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E-Learning Series. CERTIFIED ANTI MONEY LAUNDERING EXPERT. What is Money Laundering. Page 1. Table of contents. What is Money Laundering ?.

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  1. E-Learning Series CERTIFIED ANTI MONEY LAUNDERING EXPERT

  2. What is Money Laundering Page 1 Table of contents

  3. What is Money Laundering ? • Moneylaunderingisgenerallyregardedasthepracticeofengaginginfinancialtransactionstoconcealtheidentity,source,and/ordestinationofillegallygainedmoneybywhichtheproceedsofcrimeareconvertedintoassetswhichappeartohavealegitimateorigin. • Itmeansanyfinancialtransactionwhichgeneratesanassetoravalueastheresultofanillegalact,whichmayinvolveactionssuchastaxevasionorfalseaccounting. • In simplewords,Moneylaunderingispouringoftheillegitimatefundsintothelegalchannels.Ifweseeliteralmeaning, Launderingreferstocleaningupthedirtonthemoney.Cleaningthedirtmoneydependsuponthecreativeabilityofthelaunderertomanipulate,disguisetheexistence,nature,source,ownership,location,timingoftheassetsandpropertiesderivedfromtheillegalactivities. • Reasons of Money Laundering • Hiding thewealth • Avoiding the prosecution • Evading theTaxes • IncreasingProfits • International Monetary Fund • Moneylaunderingissupposedtobethesecondbiggestindustryintheworldjustnexttotheretailindustryinthetermsofitsturnover • According to the estimates of International Monetary Fund the total loss due to AML is more than 2-5% of the total GDP of the world. • Total World GDP is $ 60 Trillion according to the statistics of World bank. • $ 3 trillion is the size of global money laundering operations. What is Money Laundering ? Crimes related to Money Laundering • Drug trafficking • People smuggling • Arms, antique, gold smuggling • Prostitution rings • Financial frauds • Corruption, or • Illegal sale of wild life products and other specified predicate offences

  4. Stages of Money Laundering • There are three stages of Money Laundering • Attheplacementstage,forexample,thefundsareusuallyprocessedrelativelyclosetotheunder-lyingactivity;often,butnotineverycase,inthecountrywherethefundsoriginate. • Atthe layering stage,thelaunderedfundsmaytravel throughbankaccountsatvariouslocationswithoutleavingtracesoftheirsourceorultimatedestination. • Finally,attheintegrationphase,launderersmightchoosetoinvestlaunderedfundsinstillotherlocationsiftheyweregeneratedinunstableeconomiesorlocationsofferinglimitedinvestmentopportunities. • Placement • Placement process can be conducted through the following activities • CurrencySmuggling • BankComplicity • CurrencyExchanges • SecuritiesBrokers • BlendingofFunds • AssetPurchase • Objective of Layering Process is to disguise the nature of transaction and avoid getting tracked by Law enforcement • Cash converted into Monetary Instruments  • Material assets bought with cash then sold  • Under Integration previously laundered money is introduced into the economy through banking system and is masked as legitimate  • Property Dealing  • Front Companies and Bogus Loans • False Import/Export Invoices  • Layering • Integration Stages of Money Laundering

  5. CurrencySmuggling–Thisisthephysicalillegalmovementofcurrencyandmonetaryinstrumentsoutofacountry.Thevariousmethodsoftransportdonotleaveadiscernibleaudittrail.CurrencySmuggling–Thisisthephysicalillegalmovementofcurrencyandmonetaryinstrumentsoutofacountry.Thevariousmethodsoftransportdonotleaveadiscernibleaudittrail. • BankComplicity–Thisiswhenafinancialinstitution,suchasbanks,isownedorcontrolledbyunscrupulousindividualssuspectedofconnivingwithdrugdealersandotherorganizedcrimegroups.Thismakestheprocesseasyforlaunderers.Thecompleteliberalizationofthefinancialsectorwithoutadequatechecksalsoprovidesleewayforlaundering. • Currency Exchanges– In a number of transitional economies the liberalization of foreign exchange markets provides room for currency movements and as such laundering schemes can benefit from such policies. • Securities Brokers– Brokers can facilitate the process of money laundering through structuring large deposits of cash in a way that disguises the original source of the funds. • Blending of Funds– The best place to hide cash is with a lot of other cash. Therefore, financial institutions may be vehicles for laundering. The alternative is to use the money from illicit activities to set up front companies. This enables the funds from illicit activities to be obscured in legal transactions. • Asset Purchase– The purchase of assets with cash is a classic money laundering method. The major purpose is to change the form of the proceeds from conspicuous bulk cash to some equally valuable but less conspicuous form.

  6. LAYERING Thepurposeofthisstageistomakeitmoredifficulttodetectanduncoveralaunderingactivity.Itismeanttomakethetrailingofillegalproceedsdifficultforthelawenforcementagencies.Theknownmethodsare: 1)CashconvertedintoMonetaryInstruments:-Oncetheplacementissuccessfulwithinthefinancialsystembywayofabankorfinancialinstitution,theproceedscanthenbeconvertedintomonetaryinstruments.Thisinvolvestheuseofbanker’sdraftsandmoneyorders.

  7. 2)Materialassetsboughtwithcashthensold–Assetsthatareboughtthroughillicitfundscanberesoldlocallyorabroadandinsuchacasetheassetsbecomemoredifficulttotraceandthusseize.2)Materialassetsboughtwithcashthensold–Assetsthatareboughtthroughillicitfundscanberesoldlocallyorabroadandinsuchacasetheassetsbecomemoredifficulttotraceandthusseize. SOMEMOREEXPLAINATION:- Inthecourseoflayering,thereisthefirstattemptatconcealmentordisguiseofthesourceoftheownershipofthefundsbycreatingcomplexlayersoffinancialtransactionsdesignedtodisguisetheaudittrailandprovideanonymity.Thepurposeoflayeringistodisassociatetheillegalmoniesfromthesourceofthecrimebypurposelycreatingacomplexweboffinancialtransactionsaimedatconcealinganyaudittrailaswellasthesourceandownershipoffunds.

  8. Typically,layersarecreatedbymovingmoniesinandoutoftheoffshorebankaccountsofbearershareshellcompaniesthroughelectronicfunds'transfer(EFT).Giventhatthereareover500,000wiretransfers-representinginexcessof$1trillion-electronicallycirclingtheglobedaily,mostofwhichislegitimate,thereisn'tenoughinformationdisclosedonanysinglewiretransfertoknowhowcleanordirtythemoneyis,thereforeprovidinganexcellentwayforlaundererstomovetheirdirtymoney.Otherformsusedbylaunderersarecomplexdealingswithstock,commodityandfuturesbrokers.Giventhesheervolumeofdailytransactions,andthehighdegreeofanonymityavailable,thechancesoftransactionsbeingtracedisinsignificant.Typically,layersarecreatedbymovingmoniesinandoutoftheoffshorebankaccountsofbearershareshellcompaniesthroughelectronicfunds'transfer(EFT).Giventhatthereareover500,000wiretransfers-representinginexcessof$1trillion-electronicallycirclingtheglobedaily,mostofwhichislegitimate,thereisn'tenoughinformationdisclosedonanysinglewiretransfertoknowhowcleanordirtythemoneyis,thereforeprovidinganexcellentwayforlaundererstomovetheirdirtymoney.Otherformsusedbylaunderersarecomplexdealingswithstock,commodityandfuturesbrokers.Giventhesheervolumeofdailytransactions,andthehighdegreeofanonymityavailable,thechancesoftransactionsbeingtracedisinsignificant.

  9. STAGE 3:- INTEGRATION:- Integration–Thisisthemovementofpreviouslylaunderedmoneyintotheeconomymainlythroughthebankingsystemandthussuchmoniesappeartobenormalbusinessearnings.Thisisdissimilartolayering,forintheintegrationprocessdetectionandidentificationoflaunderedfundsisprovidedthroughinformants.Theknownmethodsusedare: 1)PropertyDealing. 2)FrontCompaniesandFalseLoans. 3)ForeignBankComplicity. 4)FalseImport/ExportInvoices. Theexplanationofalltheseareasfollow:-

  10. PropertyDealing–Thesaleofpropertytointegratelaunderedmoneybackintotheeconomyisacommonpracticeamongstcriminals.Forinstance,manycriminalgroupsuseshellcompaniestobuyproperty;henceproceedsfromthesalewouldbeconsideredlegitimate.PropertyDealing–Thesaleofpropertytointegratelaunderedmoneybackintotheeconomyisacommonpracticeamongstcriminals.Forinstance,manycriminalgroupsuseshellcompaniestobuyproperty;henceproceedsfromthesalewouldbeconsideredlegitimate. FrontCompaniesandFalseLoans–Frontcompaniesthatareincorporatedincountrieswithcorporatesecrecylaws,inwhichcriminalslendthemselvestheirownlaunderedproceedsinanapparentlylegitimatetransaction. ForeignBankComplicity–Moneylaunderingusingknownforeignbanksrepresentsahigherorderofsophisticationandpresentsaverydifficulttargetforlawenforcement.Thewillingassistanceoftheforeignbanksisfrequentlyprotectedagainstlawenforcementscrutiny.Thisisnotonlythroughcriminals,butalsobybankinglawsandregulationsofothersovereigncountries. FalseImport/ExportInvoices–Theuseoffalseinvoicesbyimport/exportcompanieshasproventobeaveryeffectivewayofintegratingillicitproceedsbackintotheeconomy.Thisinvolvestheovervaluationofentrydocumentstojustifythefundslaterdepositedindomesticbanksand/orthevalueoffundsreceivedfromexports.

  11. INSURANCE&MONEYLAUNDERINGINGLOBLEPARLANCE:- MoneyLaunderingisnoteasilypolicedwithconventionalmeansoflawenforcement.Thisisbecauseitisahiddenandtechnicallysophisticatedcrimethatoftentranscendstheboundariesofnationaljurisdiction.Withinnations,MoneyLaunderingisthesubjectoflawenforcementactivitiesbothaspartofexistingpolicyresponsibilitiesandasfunctionofnewspecializedagencies.

  12. Knownincidentsofmoneylaunderinginvolvinglargeamountsofmoneygeneratedfromcrime,areoftremendouspublicinterestandareconsequentlygivenwidepublicity.Awiderangeofnationalandinternationalagencieshaveattemptedtoquantifyorganizedcrimeandcomponentsofmoneylaunderingintheirparticularsphereofinterest,andtheirassessmentsarefrequentlymadeavailableinpublicstatements.Acomparativelysimplecrime-economicmodel,constructedfromreadilyavailableinternationaldatabases,closelypredictsarangeofsuchexpertassessments,andappearstoofferaframeworkfordeterminingandmonitoringthesizeofmoneylaunderingflowsaroundtheworld.Knownincidentsofmoneylaunderinginvolvinglargeamountsofmoneygeneratedfromcrime,areoftremendouspublicinterestandareconsequentlygivenwidepublicity.Awiderangeofnationalandinternationalagencieshaveattemptedtoquantifyorganizedcrimeandcomponentsofmoneylaunderingintheirparticularsphereofinterest,andtheirassessmentsarefrequentlymadeavailableinpublicstatements.Acomparativelysimplecrime-economicmodel,constructedfromreadilyavailableinternationaldatabases,closelypredictsarangeofsuchexpertassessments,andappearstoofferaframeworkfordeterminingandmonitoringthesizeofmoneylaunderingflowsaroundtheworld.

  13. Tobeginwith,itneedstoberememberedthatmoneylaunderingisaflowoffunds.Thereisessentiallyaplacewherethemoneyisgenerated,andaplacewhereitislaundered.Evenwherecrimeisorganizedonatransnationalbasis,theproceedsofcrimecanbeallocatedtothecountriesinwhichthevariousvictimsofcrimelive.Themoneymaythen,ofcourse,belaunderedinthesamecountryinwhichitwasgenerated,orbesenttoanothercountry(orothercountries)forlaundering.Itmay,furthermore,flowonfromitsfirstplacementtoothercountries,andmayoftenreturneventuallytotheoriginatingcountrysothattheoffenderscaninvesttheirmoneyintolegitimateenterprisesintheirhomecountry.Tobeginwith,itneedstoberememberedthatmoneylaunderingisaflowoffunds.Thereisessentiallyaplacewherethemoneyisgenerated,andaplacewhereitislaundered.Evenwherecrimeisorganizedonatransnationalbasis,theproceedsofcrimecanbeallocatedtothecountriesinwhichthevariousvictimsofcrimelive.Themoneymaythen,ofcourse,belaunderedinthesamecountryinwhichitwasgenerated,orbesenttoanothercountry(orothercountries)forlaundering.Itmay,furthermore,flowonfromitsfirstplacementtoothercountries,andmayoftenreturneventuallytotheoriginatingcountrysothattheoffenderscaninvesttheirmoneyintolegitimateenterprisesintheirhomecountry.

  14. Inearly1998,theretiringchairmanoftheO.E.C.D.'sFinancialActionTaskForce(FATF)WorkingGrouponStatisticsandMethods,Mr.StanleyMorris,statedthat"theneedtoestimatethesizeofmoneylaunderingandquantifyitsconstituentpartshasbeenaconcernoftheFATFsinceitsinitialreport."Inearly1998,theretiringchairmanoftheO.E.C.D.'sFinancialActionTaskForce(FATF)WorkingGrouponStatisticsandMethods,Mr.StanleyMorris,statedthat"theneedtoestimatethesizeofmoneylaunderingandquantifyitsconstituentpartshasbeenaconcernoftheFATFsinceitsinitialreport." Hisreportidentifiedatleastfourareasoflegitimatedemandforquantitativemeasuresofmoneylaundering: Understandingthemagnitudeofthecrime,sothatlawenforcementauthorities,nationallegislators,andinternationalorganizationscanreachagreementontheplaceofcounter-moneylaunderingprogramswithinnationalandinternationalenforcementandregulatoryagendas.

  15. Understandingtheeffectivenessofcounter-moneylaunderingefforts,byprovidingabaselineandascaleformeasurementandenablingevaluationofparticularprogramsorapproaches.Understandingtheeffectivenessofcounter-moneylaunderingefforts,byprovidingabaselineandascaleformeasurementandenablingevaluationofparticularprogramsorapproaches. Understandingthemacro-economiceffectsofmoneylaundering,particularlytheadverseeffectsofmoneylaunderingonfinancialinstitutionsandeconomies.E.g.changesindemandformoney;exchangeandinterestratevolatility;heightenedriskstoassetqualityforfinancialinstitutions;adverseeffectsontaxcollectionand,ultimately,onfiscalpolicyprojections;contaminationeffectsonparticulartransactionsorsectorsandbehavioralexpectationsofmarketactors;andcountry-specificdistributionaleffectsorassetpricebubbles.

  16. Understandingmoneylaundering,sinceeventherigorousexaminationofthecomponentsofmeasurementshouldproduceadeepenedunderstandingoftherelationshipsamong,andthedifferencesbetween,variouspartsofthephenomenathataregroupedtogetherwhenwespeakofmoneylaundering.Understandingmoneylaundering,sinceeventherigorousexaminationofthecomponentsofmeasurementshouldproduceadeepenedunderstandingoftherelationshipsamong,andthedifferencesbetween,variouspartsofthephenomenathataregroupedtogetherwhenwespeakofmoneylaundering. Thereisasurprisingamountofinformationaboutglobaltrendsincrimeandinmoneylaundering.Forexample: UnitedNationsCrimeandJusticedatabases,describingcrimesofficiallyrecordedatthenationallevelinovereightycountries; InternationalCrimeVictimsSurveys,thatprovideinsightsintotherelationshipsbetweencrime(includingcrimesnotofficiallyrecorded)andnationalsocio-economiccharacteristicsinoversixtycountries;

  17. Estimatesoftheproceedsofcrimes–particularlydrug-relatedandothertrans-nationalcrimesEstimatesoftheproceedsofcrimes–particularlydrug-relatedandothertrans-nationalcrimes Indicesofcorruptionandsusceptibilitytomoneylaundering,suchasthosecompiledbyTransparencyInternationalortheAustralianOfficeofStrategicCrimeAssessmentsinCanberra; Geographic,demographic,economic,tradeandfinancedataatthenationalandinternationallevels.

  18. FINANCIAL ACTION TASK FORCE(FATP) TheFinancialActionTaskForce(FATF)isaninter-governmentalbodywhosepurposeisthedevelopmentandpromotionofpolicies,bothatnationalandinternationallevels,tocombatmoneylaunderingandterroristfinancing. TheTaskForceisthereforea"policy-makingbody"whichworkstogeneratethenecessarypoliticalwilltobringaboutnationallegislativeandregulatoryreformsintheseareas.  SinceitscreationtheFATFhasspearheadedtheefforttoadoptandimplementmeasuresdesignedtocountertheuseofthefinancialsystembycriminals. ItestablishedaseriesofRecommendationsin1990,revisedin1996andin2003toensurethattheyremainuptodateandrelevanttotheevolvingthreatofmoneylaundering,thatsetoutthebasicframeworkforanti-moneylaunderingeffortsandareintendedtobeofuniversalapplication.

  19. TheFATFmonitorsmembers'progressinimplementingnecessarymeasures,reviewsmoneylaunderingandterroristfinancingtechniquesandcounter-measures,andpromotestheadoptionandimplementationofappropriatemeasuresglobally. Inperformingtheseactivities,theFATFcollaborateswithotherinternationalbodiesinvolvedincombatingmoneylaunderingandthefinancingofterrorism. TheFATFmonitorsmembers'progressinimplementingnecessarymeasures,reviewsmoneylaunderingandterroristfinancingtechniquesandcounter-measures,andpromotestheadoptionandimplementationofappropriatemeasuresglobally. Inperformingtheseactivities,theFATFcollaborateswithotherinternationalbodiesinvolvedincombatingmoneylaunderingandthefinancingofterrorism.  TheFATFdoesnothaveatightlydefinedconstitutionoranunlimitedlifespan. TheTaskForceperiodicallyreviewsitsmission. TheFATFhasbeeninexistencesince1989. The currentmandate oftheFATF(for2004-2012)wassubjecttoamid-termreviewandwasapprovedandrevisedataMinisterialmeetinginApril2008.

  20. MEMBERS OF FATF:- FATF currently comprises 34 member jurisdictions and 2 regional organizations, representing most major financial centers in all parts of the globe. Argentina, Australia ,Austria ,Belgium, Brazil, Canada, China, Denmark, European Commission, Finland, France, Germany, Greece, Gulf Co-operation Council, Hong Kong, China, Iceland, India, Ireland, Italy, Japan, Kingdom of the Netherlands*,Luxembourg, Mexico, New Zealand, Norway, Portugal, Republic of Korea, Russian Federation, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States etc.

  21. FATF Associate Members The Asia/PacificGrouponMoneyLaundering (APG) CaribbeanFinancialActionTaskForce (CFATF) EurasianGroup(EAG) EasternandSouthernAfricaAnti-MoneyLaunderingGroup The CouncilofEurope CommitteeofExpertsontheEvaluationofAnti-MoneyLaunderingMeasuresandtheFinancingofTerrorism  (MONEYVAL)-formerlyPC-R-EV The FinancialActionTaskForceonMoneyLaunderinginSouthAmerica (GAFISUD) InterGovernmentalActionGroupagainstMoneyLaunderinginWestAfrica  (GIABA) MiddleEastandNorthAfricaFinancialActionTaskForce (MENAFATF)

  22. FATFOBSERVERS:- ThefollowinginternationalorganizationshaveobserverstatuswiththeFATF. Theinternationalorganizationslistedarethosewhichhave,amongotherfunctions,aspecificanti-moneylaunderingmissionorfunction. AfricanDevelopmentBank AsianDevelopmentBank BaselCommitteeonBankingSupervision (BCBS) CommonwealthSecretariat EgmontGroupofFinancialIntelligenceUnits EuropeanBankforReconstructionandDevelopment (EBRD EuropeanCentralBank (ECB) Europol  Inter-AmericanDevelopmentBank (IDB) InternationalAssociationofInsuranceSupervisors (IAIS) InternationalMonetaryFund(IMF) InternationalOrganizationofSecuritiesCommissions (IOSCO) Interpol

  23. Interpol/MoneyLaundering. OrganizationofAmericanStates/Inter-AmericanCommitteeAgainstTerrorism (OAS/CICTE) OrganizationofAmericanStates/Inter-AmericanDrugAbuseControlCommission (OAS/CICAD) OrganizationforEconomicCo-operationandDevelopment (OECD) OffshoreGroupofBankingSupervisors (OGBS) UnitedNations-OfficeonDrugsandCrime(UNODC)Counter-TerrorismCommitteeoftheSecurityCouncil(UNCTC)TheAl-QaidaandTalibanSanctionsCommittee(1267Committee) WorldBank WorldCustomsOrganization (WCO)

  24. OECD:- OECDstandsforOrganizationForEconomicCo-operationAndDevelopment.SomeoftheimportantinformationaboutOECDisasfollow:- establishedin1961 Headquarters:- Paris,France Membership;-34countries Budget:-EUR328million Secretary-General:-AngelGerri Secretariatstaff :-2500 Publications:-250newtitles/year

  25. MISSIONOFOECD:- ThemissionoftheOrganizationforEconomicCo-operationandDevelopment(OECD)istopromotepoliciesthatwillimprovetheeconomicandsocialwell-beingofpeoplearoundtheworld. TheOECDprovidesaforuminwhichgovernmentscanworktogethertoshareexperiencesandseeksolutionstocommonproblems.Itworkswithgovernmentstounderstandwhatdriveseconomic,socialandenvironmentalchange.Itmeasuresproductivityandglobalflowsoftradeandinvestment.Itanalysesandcomparesdatatopredictfuturetrends.Itsetsinternationalstandardsonallsortsofthings,fromthesafetyofchemicalsandnuclearpowerplantstothequalityofcucumbers.

  26. Itlooks,too,atissuesthatdirectlyaffectthelivesofordinarypeople,likehowmuchtheypayintaxesandsocialsecurity,andhowmuchleisuretimetheycantake.Itcompareshowdifferentcountries’schoolsystemsarereadyingtheiryoungpeopleformodernlife,andhowdifferentcountries’pensionsystemswilllookaftertheircitizensinoldage.Drawingonfactsandreal-lifeexperience,Itrecommendspoliciesdesignedtomakethelivesofordinarypeoplebetter.Itworkswithbusiness,throughtheBusinessandIndustryAdvisoryCommitteetotheOECD,andwithlabor,throughtheTradeUnionAdvisoryCommittee.Ithasactivecontactsaswellwithothercivilsocietyorganizations.Thecommonthreadofworkisasharedcommitmenttomarketeconomiesbackedbydemocraticinstitutionsandfocusedonthewellbeingofallcitizens.Alongtheway,italsosetsouttomakelifeharderfortheterrorists,taxdodgers,crookedbusinessmenandotherswhoseactionsundermineafairandopensociety.Itlooks,too,atissuesthatdirectlyaffectthelivesofordinarypeople,likehowmuchtheypayintaxesandsocialsecurity,andhowmuchleisuretimetheycantake.Itcompareshowdifferentcountries’schoolsystemsarereadyingtheiryoungpeopleformodernlife,andhowdifferentcountries’pensionsystemswilllookaftertheircitizensinoldage.Drawingonfactsandreal-lifeexperience,Itrecommendspoliciesdesignedtomakethelivesofordinarypeoplebetter.Itworkswithbusiness,throughtheBusinessandIndustryAdvisoryCommitteetotheOECD,andwithlabor,throughtheTradeUnionAdvisoryCommittee.Ithasactivecontactsaswellwithothercivilsocietyorganizations.Thecommonthreadofworkisasharedcommitmenttomarketeconomiesbackedbydemocraticinstitutionsandfocusedonthewellbeingofallcitizens.Alongtheway,italsosetsouttomakelifeharderfortheterrorists,taxdodgers,crookedbusinessmenandotherswhoseactionsundermineafairandopensociety.

  27. TheOECD’scorevalues Objective:Itanalysesandrecommendationsareindependentandevidence-based. Open:Itencouragesdebateandasharedunderstandingofcriticalglobalissues. Bold:Itdarestochallengeconventionalwisdomstartingwithourown. Pioneering:Itidentifiesandaddressesemergingandlongtermchallenges. Ethical: Itscredibilityisbuiltontrust,integrityandtransparency.

  28. VULNARABILITY OF INSURANCE SECTOR TO LAUNDERING:- TheworldwideinsuranceindustrygeneratespremiumsintherangeofUSD2.4to2.6trillionandishighlyvulnerabletomoneylaunderingandterroristfinancing.Thevulnerabilityismoreforlifeinsuranceandlessforgeneralinsuranceasaresultofwhichanti-moneylaunderingruleshavegenerallyfocusedontheformerincountrieslikeUSA.InsomeofthecountrieslikeLuxembourg,MauritiusandHongKong,AMLguidelinesininsurancesectorapplieseventonon-lifeinsurancecompanies.

  29. Themostcommonformofmoneylaunderingthatinsuranceinstitutionswillencountertakestheformofaproposaltoenterintoasinglepremiumcontract,lumpsumtop-upstoanexistinglifecontract.Thesecontractsinthemselvesmaybemerelyonepartofasophisticatedwebofcomplextransactions,whichwilloftenhavetheiroriginselsewhereinthefinancialservicessector.Moneylaunderingisconfusedtothefraudulentpracticesprevalentinindustrylikefraudulentclaims.Itisalsothoughttoberelatabletoforeignexchangetransactions,andbothofthesearesomeofthemisconceptionsaboutmoneylaundering.Theymaybemerelyoneofthestagesoflaunderingmoney.Themostcommonformofmoneylaunderingthatinsuranceinstitutionswillencountertakestheformofaproposaltoenterintoasinglepremiumcontract,lumpsumtop-upstoanexistinglifecontract.Thesecontractsinthemselvesmaybemerelyonepartofasophisticatedwebofcomplextransactions,whichwilloftenhavetheiroriginselsewhereinthefinancialservicessector.Moneylaunderingisconfusedtothefraudulentpracticesprevalentinindustrylikefraudulentclaims.Itisalsothoughttoberelatabletoforeignexchangetransactions,andbothofthesearesomeofthemisconceptionsaboutmoneylaundering.Theymaybemerelyoneofthestagesoflaunderingmoney.

  30. Theglobalinsuranceindustryprovidesrisktransfer,savingsandinvestmentproductstoavarietyofconsumersworldwide,fromindividualstomulti-nationalcorporationsandgovernments.Theinsurancesector,likeotherfinancialservices,isexposedtothethreatofmoneylaundering(ML)Theinsurancesectorcouldbeattractivetomoneylaunderersseekingtoplacefundsintoafinancialproductthatwillprovidethemwithareliable,cleanreturnoffundsinvested.Ifamoneylaundererisabletomovefundsintoaninsuranceproductandreceiveapaymentmadebyaninsurancecompanythenhewillhavemadehisfundsappearlegitimate.PreviousFATFtypologiesresearchhasobservedthattheinherentcharacteristicsoftheinsurancesectormaygiverisetoMLrisksuniquetotheinsuranceindustry,increasingitsvulnerabilitytoML.Inconsistentregulationandsupervisionacrosstheindustrywasnotedasprovidingopportunitiesthatcouldalsobeexploitedbymoneylaunderers.FATFtypologiesresearchindicatedthattherewasalowdetectionofMLwithintheinsuranceindustryincomparisontothesizeoftheindustryandincomparisontootherpartsofthefinancialservicesindustry.Theglobalinsuranceindustryprovidesrisktransfer,savingsandinvestmentproductstoavarietyofconsumersworldwide,fromindividualstomulti-nationalcorporationsandgovernments.Theinsurancesector,likeotherfinancialservices,isexposedtothethreatofmoneylaundering(ML)Theinsurancesectorcouldbeattractivetomoneylaunderersseekingtoplacefundsintoafinancialproductthatwillprovidethemwithareliable,cleanreturnoffundsinvested.Ifamoneylaundererisabletomovefundsintoaninsuranceproductandreceiveapaymentmadebyaninsurancecompanythenhewillhavemadehisfundsappearlegitimate.PreviousFATFtypologiesresearchhasobservedthattheinherentcharacteristicsoftheinsurancesectormaygiverisetoMLrisksuniquetotheinsuranceindustry,increasingitsvulnerabilitytoML.Inconsistentregulationandsupervisionacrosstheindustrywasnotedasprovidingopportunitiesthatcouldalsobeexploitedbymoneylaunderers.FATFtypologiesresearchindicatedthattherewasalowdetectionofMLwithintheinsuranceindustryincomparisontothesizeoftheindustryandincomparisontootherpartsofthefinancialservicesindustry.

  31. TheFATF-XVTypologiesExerciseexaminationoftheinsurancesectorconcludedthatitremaineduncleartowhatextenttheinsurancesectorisexposedtoML.Accordingly,theFATFFebruary2004PlenarydecidedtoexaminefurthertheMLvulnerabilitiesintheinsurancesectoraspartoftheFATFXVITypologiesExercise.Tofacilitatethisworkaprojectteamofexpertsfromanumberofdifferentbackgrounds(FIUs,centralbanksandinsurancesupervisors)wasformedfromjurisdictionswithsignificantinsuranceindustries,togetherwithrepresentativesfromtheInternationalAssociationofInsuranceSupervisors(IAIS).ThisprojectteamwastaskedwithperformingastudyonMLvulnerabilitiesintheinsurancesector.Tothisend,themandateoftheprojectteamwasdefinedsoastotakeabroadapproachtoexaminationofthefactorsthatmaymaketheinsurancesectorvulnerabletoML.Theobjectivesoftheworktobeundertakenwereasfollow:-TheFATF-XVTypologiesExerciseexaminationoftheinsurancesectorconcludedthatitremaineduncleartowhatextenttheinsurancesectorisexposedtoML.Accordingly,theFATFFebruary2004PlenarydecidedtoexaminefurthertheMLvulnerabilitiesintheinsurancesectoraspartoftheFATFXVITypologiesExercise.Tofacilitatethisworkaprojectteamofexpertsfromanumberofdifferentbackgrounds(FIUs,centralbanksandinsurancesupervisors)wasformedfromjurisdictionswithsignificantinsuranceindustries,togetherwithrepresentativesfromtheInternationalAssociationofInsuranceSupervisors(IAIS).ThisprojectteamwastaskedwithperformingastudyonMLvulnerabilitiesintheinsurancesector.Tothisend,themandateoftheprojectteamwasdefinedsoastotakeabroadapproachtoexaminationofthefactorsthatmaymaketheinsurancesectorvulnerabletoML.Theobjectivesoftheworktobeundertakenwereasfollow:-

  32. 1)toexaminethemoneylaunderingvulnerabilitiesintheinsurancesectortakingintoaccountthedifferencesamongthevariouspartsofthesectorandamonginsuranceproducts;1)toexaminethemoneylaunderingvulnerabilitiesintheinsurancesectortakingintoaccountthedifferencesamongthevariouspartsofthesectorandamonginsuranceproducts; •2)todevelopindustryspecificmoneylaunderingindicatorsthatmayassistboththefinancialservicessectorandnationalcompetentauthoritiesindetectingmoneylaunderingthroughinsurance; •3)tohighlightpossiblepolicyimplications,ifany,inthecontextofanti-moneylaunderingmeasuresfortheinsurancesector. Theteam’sfindingsweretocontributetotheFATF-XVIannualtypologiesexerciseandtoproduceareporttobepublishedbytheFATF.

  33. Thefollowingresponsewererecorded.Thefollowingwasthemajorfinding.Thefollowingresponsewererecorded.Thefollowingwasthemajorfinding. Fromtheresponsesjurisdictionsprovided,nonoticeabledifferenceshaveemergedintheextenttowhichAMLregulationappliestothelifeinsurancesectorwhencomparedwithotherpartsoffinancialservicesindustry.Withsomeexceptions15,alljurisdictionssubjectinsurerstothewholesetofAMLobligations,includingcustomeridentificationandverification,recordkeepingandsuspicioustransactionreporting.Notably,ten16jurisdictionsrespondedthatthereweresomeexemptionsonAMLregulationsonthelifeinsuranceindustry.FrequentlyAMLregulationdoesnotapplytothesameextenttothenon-lifesectorandisveryoftenabsentinthereinsurancesector.ThisreflectsthecurrentpositionofFATFRecommendationswhichdonotspecificallyincludegeneralinsuranceorreinsurance.

  34. Duetothewaytheinsurancemarketoperates,compliancewithAMLregulationisrequired(withexceptionsinfourjurisdictions)ofbothinsurersandtheintermediarieswhodistributeinsuranceproductsontheirbehalf.However,AMLregulationmaysometimesbeappliedatanunsatisfactorylevel.Here,sufficetosaythat,asforidentificationandverificationobligations,intermediariessometimesconsider,incorrectlytheydonotbeartheresponsibilityforAMLcompliance.Theybelievethisresponsibilityonlyremainswiththeinsurers,towhomthebusinessrelationswiththecustomershavetobeultimatelyreferred.Thismisconceptionmaybereinforcedbythefactthat,ratherthanfilingSTRsdirectlytotheFIUs,intermediariesareusuallyrequiredtoreportunusualbehaviorstotheinsureronbehalfofwhomtheyoperate.AMLregulationisusuallyappliedtoalimitedextentinthegeneralinsurancesector.Duetothewaytheinsurancemarketoperates,compliancewithAMLregulationisrequired(withexceptionsinfourjurisdictions)ofbothinsurersandtheintermediarieswhodistributeinsuranceproductsontheirbehalf.However,AMLregulationmaysometimesbeappliedatanunsatisfactorylevel.Here,sufficetosaythat,asforidentificationandverificationobligations,intermediariessometimesconsider,incorrectlytheydonotbeartheresponsibilityforAMLcompliance.Theybelievethisresponsibilityonlyremainswiththeinsurers,towhomthebusinessrelationswiththecustomershavetobeultimatelyreferred.Thismisconceptionmaybereinforcedbythefactthat,ratherthanfilingSTRsdirectlytotheFIUs,intermediariesareusuallyrequiredtoreportunusualbehaviorstotheinsureronbehalfofwhomtheyoperate.AMLregulationisusuallyappliedtoalimitedextentinthegeneralinsurancesector.

  35. Generalinsuranceisgenerallyviewedaspronetofraudulentschemestothedetrimentofinsurers,asinthecaseoffalseclaims,ratherthanbetheconduitofmoneylaunderingoperations.Asaresult,whereAMLprovisionsdoapplycarve-outsandexceptionsarepermittedusuallytoreflecttheperceivedlowerMLriskinthegeneralinsurancemarket.Asinotherpartsofthefinancialservicesindustry,prudentialsupervisionisappliedtoinsurers,involvingsomekindofinitialauthorizationprocessandongoingprudentialstandardschecks.Generallyinsurersareregisteredatacentralizedsupervisoryauthority,whilstthebusinessesownersandmanagementareusuallyrequiredtoundergointegritychecks.Inthelifeinsurancemarketprudentialsupervisionisextendedtointermediaries,althoughofteninmilderforms.Generalinsuranceisgenerallyviewedaspronetofraudulentschemestothedetrimentofinsurers,asinthecaseoffalseclaims,ratherthanbetheconduitofmoneylaunderingoperations.Asaresult,whereAMLprovisionsdoapplycarve-outsandexceptionsarepermittedusuallytoreflecttheperceivedlowerMLriskinthegeneralinsurancemarket.Asinotherpartsofthefinancialservicesindustry,prudentialsupervisionisappliedtoinsurers,involvingsomekindofinitialauthorizationprocessandongoingprudentialstandardschecks.Generallyinsurersareregisteredatacentralizedsupervisoryauthority,whilstthebusinessesownersandmanagementareusuallyrequiredtoundergointegritychecks.Inthelifeinsurancemarketprudentialsupervisionisextendedtointermediaries,althoughofteninmilderforms.

  36. Againstthisgeneralpicture,however,regulationandsupervisionhaveemergedasbeingappliedunevenlyacrosstheinsuranceindustrywhichmayprovideopportunitiesthatcanbeeasilyexploitedbycriminals.Forinstance,thefindingsconcerningthereinsurancesectorseemtobequitesignificant.Indevisingthequestionnaires,specialattentionwasdevotedtothissector,sincelittleanalysishadpreviouslybeenundertakenofthereinsurancesectorfromanAMLperspective.Aswillbecomeclear,especiallyfromtheanalysisofthecasesprovidedbyjurisdictions,reinsurancebusinesseshavesufferedfromcriminalinfiltration,facilitatedbyseeminglyineffectivesupervisionandintegritychecks,wheretheseexistatall.Againstthisgeneralpicture,however,regulationandsupervisionhaveemergedasbeingappliedunevenlyacrosstheinsuranceindustrywhichmayprovideopportunitiesthatcanbeeasilyexploitedbycriminals.Forinstance,thefindingsconcerningthereinsurancesectorseemtobequitesignificant.Indevisingthequestionnaires,specialattentionwasdevotedtothissector,sincelittleanalysishadpreviouslybeenundertakenofthereinsurancesectorfromanAMLperspective.Aswillbecomeclear,especiallyfromtheanalysisofthecasesprovidedbyjurisdictions,reinsurancebusinesseshavesufferedfromcriminalinfiltration,facilitatedbyseeminglyineffectivesupervisionandintegritychecks,wheretheseexistatall.

  37. IAIS IAIS stands for International Association Of Insurance Supervisors. Established in 1994, the International Association of Insurance Supervisors (IAIS) represents insurance regulators and supervisors of some 190 jurisdictions. Since 1999, the IAIS has welcomed insurance professionals as Observers. Currently there are more than 120 Observers representing industry associations, professional associations, insurers and reinsurers, consultants and international financial institutions. The IAIS issues global insurance principles, standards and guidance papers, provides training and support on issues related to insurance supervision, and organizes meetings and seminars for insurance supervisors.

  38. The IAIS works closely with other financial sector standard setting bodies and international organizationsto promote financial stability. It holds an Annual Conference where supervisors, industry representatives and other professionals discuss developments in the insurance sector and topics affecting insurance regulation. An Executive Committee, whose members represent different geographical regions, heads the IAIS. It is supported by three main committees - the Technical Committee, the Implementation Committee and the Budget Committee. These committees form subcommittees and working parties (working groups, task forces and groups) to accomplish their objectives

  39. Some of the PRINCIPLES OF IAIS are:- 2. Principles applicable to the supervision of international insurers and insurance groups and their cross-border business operations (Insurance Concordat), December 1999  Description: First approved in September 1997, these principles were amended in December 1999 to extend to insurance business that is conducted on a services basis without any foreign establishment. These principles aim to improve the supervision of internationally active insurance companies, stating that all insurance establishments should be subject to effective supervision, that authorization involving cross-border activities should be subject to consultation between the relevant supervisors, and that provision should be made for external audits and for information sharing with other supervisors. 3. Principles for conduct of insurance business, December 1999   Description: Has the objective of improving insurer, intermediary and consumer relationships, thereby strengthening consumer confidence in the industry.

  40. 4. Principles on the supervision of insurance activities on the Internet, October 2004  Description: This paper was originally issued in 2000 and was revised in 2004 to expand the scope to include insurance intermediaries and to add comments regarding key risks and risk management of insurance activities on the internet. 5. Principles on capital adequacy & solvency, January 2002  Description: Intended as an essential building block in the development of more detailed standards relating to capital adequacy and solvency, this paper elaborates 14 principles for evaluating the solvency of life and non-life insurance undertakings. It is also relevant to reinsurers, depending on the degree of regulation of the reinsurance industry in their jurisdictions.

  41. ICP GUIDELINES:- InJune2003,theBaselCommitteeonBankingSupervision(BCBS),InternationalAssociationofInsuranceSupervisors(IAIS)andInternationalOrganizationofSecuritiesCommissions(IOSCO)publishedajointnoteprovidingarecordoftheinitiativestakenbyeachsectortocombatmoneylaunderingandthefinancingofterrorism(AML/CFT).ThenoteprovidedanoverviewofthecommonAML/CFTstandardsthatapplytoallthreesectorsandanassessmentastowhetherthereareseriousgapsorinconsistenciesinapproachesandrecommendations.Inaddition,italsocoveredforeachsector:therelationshipsbetweentheinstitutionsandtheircustomersfocusingontheproductsorservicesthatareparticularlyvulnerabletomoneylaundering,howeachCommitteehassoughttoaddressthesevulnerabilities;and,finally,adescriptionofongoingandfuturework.

  42. GuidelinesprovidedtoaddressvulnerabilitiesinInsurance:- TheIAIShasgivenanti-moneylaunderingandcombatingthefinancingofterrorismhighpriority.InOctober2003theIAISrevisedandexpandeditsInsurancecoreprinciplesandmethodology,compliancewithwhichisrequiredforaninsurancesupervisorysystemtobeeffective.AspartofthisrevisionnewICP28wasintroduced,dealingspecificallywithanti-moneylaunderingandcombatingthefinancingofterrorism.InaccordancewithICP28theRecommendationsoftheFATFapplicabletotheinsurancesectorandtoinsurancesupervisionmustbesatisfiedtoreachthisobjective.

  43. InthelightoftheFATF40Recommendations,theIAISconsidersthereisneedforspecificguidanceforinsurancesupervisorsandtheinsurancesector.OneofthenewelementsoftheRecommendationsistheconceptofCustomerDueDiligence(CDD);oneaimofthenewguidancepaperistogiveguidancewithrespecttoCDD,tailoredtothespecificfeaturesoftheinsuranceindustryanditssupervision.Theguidancepaperalsoprovidescasesandexamplesofmoneylaunderinginvolvinginsurance,inordertoprovideabetterunderstandingoftheindicatorsforthemisuseoftheinsurancesector.InthelightoftheFATF40Recommendations,theIAISconsidersthereisneedforspecificguidanceforinsurancesupervisorsandtheinsurancesector.OneofthenewelementsoftheRecommendationsistheconceptofCustomerDueDiligence(CDD);oneaimofthenewguidancepaperistogiveguidancewithrespecttoCDD,tailoredtothespecificfeaturesoftheinsuranceindustryanditssupervision.Theguidancepaperalsoprovidescasesandexamplesofmoneylaunderinginvolvinginsurance,inordertoprovideabetterunderstandingoftheindicatorsforthemisuseoftheinsurancesector. InaccordancewiththeFATF40Recommendations,theguidancepaperappliesentirelytoinsurersandinsuranceintermediariesdealingwithlifeinsurance.TheIAISisalsoconcernedtoensurethatthepotentialriskstotypesofinsuranceotherthanlifeinsurance−non-lifeinsuranceandreinsurance−arealsoconsideredbyinsurancesupervisorsandinsurers.Theguidancepaperthereforealsoallowsthepossibilityforinsurancesupervisorstoextendthescopeoftheguidancepapertotheseothertypesofinsurance:insurancesupervisorsshouldbeawareofthepossibleriskstonon-lifeinsuranceandreinsuranceand,onthebasisofathoroughanalysisoftheserisks,mayextentthescopeofthepapertotheseothertypesofinsurance.Theguidancepaperoffersarangeofpossiblemeasures,proceduresandbestpracticefromwhichthesupervisorshouldselectthosemostappropriatetodealeffectivelyandefficientlywiththerisks.

  44. Application Of FATF Recommendations To Insurance:- RecommendationNo.5:- Financialinstitutionsshouldundertakecustomerduediligencemeasures,includingidentifyingandverifyingtheidentityoftheircustomers,when: establishingbusinessrelations; carryingoutoccasionaltransactions:(I)abovetheapplicabledesignatedthreshold;or(ii)thatarewiretransfersinthecircumstancescoveredbytheInterpretativeNotetoSpecial Thecustomerduediligence(CDD)measurestobetakenareasfollows: a)Identifyingthecustomerandverifyingthatcustomer'sidentityusingreliable,independentsourcedocuments,dataorinformation. b)Identifyingthebeneficialowner,andtakingreasonablemeasurestoverifytheidentityofthebeneficialownersuchthatthefinancialinstitutionissatisfiedthatitknowswhothebeneficialowneris.Forlegalpersonsandarrangementsthisshouldincludefinancialinstitutionstakingreasonablemeasurestounderstandtheownershipandcontrolstructureofthecustomer.

  45. c) Obtaining information on the purpose and intended nature of the business relationship. d) Conducting ongoing due diligence on the business relationship and scrutiny of transactions undertaken throughout the course of that relationship to ensure that the transactions being conducted are consistent with the institution's knowledge of the customer, their business and risk profile, including, where necessary, the source of funds.

  46. Recommendation No.6:- Financial institutions should, in relation to politically exposed persons, in addition to performing normal due diligence measures: a) Have appropriate risk management systems to determine whether the customer is a politically exposed person. b) Obtain senior management approval for establishing business relationships with such customers. c) Take reasonable measures to establish the source of wealth and source of funds. d) Conduct enhanced ongoing monitoring of the business relationship.

  47. RECOMMENDATION NO.8:- Financial institutions should pay special attention to any money laundering threats that may arise from new or developing technologies that might favor anonymity, and take measures, if needed, to prevent their use in money laundering schemes. In particular, financial institutions should have policies and procedures in place to address any specific risks associated with non-face to face business relationships or transactions.

  48. RECOMMENDATIONNO.9:- Countriesmaypermitfinancialinstitutionstorelyonintermediariesorotherthirdpartiestoperformelements(a)–(c)oftheCDDprocessortointroducebusiness,providedthatthecriteriasetoutbelowaremet.Wheresuchrelianceispermitted,theultimateresponsibilityforcustomeridentificationandverificationremainswiththefinancialinstitutionrelyingonthethirdparty. Thecriteriathatshouldbemetareasfollows: a)Afinancialinstitutionrelyinguponathirdpartyshouldimmediatelyobtainthenecessaryinformationconcerningelements(a)–(c)oftheCDDprocess.FinancialinstitutionsshouldtakeadequatestepstosatisfythemselvesthatcopiesofidentificationdataandotherrelevantdocumentationrelatingtotheCDDrequirementswillbemadeavailablefromthethirdpartyuponrequestwithoutdelay. b)Thefinancialinstitutionshouldsatisfyitselfthatthethirdpartyisregulatedandsupervisedfor,andhasmeasuresinplacetocomplywithCDDrequirementsinlinewithRecommendations5and10. Itislefttoeachcountrytodetermineinwhichcountriesthethirdpartythatmeetstheconditionscanbebased,havingregardtoinformationavailableoncountriesthatdonotordonotadequatelyapplytheFATFRecommendations.

  49. RECOMMENDATIONNO.1O:- Financialinstitutionsshouldmaintain,foratleastfiveyears,allnecessaryrecordsontransactions,bothdomesticorinternational,toenablethemtocomplyswiftlywithinformationrequestsfromthecompetentauthorities.Suchrecordsmustbesufficienttopermitreconstructionofindividualtransactions(includingtheamountsandtypesofcurrencyinvolvedifany)soastoprovide,ifnecessary,evidenceforprosecutionofcriminalactivity. Financialinstitutionsshouldkeeprecordsontheidentificationdataobtainedthroughthecustomerduediligenceprocess(e.g.copiesorrecordsofofficialidentificationdocumentslikepassports,identitycards,drivinglicensesorsimilardocuments),accountfilesandbusinesscorrespondenceforatleastfiveyearsafterthebusinessrelationshipisended. Theidentificationdataandtransactionrecordsshouldbeavailabletodomesticcompetentauthoritiesuponappropriateauthority.

  50. RECOMMENDATIONNO.11:- Financialinstitutionsshouldpayspecialattentiontoallcomplex,unusuallargetransactions,andallunusualpatternsoftransactions,whichhavenoapparenteconomicorvisiblelawfulpurpose.Thebackgroundandpurposeofsuchtransactionsshould,asfaraspossible,beexamined,thefindingsestablishedinwriting,andbeavailabletohelpcompetentauthoritiesandauditors.

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