Methods And Stages Of Money Laundering.docx

Methods and Stages of Money Laundering There are three stages involved in money laundering; placement, layering and integration. Placement –This is the movement of cash from its source. On occasion the source can be easily disguised or misrepresented. This is followed by placing it into circulation through financial institutions, casinos, shops, bureau de change and other businesses, both local and abroad. The process of placement can be carried out through many processes including: 1. Currency Smuggling – This is the physical illegal movement of currency and monetary instruments out of a country. The various methods of transport do not leave a discernible audit trail FATF 1996-1997 Report on Money Laundering Typologies. 2. Bank Complicity – This is when a financial institution, such as banks, is owned or controlled by unscrupulous individuals suspected of conniving with drug dealers and other organised crime groups. This makes the process easy for launderers. The complete liberalisation of the financial sector without adequate checks also provides leeway for laundering. 3. Currency Exchanges – In a number of transitional economies the liberalisation of foreign exchange markets provides room for currency movements and as such laundering schemes can benefit from such policies. 4. 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. 5. 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. 6. 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.

Layering – The purpose of this stage is to make it more difficult to detect and uncover a laundering activity. It is meant to make the trailing of illegal proceeds difficult for the law enforcement agencies. The known methods are: 1. Cash converted into Monetary Instruments – Once the placement is successful within the financial system by way of a bank or financial institution, the proceeds can then be converted into monetary instruments. This involves the use of banker’s drafts and money orders. 2. Material assets bought with cash then sold – Assets that are bought through illicit funds can be resold locally or abroad and in such a case the assets become more difficult to trace and thus seize.

Integration – This is the movement of previously laundered money into the economy mainly through the banking system and thus such monies appear to be normal business earnings. This is dissimilar to layering, for in the integration process detection and identification of laundered funds is provided through informants. The known methods used are: 1. Property Dealing – The sale of property to integrate laundered money back into the economy is a common practice amongst criminals. For instance, many criminal groups use shell companies to buy property; hence proceeds from the sale would be considered legitimate. 2. Front Companies and False Loans – Front companies that are incorporated in countries with corporate secrecy laws, in which criminals lend themselves their own laundered proceeds in an apparently legitimate transaction. 3. Foreign Bank Complicity – Money laundering using known foreign banks represents a higher order of sophistication and presents a very difficult target for law enforcement. The willing assistance of the foreign banks is frequently protected against law enforcement scrutiny. This is not only through criminals, but also by banking laws and regulations of other sovereign countries. 4. False Import/Export Invoices – The use of false invoices by import/export companies has proven to be a very effective way of integrating illicit proceeds back into the economy. This involves the overvaluation of entry documents to justify the funds later deposited in domestic banks and/or the value of funds received from exports.

The money laundering cycle can be broken down into three distinct stages; however, it is important to remember that money laundering is a single process. The stages of money laundering include the:

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Placement Stage Layering Stage Integration Stage

The Placement Stage

The placement stage represents the initial entry of the "dirty" cash or proceeds of crime into the financial system. Generally, this stage serves two purposes: (a) it relieves the criminal of holding and guarding large amounts of bulky of cash; and (b) it places the money into the legitimate financial system. It is during the placement stage that money launderers are the most vulnerable to being caught. This is due to the fact that placing large amounts of money (cash) into the legitimate financial system may raise suspicions of officials.

The placement of the proceeds of crime can be done in a number of ways. For example, cash could be packed into a suitcase and smuggled to a country, or the launderer could use smurfs to defeat reporting threshold laws and avoid suspicion. Some other common methods include:

Loan Repayment

Repayment of loans or credit cards with illegal proceeds

Gambling

Purchase of gambling chips or placing bets on sporting events

Currency Smuggling

The physical movement of illegal currency or monetary instruments over the border

Currency Exchanges

Purchasing foreign money with illegal funds through foreign currency exchanges

Blending Funds

Using a legitimate cash focused business to co-mingle dirty funds with the day's legitimate sales receipts

This environment has resulted in a situation where officials in these jurisdictions are either unwilling due to regulations, or refuse to cooperate in requests for assistance during international money laundering investigations.

To combat this and other international impediments to effective money laundering investigations, many like-minded countries have met to develop, coordinate, and share model legislation, multilateral agreements, trends & intelligence, and other information. For example, such international watchdogs as the Financial Action Task Force (FATF) evolved out of these discussions.

The Layering Stage

After placement comes the layering stage (sometimes referred to as structuring). The layering stage is the most complex and often entails the international movement of the funds. The primary purpose of this stage is to separate the illicit money from its source. This is done by the sophisticated layering of financial transactions that obscure the audit trail and sever the link with the original crime.

During this stage, for example, the money launderers may begin by moving funds electronically from one country to another, then divide them into investments placed in advanced financial options or overseas markets; constantly moving them to elude detection; each time, exploiting loopholes or discrepancies in legislation and taking advantage of delays in judicial or police cooperation.

The Integration Stage

The final stage of the money laundering process is termed the integration stage. It is at the integration stage where the money is returned to the criminal from what seem to be legitimate sources. Having been placed initially as cash and layered through a number of financial transactions, the criminal proceeds are now fully integrated into the financial system and can be used for any purpose.

There are many different ways in which the laundered money can be integrated back with the criminal; however, the major objective at this stage is to reunite the money with the criminal in a manner that does not draw attention and appears to result from a legitimate source. For example, the purchases of property, art work, jewellery, or high-end automobiles are common ways for the launderer to enjoy their illegal profits without necessarily drawing attention to themselves.

Money laundering is big business. Criminals use money laundering techniques to cover up funds acquired through illegal activity and make it appear as if they were generated through legitimate and legal means. The fraudster aims to conceal that the funds exist, how he or she acquired them and where they are stored. Whether it’s Walter White using A1A Carwash as a front for his drug business or the Zeta cartel running a horse-racing farm, the ways to launder money are limited only by the fraud organization’s imagination.

Image Credit People launder money using money laundering techniques for two principal reasons. First, the money can lead a traceable pathway to their fraudulent activity. Second, the cash itself is susceptible to take-over from law enforcement authorities and therefore needs to be protected. To a smaller degree, tax evasion is another reason. No good criminal wants their briefcase full of cash taken away. Regardless of the reason why, the operational steps of money-laundering techniques involve three stages: 1. Movement – Move the funds away from explicit connection to the illegal activity 2. Disguise – Obscure the money audit trail and sever the link to the original crime 3. Return – Reunite the money with the owner from what appears to be legitimate sources Often times these stages are also referred to as placement (movement), layering (disguise) and integration (return).

Movement Movement of funds away from its source is the first step in the process. This step is the initial entry of the money or proceeds of a crime into the financial ecosystem. The cash is moved into circulation through banks, casinos, shops and other cash heavy businesses (e.g. restaurants, night clubs). Movement can be carried out through many processes such as:

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Purchasing assets – The purchase of assets with cash where the primary purpose is to transfer the illegal profits from bulk cash to an equally valuable but less conspicuous form Blending funds – Using a justifiable cash focused business to mix “dirty” funds with the legitimate income Exchanging currency – Buying foreign money with illegal funds through foreign currency exchanges Gambling – Buying casino chips, cashing out the chips and taking check payment or claiming the proceeds as gambling winnings

It is at the movement stage that federal legislation has been put in place (e.g. Bank Secrecy Act, OFAC regulations) to prevent launderers from using money laundering techniques like depositing or converting large sums of cash at financial institutions or taking cash out of the country. This stage is also where money launderers are the most exposed since introducing large amounts of cash and a high volume of small transactions (in order to stay under $10K limits) into the financial system raises red flags.

Image Credit Disguise After introducing the money into the financial system, the fraudster carries out a series of money laundering techniques, one transaction after another, all designed to hide what they are doing. During this step, the laundering organization adds layers such as moving funds electronically across international borders, reselling assets, investing in overseas stock markets and diverting funds to offshore accounts, shell companies and paying front men. The disguise stage of the process represents the most challenging area of detection. Due to the many layers, it’s hard to trace the funds, especially if the money is moved multiple times from one institution to another. Finding all of the individuals involved, and how they are linked and connected, requires lengthy forensic investigations and advanced correlation algorithms.

Fraudsters know what they are doing. Investing in inconspicuous institutions and spreading activity across many institutions are effective ways to remain under law enforcement’s watch. Many successful money laundering techniques have gone through institutions that most people would never consider as fronts for illegal operations. Who would suspect a family-friendly water park, a resort management company and a charity foundation for cancer? One of the reasons why organized crime syndicates such as drug cartels have continued to flourish is because of their infiltration into hundreds of institutions. They coordinate with so many types of organizations across many countries that eliminating one institution will not hinder their practices.

Image Credit Return The final example of money laundering techniques is the integration of the money back into the economy in such a way as to make it look like a legitimate business transaction with an audit trail. Reuniting the funds with the owner can happen a number of ways including;   

Buying property – Use shell companies to buy property where the revenue from the sale would be considered legitimate Providing loans – Criminals lend themselves their own laundered proceeds in an apparently legitimate transaction Faking invoices – Overstate their income, which comes from over-invoicing to allow inflow of illegally obtained money

Image Credit Financial crimes unit and anti-money laundering (AML) investigators know that inherent in money-laundering techniques is the requisite that the owner and origin of the funds be hidden. They recognize this and understand at the same time that the owner needs some way to maintain control of the funds. An indirect connection will always exist throughout the process. Looking for these connections between transactions and institutions can turn out to be key in uncovering and busting a money-laundering scheme.

BSP Advocacy on Anti-Money Laundering (AML) Passage of Anti-Money Laundering Act (AMLA) of 2001 (Republic Act No. 9160) and Subsequent AMLA Amendments (RA 9194, RA 10167 and RA 10365) The Original AMLA under RA 9160 (September 2001) In order to implement its continued commitment and support of the global fight against money laundering, the BSP has issued a number of measures to bring the Philippines' regulatory regime on money laundering closer to international standards. In September 2001, the AntiMoney Laundering Act (AMLA) of 2001 was passed under Republic Act No. 9160. The legislation, among others, defines money laundering as a criminal offense, prescribes penalties for such crimes committed and forms the foundation of a central monitoring and implementing council called the Anti-Money Laundering Council (AMLC). To combat money laundering, this law imposes requirements on customer identification, record keeping, reporting of covered and suspicious transactions, relaxes strict bank deposit secrecy laws, and provides for freezing/seizure/forfeiture/recovery of dirty money/property as well as for international cooperation. The AMLC is comprised of three (3) members: the Governor of the Bangko Sentral ng Pilipinas as the Chairman and the other two (2) members are the Commissioner of the

Insurance Commission and the Chairman of the Securities and Exchange Commission. It acts unanimously in the discharge of its functions. AMLC is also referred to as the country’s Financial Intelligence Unit (FIU) and is assisted by a Secretariat, otherwise known as the AMLC Secretariat (AMLCS), headed by an Executive Director. The AMLA Implementing Rules and Regulations (IRR) was also issued in 2001. First AMLA Amendment under RA 9194 – March 2003 To address concerns such as the high threshold level for covered transactions, the coverage of “covered institutions” and the existing Bank Secrecy Law, the amendments to the AMLA were signed into law on 7 March 2003 under Republic Act No. 9194. The amendments included the following: a) lowering the threshold for covered transactions from P4.0 million to P500,000; b) authorizing the BSP to inquire or examine any deposit or investment with any banking institution without court order in the course of a periodic or special examination; and c) removing the provision prohibiting the retroactivity of the law. Said amendments were given favorable consideration by the Financial Action Task Force (FATF) and sanctions were not imposed on the Philippines. However, the Philippines at that time remained in the list of non-cooperative countries and territories (NCCTs) of the FATF and the country’s removal from the list will be determined by the FATF after close monitoring of the implementation issues. The Philippines was finally removed from the NCCT list of the FATF in February 2005 due to excellent progress made in combating money laundering and terrorist financing. The Revised Implementing Rules and Regulations (RIRR) on the AMLA of 2001, as amended, was approved by the Congressional Oversight Committee on 6 August 2003 and was implemented on 3 September 2003. Second AMLA Amendment under RA 10167 – June 2012 To further strengthen the country’s AML regime and address the concerns of the FATF, second AMLA amendment under RA 10167 was signed into law on 18 June 2012 amending for the purpose Sections 10 and 11 of the AMLA, as amended. Section 10 relates to the “Freezing of Monetary Instrument” wherein upon verified “ex parte” petition by the AMLC, the Court of Appeals (CA) should act on the petition to freeze within twenty-four (24) hours from filing of the petition, and the freeze order shall be for a period of twenty (20) days unless extended by the Court/CA. Section 11 relates to the “Authority to Inquire into Bank Deposits” wherein the AMLC is given authority to examine bank accounts “upon order of any competent court based on an ex parte application” which effectively expanded the instances when no such court application is required. Said provision simply means that the court may allow the AMLC to look into bank deposit accounts of suspected money launderers without notifying them. Under this Section, the CA is directed to act on the application to inquire into or examine any deposit or

investment account within twenty-four (24) hours from date of filing of the application. In addition, although Section 11 of the AMLA reworded the authority of BSP to check the compliance in the course of a periodic or special examination of a covered institution with the requirements of the AMLA and its implementing rules and regulations, the sponsoring Senator when asked if the BSP, without court order, may be allowed to look into specific accounts under the proviso, Senator Guingona said that it is only to ensure compliance with AMLA. These two amended provisions recognized the urgency of the issuance of the freeze order and the grant of authority to AMLC to conduct bank inquiry within 24 hours from the filing of the petition. This AMLA amendment under RA 10167 resulted to favorable action of the FATF where it decided to upgrade the country's “dark gray” list to “gray”, which is just one notch away from being taken out in the FATF list of nations considered non-compliant to global AML standards. After the passage of RA 10167, the Revised Implementing Rules and Regulations (RIRR) was approved under AMLC Resolution No. 84 dated 23 August 2012. BSP disseminated said RIRR to all BSP covered institutions under BSP Circular Letter No. CL-2012-068 dated 20 September 2012. Third AMLA Amendment under RA 10365 – February 2013 As continuing commitment to comply with FATF AML/CFT standards, the third AMLA amendment under RA 10365 was passed into law on 15 February 2013 that covered the following major amendments: 

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Expansion of the definition of the crime of money laundering: AMLC can now go after persons who engage in the conversion, transfer, movement, disposal of, possession, use, and concealment or disguise, of the monetary proceeds of an unlawful activity, that was previously limited to the transaction of laundered funds and property; Inclusion of jewelry dealers in precious metals and stones whose transactions are in excess of P1,000,000 and company service providers as defined and listed under RA 10365, are now included as “Covered Persons”; Increase of unlawful activities to money laundering from 14 to 34. The 20 additional crimes include trafficking in persons, bribery, counterfeiting, fraud and other illegal exactions, forgery, malversation, various environmental crimes, and terrorism and its financing; Authorize the AMLC to require the Land Registration Authority and all its Register of Deeds to submit report to the AMLC covering real estate transactions in excess of P500,000.00; Issuance of freeze order by the Court is now valid for a maximum period of six (6) months, from the previous twenty (20) days validity under RA 10167.

Compliance with FATF International Standards In November 2003, the Philippines’ amendments to the AMLA were evaluated by the FATF and were found to be at par with international standards. On 11 February 2005, the Philippines, Cook Islands, and Indonesia were removed from the list of NCCTs during the meeting of the FATF. After the country’s delisting from the list of NCCT’s, the AMLC of the Philippines was accepted as one of seven new members of the Egmont Group, the global network of FIUs against money laundering and terrorist financing, making the Philippines an equal partner in the global fight against money laundering and terrorist financing. Membership to the Egmont Group means affording AMLC free and unlimited access to a wealth of financial data contained in the databases of all the FIU-members of the group. All information exchanged by FIUs are subjected to strict controls and safeguards to ensure it is used only in an authorized manner, consistent with national provisions on privacy and data protection. The recent AMLA amendments under RA 10167 and RA 10365 are testament of the Philippine’s serious commitment to further strengthen the country’s AML regime and to address the weaknesses noted by the FATF in the Philippine’s legal framework with regard to AML. Passage of these laws were officially recognized and favorably considered by the FATF that are now in substantial compliance with its AML/CFT international standards. Thus, FATF in its February 2013 plenary meeting, shielded the Philippines from being blacklisted again.

Other AML Initiatives Undertaken by BSP to Further Strengthen the Country’s AML Regime Since 2000, the BSP continued to firmly undertake several initiatives on how to safeguard the Philippine banking system through constant reshaping of existing AML preventive measures and implementation of appropriate policies at par with global standards such as the following initiatives. 1. Creation of the Anti-Money Laundering Specialist Group (AMLSG) within the Supervision and Examination Sector (SES) The AMLSG was created on 13 December 2007 under MB Resolution No. 1443 to address the need for technical expertise in the supervision of AML activities of banks and non-bank financial institutions (NBFIs) under the supervision and regulation of the BSP. The Group became fully operational in November 2008 and currently has 34 authorized plantilla positions. It is under the direct supervision of the Managing Director, Supervision and Examination Subsector I, SES. AMLSG aims to be BSP's core unit of highly competent, dynamic and ethical professionals who work to ensure financial institutions (FIs) adopt and maintain adequate and effective policies, systems and procedures that prevent them from being used to support the laundering

of proceeds from any unlawful activity. AMLSG is tasked to develop relevant guidelines and regulations to support and guide the AML efforts of financial institutions supervised by the BSP, ensure the effective implementation of said policies through examination services and technical assistance to the SES and enhance the related technical skills of the SES human resource pool through training. In addition, AMLSG shall perform off-site monitoring to identify those FIs whose operations present an elevated risk of money laundering activities. AMLSG works closely with the AMLC Secretariat and various banking and non-bank industry associations under the regulatory ambit of the BSP to foster domestic cooperation. Since 2008, AMLSG has conducted several AML onsite examinations, particularly commercial banks due to their significant assets size and complex banking activities. The Group was also principally involved in the crafting of AML rules and regulations, such as the issuance of Circular 706 dated 5 January 2011 and the adoption on 2 March 2012 of the AML Risk Rating System, that are discussed below.

2. Issuance of a consolidated AML regulations under BSP Circular No. 706 dated 5 January 2012, otherwise known as the Updated AML Rules and Regulations (UARR) UARR was issued for the purpose of consolidating all existing BSP circulars, circular letters and other issuances related to AML. Likewise, it enhances the implementation of the existing AML legal framework to better conform with international standards as well as address the deficiencies noted by the joint team of assessors from the World Bank and Asia Pacific Group on Money Laundering during the mutual evaluation of the country in 2008. The UARR applies to all covered institutions supervised and regulated by the BSP including Banks, Offshore banking units, quasi banks, trust entities, non-stock savings and loan associations, pawnshops, foreign exchange dealers, money changers and remittance agents, electronic money issuers including their subsidiaries and affiliates wherever they may be located. In addition to the usual provisions on customer identification/KYC, covered and suspicious transaction reporting and record keeping and retention requirements that are found in the AMLA-RIRR, the UARR emphasizes the incorporation of a sound risk management system to ensure that risks associated with money laundering and terrorist financing are identified, assessed, monitored, mitigated and controlled by covered institutions. A sound risk management system includes adequate and active Board and Senior Management oversight, acceptable policies and procedures embodied in a Money Laundering and Terrorist Financing Prevention Program (MLPP), appropriate

monitoring and Management Information System and comprehensive internal controls and audit. UARR encourages covered institutions to formulate a risk-based and tiered customer acceptance and retention policies, adoption of a criteria for assessing customers as low, normal and high risk and standards for applying reduced, average and enhanced due diligence. It also mandates observance of extreme caution and vigilance in dealing with high risk customers such as shell companies. The UARR also strongly supports the Financial Inclusion advocacy promoted by the BSP. For instance, it allows a) the outsourcing of the conduct of face-to-face contact as well as the gathering of the KYC documents and information to establish the identity of a customer; b) acceptance of one (1) valid ID for the conduct of financial transactions, listing for this purpose a wide variety of acceptable IDs and the utilization of the covered institution’s own technology to take the photo of their customers in case the ID presented is non-photo-bearing such as TIN, barangay and DSWD certification; and c) the third-party reliance is likewise introduced in the UARR to avoid duplication of customer identification processes so that covered institutions may refocus their resources to better serve and address the needs of customers. This principle allows a covered institution such as a Bank to rely on the KYC conducted by another covered institution. UARR further provides that any violations of existing provisions thereof shall constitute a major violation, that may subject the bank, its directors, officers and staff to enforcement actions such as monetary and non-monetary penalties. The enforcement actions shall may be imposed on the basis of the overall assessment of a covered institution’s AML compliance system, and if found to be grossly inadequate, such may be considered as unsafe and unsound banking practice that may warrant initiation of prompt corrective action.

3. Adoption of AML Risk Rating System (ARRS) A necessary consequence of a risk-based approach to supervision is the development of a risk-focused examination process that is complemented by the adoption of an AML Risk Rating System (ARRS) approved under MB Resolution No. 362 dated 2 March 2012 and disseminated to all BSP covered institutions under Memorandum to All Banks No. 2012-017 dated 4 April 2012. ARRS is an internal rating system to be used by BSP to understand whether the risk management policies and practices as well as internal controls of Banks and NBFIs to prevent money laundering and terrorist financing are in place, well disseminated and effectively implemented. ARRS is an effective supervisory tool that undertakes to ensure that all covered institutions as defined under Circular No. 706 are assessed in a

comprehensive and uniform manner, and that supervisory attention is appropriately focused on entities exhibiting inefficiencies in Board of Directors and Senior Management oversight and monitoring, inadequacies in their AML framework, weaknesses in internal controls and audit and defective implementation of internal policies and procedures. Under the ARRS, each covered institution is assigned a Numerical and Adjectival Composite Rating (4 as the highest – sound; 3 – adequately sound; 2- vulneralbe; and 1 as the lowest – grossly inadequate) based on the assessment of the following four (4) components: 1. Component I- Efficient Board of Directors (BOD) and Senior Management (SM) Oversight (“Management”); 2. Component II- Sound AML policies and procedures embodied in a Money Laundering and Terrorist Financing Prevention Program duly approved by the Board of Directors (“MLPP”); 3. Component III- Robust internal controls and audit (“Controls and Audit”); and 4. Component IV- Effective implementation (“Implementation”). Evaluation of the four (4) components takes into consideration the covered institution’s responses to various questions that are designed to comprehend its business operations as well as its risk profile. The responses will be assessed and on-site examination will confirm their veracity and accuracy. Based on the evaluation of the existence or nonexistence of the each of the above components, BSP covered institutions are assigned a Numerical and Adjectival Component Rating that also ranges from 4 as the highest and 1 as the lowest. After considering the four components, enforcement actions proportional to the Composite Rating are recommended to ensure that BSP covered institutions take necessary measures to improve their risk management policies and practices.

4. Proactive issuance of AML Regulations on Ongoing Basis since 2000 Aside from AML Circulars, BSP also issues on an ongoing basis Circular-Letters since 2000 to disseminate resolutions adopted by the AMLC covering updates of guidelines on reporting of suspicious transactions or identifying suspected individuals or organizations (local and international) known to be involved in money laundering and other illegal activities, particularly those included in the United Nations Sanctions List. In addition, BSP has issued several media releases and other public advisories to disseminate certain suspicious or illegal activities to make the public fully aware of them.