- Over the last few years, rapid developments in financial information, technology and communication has enabled money to be moved anywhere in the world with speed and ease. This, together with other factors such as the general use of the US$ in black market economies, the progress of the Euro-market, the global trend of financial de-regulation and the proliferation of under-regulated Offshore Financial Centres has fuelled an enormous increase in money laundering on a global basis.
- The International Monetary Fund has estimated that about 2.8% of global GDP is made up of the proceeds of money laundering. In other words, up to US$2.5 trillion was laundered around the world in 2013. In some countries as much as 5% of GDP is the result of money laundering.
So how do we define an AML high risk jurisdiction?
- Any search around the internet will provide country anti-money laundering ratings tables wherein the usual suspects will always tend to appear within the high risk band area – Afghanistan, Iran, Syria, North Korea, etc. This is due to a number of factors including, but not limited to, whether the jurisdiction is named on the FATF list of anti-money laundering deficient jurisdictions, if international sanctions have been imposed against it, or if it subject to high levels of bribery and corruption. Obviously, the raising of any of those red flags should cause a Financial Service Provider to approach prospective business from that location with caution and cause enhanced due diligence procedures to be activated..
- Therefore, to define the level of money laundering risk that a jurisdiction poses would seem a relatively straightforward exercise. If only it were that simple!
- As almost all money laundering is a consequence of profit generating crime, it can occur practically anywhere in the world. Furthermore, jurisdictional risk is very much dependent upon the stage of the money laundering process i.e. the stage at where the funds are being placed, layered or integrated.
- For example, at the placement stage, the funds are usually processed relatively close to the under-lying activity; often, but not in every case, in the jurisdiction of the originating funds.
- With the layering phase, the launderer might choose an offshore financial centre, a large regional business centre, or a world banking centre – any location that provides an adequate financial or business infrastructure. At this stage, the laundered funds may transit bank accounts at various locations without leaving traces of their source or ultimate destination.
- Finally, at the integration phase, launderers might choose to invest laundered funds in still other locations if they were generated in unstable economies or locations offering limited investment opportunities.
- In fact, within the last few years, international banks located in many of those countries that would normally be deemed ‘low risk’, especially Western European and North American countries, have admitted to massive violations of money laundering controls and sanction busting over relatively long periods of time.
- In the UK, the Financial Conduct Authority’s 2011 thematic review of Banks’ management of high money laundering risk situations found that three quarters of the banks reviewed were not managing money laundering risk effectively. It was also discovered that around a third of all banks, including the private banking arms of some major banking groups, appeared willing to accept very high levels of money laundering risk, if the immediate reputational and regulatory risk was deemed acceptable.
Below is a list of recent examples of violations committed by OECD country based financial institutions (Illicit Financial Flows from Developing Countries – OECD 2014) : – http://www.oecd.org/corruption/Illicit_Financial_Flows_from_Developing_Countries.pdf
- HSBC –
- In 2012, HSBC paid a record-fine of USD 1 921 million to avoid criminal proceedings. US authorities investigated allegations that the bank laundered money originating from OFAC-sanctioned countries,
- including Cuba, Iran, Libya, Myanmar and Sudan. In addition, HSBC allegedly laundered proceeds of criminal activity in Mexico and Colombia. Additional fines by UK regulators. (Financial Times, 2012)
- Standard Chartered –
- Following US investigations, Standard Chartered in 2012 paid a total of USD 677 million as civil penalty and under a deferred prosecution agreement to US authorities.
- The bank violated sanctions on Iran, Libya, Myanmar and Sudan. (BBC, 2012; New York Times, 2012)
- ING –
- In 2012, ING settled allegation by US regulators that it laundered money from OFAC-sanctioned countries Cuba and Iran.
- ING paid USD 619 million. (United States Department of the Treasury, 2012a, 2012b)
- JP Morgan –
- In 2011, JP Morgan was fined USD 88.3 million by the US Treasury Department, for violating sanctions
- by the US Office of Foreign Asset Control (OFAC). JP Morgan conducted transactions with clients from
- Cuba, Iran, Sudan and Liberia. (United States Department of the Treasury, 2011; CNBC, 2011; Wall Street Journal, 2011a)
- Barclays –
- In 2010, Barclays paid USD 298 million in financial penalties as part of a deferred prosecution
- agreement to settle criminal charges by the US Department of Justice, which alleged that Barclays had
- conducted transactions with sanctioned countries Cuba, Iran, Myanmar and Sudan. (The Guardian, 2010; Telegraph, 2010a; United States Department of Justice, 2010a)
- RBS (ABN AMRO) –
- In 2010, RBS paid a USD 500 million penalty as part of a deferred prosecution agreement with US authorities. ABN AMRO, which was acquired by RBS, had illegally processed transactions from clients
- in Iran and Libya. (United States Department of Justice, 2010b; Telegraph, 2010b; Wall Street Journal, 2011b)
- Credit Suisse –
- In 2009, Credit Suisse paid a USD 538 million penalty for hiding transactions made by clients from
- Cuba, Iran, Libya, Myanmar and Sudan, as part of a deferred prosecution agreement with the US
- Justice Department. (Bloomberg, 2009; United States Department of the Treasury, 2009a)
- Lloyds Banking Group
- In 2009, Lloyds Banking Group agreed to a deferred prosecution arrangement with US prosecutors.
- The bank avoided prosecution for its dealings with clients in Iran, Libya and Sudan by paying USD 350 million. (Financial Times, 2009; United States Department of the Treasury, 2009b)
- Riggs Bank
- In 2004, Riggs Bank plead guilty to money laundering charges and paid a USD 16 million penalty.
- The bank failed to report suspicious activity by clients in Equatorial Guinea and Chile. Accounts were held, among others, by former dictator Augusto Pinochet. (Washington Post, 2005)
Furthermore, recent Mutual Evaluations conducted in OECD countries have highlighted serious weaknesses in AML systems, particularly in those categories relating to transparency of legal persons, regulation and supervision, customer due diligence and record keeping, reporting of suspicious transactions and, finally, the double whammy, especially with regard to the layering and integration stages of money laundering, dealing with those jurisdictions which have been named by FATF as being non-cooperative or deficient in their AML systems and regimes.
OECD countries deemed to be non-compliant with FATF Recommendations 21-22 relating to dealing with high-risk jurisdictions include Estonia, Greece, Japan, Korea, Luxembourg, New Zealand, Poland, Slovakia and Turkey.
I can understand the defining of a ‘high risk’ jurisdiction on the basis that a jurisdiction might be subject to any of the AML red flags and would therefore require enhanced due diligence, but what is concerning, particularly when we note the above mentioned AML weaknesses in OECD countries, is the general defining of many jurisdictions as being ‘low risk’ because either they do not cause those red flags to be raised or they are not named and shamed on any lists relating to AML system deficiencies. And, consequently, the fact that due diligence and risk controls will be eased off for any customer or customer business related to those ‘low risk’ jurisdictions.
Obviously, a financial institution that undertakes a significant amount of transactions in a relatively short period of time will need to rely upon some form of rating system for geographical risk and set its risk assessment parameters accordingly and, indeed, most financial transactions conducted around the world are perfectly legitimate. However, risk assessment for any jurisdiction should take into consideration the following: –
Does the jurisdiction have an effective AML/CFT system in place and, furthermore, does it have a high-level commitment to address AML/CFT issues?
- What are the circumstances of the jurisdiction, internally and internationally, the imposition of any sanctions, the levels of crime and corruption, and the make-up of its economy and financial sector?
- What structural elements underpin the AML/CFT system including regulation and supervision, enforcement, anti-corruption measures and the integrity of its judicial system?
- The nature of the relevant industry sector, if applicable, and its susceptibility to bribery and corruption in that jurisdiction.
- Whether there any trends in current and emerging financial crime prevalent within the jurisdiction/region?
- The nature of the proposed financial transaction and consequently why a specific jurisdiction is being used, i.e. might it relate to funds being processed through one of the placement, layering or integration stages of money laundering?
- Other contextual factors including cultural and trading links
Geographical anti-money laundering risk is an ever changing landscape.
Jurisdictions are put on high risk lists, jurisdictions are taken off high risk lists. Economies boom, economies crash. Governments are ousted, new ones take their place. Sanctions are imposed, sanctions are revoked. New criminal trends appear.
Therefore, it is essential that Financial Service Providers, on a customer by customer basis, identify, understand and assess the anti-money laundering concepts posed by the geographical location of that customer, their business, and the entry/exit point of any international transaction undertaken in the course of the customer’s business, in order to ensure that they are aware of the implications of any risks posed and, therefore, are able to mitigate against those risks.
Geographical due diligence and risk assessment must be an integral part of any customer due diligence and risk assessment.
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