrusted with tasks that include: Preparing reports that reflect compliance of banks and other reporting entities with the relevant Anti-Money Laundering regulations.

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Links on the Internet www.sic.gov.lb www.moneylaundering.com www.bis.gov www.imolin.com www.oecd.org/fatf www.ustreas.gov/fincen www.ncis.co.uk

Thank You