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 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
on financial transactions
with Iran and other countries, thus continuing to offer its services to those countries.
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”.
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.
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
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
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
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.
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:
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.
KYC policy can help to mitigate the five types of risks mentioned above.
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.
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!
next article, we will look a bit more closely at what makes a successful AML strategy.
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