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Abracadabra, Alakazam! Have you ever been to a magic show? Or perhaps you’ve mastered a few magic tricks of your own! Magic is the art of performing tricks, rituals and stunts that change how people see reality. When it comes to magic, things aren’t always as they seem, and mysterious forces appear to be at work. Coins seem to disappear into thin air, while animals may appear out of nowhere! When it comes to magic, sometimes it’s hard to tell what is real and what isn’t! Who makes it all possible? The magician!

Money laundering is in essence like stage magic. Does the money actually disappear? Obviously not, it just changes form and gets harder to find, giving the impression that it is clean. The job of the money launderer is, like that of the magician, to use proven and secret techniques to make money obtained in a “dirty” way appear to have been acquired elsewhere and from “legitimate sources”.

Money laundering is a cycle, the objective of which is to have access to “clean” appearing money at the end of the process.

The example of HSBC

THE FACTS

Consider the recent case of HSBC. HSBC is Europe’s largest bank. Founded in 1865 to accommodate the increased trade between Europe, China, and India, it presently operates in 80 countries.

The bank was investigated by a U.S. Senate investigative committee that revealed HSBC's Mexican affiliate transferred USD$7 billion in cash that flowed through the United States. The Senate investigative committee reported that this large amount of cash was indicative of illegal drug proceeds. It also determined that HSBC affiliates did not comply with the U.S. government ban decree on financial transactions with Iran and other countries, thus continuing to offer its services to those countries.

The bank’s U.S. division provided money and banking services to banks in Saudi Arabia and Bangladesh, which were alleged to have helped finance al-Qaeda and other terrorist groups.

The Bank was not the only guilty party to be blamed. U.S. Regulators were also blamed for not enforcing U.S. laws. They knew that the bank had insufficient controls to detect problems and had failed to follow up and verify whether adequate corrective measures were instituted. The Senate report stated that the Bank had operated a compliance culture that was pervasively polluted for a long time.

RESULT

The end result was that HSBC, so as to avoid prosecution, was asked to pay $1.9 billion to settle the money-laundering probe and to avoid a protracted legal battle that would have further embarrassed the British banking giant. HSBC said in a statement that its anti-money laundering measures were inadequate and it has since made strides in beefing up its controls.

LESSON

HSBC’s problems rose from the bank’s rapid growth in size after acquiring numerous banks around the world as its affiliates. These affiliates all over the world operated with a degree of autonomy that gave little authority and control to senior banking officials. Each affiliate had its own officer overseeing compliance and experts said that each of these officers often operated in different and conflicting international regulatory environments.

Is AML training necessary?

The best way to answer this particular question is by considering the potential costs and risks of having an inadequate approach to money laundering. 

Besides financial loss due to penalties, non-compliance with AML policies will cause financial institutions additional problems. The following risks have to be taken into consideration:


In relation to all of the above mentioned risks, the biggest one (other than the financial loss of course) has to be the potential damage to an organisation’s reputation arising from the organisation’s alleged involvement in money laundering or even worse, terrorism. The reputation of a business is usually at the core of its success. The ability to attract good employees, customers, funding and business is dependent on reputation. Even if a business is otherwise doing all the right things, if customers are permitted to undertake illegal transactions through that business, its reputation could be irreparably damaged. A strong KYC policy helps to prevent a business from being used as a vehicle for illegal activities.  In today’s world no organisation can stand the risk of association with terrorism.

Companies conducting business internationally have a higher risk factor, especially those subject to the AML regimes of the UK and the US. Such companies are increasingly looking to deal with other companies with a strong AML programme in place in order to help meet their own AML regulatory requirements and to avoid guilt by association.

As costly and time-consuming as AML compliance will be for an organisation, there are a range of real benefits to be gained from a robust AML compliance programme that has been endorsed by its governing body: 



In particular, special attention should be placed on the KYC and Due Diligence processes.

KYC

It is critical for financial institutions and professionals working within the financial sector, as well as other regulated entities to know their customers very well. “Know your customer” simply means:

  • ensuring that only legitimate and bona fide (i.e. authentic, real) customers are accepted;
  • ensuring that customers are properly identified and that they understand the risks they may pose;
  • verifying the identity of customers using reliable and independent documentation;
  • monitoring customer accounts and transactions to prevent or detect illegal activities;
  • implementing processes to effectively manage the risks posed by customers trying to misuse facilities.

 An effective KYC policy can help to mitigate the five types of risks mentioned above.

Due Diligence

Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party. An enhanced customer due diligence programme must be applied when the reporting entity determines there is high risk of money laundering or terrorist financing, or a suspicion has arisen under the provisions for reporting suspicious matters.

Every organisation with a strong knowledge and objective to support and implement an AML programme should have a plan in place, including efficient software for risk assessment, generation and dissemination of related policies and procedures, and training of employees on a regular basis. This allows for a more robust defence against any unwanted "magic" coming your way!

In our next article, we will look a bit more closely at what makes a successful AML strategy. Stay tuned!

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