The harmony between a Certified Anti-Money Laundering Specialist and a Financial Crime Specialist
By Bachir El Nakib, Founder-CEO Compliance Alert
There is some a harmony between being a CAMS &/or FCS, a risk-based factor intended to root out money laundering and financial crimes found in the tidal waves of financial crimes that continues to weep trough the world at alarming pace - especially cyber crime, which transcends cross boders.
It is without doubt a global crisis and the reason more and more global businesses are seeking solutions through recognised experts, Both certifications respond to the need for professionals with diverse skills and knowledge across the financial crime spectrum. Both facilitate sound hiring practices, advances careers and gives a competitive advantage to individuals who eran them and their employers.
Know your customer (KYC) is the process of a business verifying the identity of its clients. The term is also used to refer to the banking regulatory framework which governs these activities. The Know Your Customer processes are also employed by Banks, Financial Services, and Companies of all sizes for the purpose of ensuring their proposed agents, consultants, or distributors are anti-bribery compliant. Banks, insurers and export creditors are increasingly demanding that customers provide detailed anti-corruption due diligence information, to verify their probity and integrity.
KYC or Know Your Customer policies are becoming much more important globally to prevent identity theft, financial fraud, money laundering and terrorist financing:
Know Your Customer (Customer Due Diligence)
Financial institutions are vulnerable to fraud in many ways and their old adage, "Know Your Customer," is as effective a safeguard against external financial crime as any government regulation can be. One way to prevent these problems is to assure that an application for a new account or relationship by an individual or entity is truthful and fully vetted and is not a prelude to a financial crime scheme.
A good way for a financial institution to prevent future problems with a customer is to assure it takes reasonable due diligence steps when the potential new customer seeks to establish a relationship. The applicant should be asked to corroborate all the information he provides and the institution must verify the information. Here is one way to find beneficial ownership.
The Corporate Registry provides the legal framework within which all businesses, not-for-profit societies, cooperative associations and financial institutions reporting and filing requirements for companies differ from country to country and sometimes from state to state, or region to region. They also vary depending on the size and legal form of the company (sole proprietorship, partnership, limited liability, etc...). Companies registeries collect and store information pertaining to corporations and other legal entities created within a given jurisdiction, depending on the jurisdiction, there may be a single registry for an entire nation, or multiple registries for different states, regions or cities.
As storehouses for corporate information, registries serve several functions. They record the creation or incorporation of a new legal entity, collect information on that entity as required by the laws and regulations of their jurisdiction, and typically make certain information on legal entities publically available. Registries exist to identify entities for tax purposes and allow other companies and financial institutions to collect information on the corporations and legal entities they are doing business with.
Due to the widespread presence of corporations, both legitimate and illegitimate, in financial crime schemes, corporate registries are key source of information in investigations, enforcement actions and due diligence. As mentioned, however, the quality and type of information that can be obtained from corporate registries varies substantially between jurisdictions.
In 2011, the World Bank conducted a global study of corporate registries to determine what information on legal entities could be found in them. The full report based partly on that study, titled “The Puppet Masters,” is a useful resource for all financial crime professionals, and can be found here:http://star.worldbank.org/star/publication/puppet-masters.
Of the 40 jurisdictions surveyed, the World Bank found the following information was usually available from the corporate registry:
The name and type of the legal entity
Date of the company formation, and date when the company was dissolved if no longer in existence
Articles of incorporation and other company formation documents, such as bylaws
A physical address of the corporation, or address of the company formation agent
Name and address of a registered agent for the company
Roughly half of the jurisdictions surveyed also had the following information in their corporate registries:
Names and addresses of the legal entity’s directors or officers
Names and addresses of the shareholders, members or other legal owners of the legal entity
One very significant piece of information was missing from almost all corporate registries – the beneficial owner or owners of the legal entity. Only one jurisdiction, Jersey, required this information to be supplied at the time of entity formation. This fact points to the shortcomings of corporate registries as a resource for financial crime investigations.
Further compounding the difficulties of corporate registries as an investigative source is the fact that information in them can often be outdated and inaccurate. Many corporate registries are not updated on a regular basis, and most do not conduct due diligence on the information provided, instead relying on the person or company registering the legal entity to provide accurate and true information at the time of incorporation.
Despite these weaknesses, registries can be a valuable starting point in an investigation. Information obtained from them, such as the names and contact details for registered agents or shareholders, will typically require further investigation and verification before the true owners behind a legal entity can be discerned.
Many jurisdictions have national or regional registries that can be publicly accessed online. Additionally, a number of international bodies maintain websites that can either be used to find corporate registry information directly, or have links to corporate registries of various jurisdictions. Names and links to these organizations and regional registries are provided below. In the US, corporate registries are maintained at the state level, and can be accessed by searching online for the registry of a given state.
Because it is the oldest and most powerful in the world, it is instructive to study the provisions of the United States money laundering law. Enacted in 1986, the US law has a specific “extraterritorial” provision and is unique for its far-reaching applicability.
For power and reach there is no money laundering law like it. The US money laundering law is proof that money laundering is a part of all financial crimes. Anyone who works in financial crime should understand the architecture and "extraterritorial" reach of this law, which carries a maximum penalty of 20 years in prison. It can be applied to anybody, for virtually any transaction or activity related to a crime, anywhere in the world. The US uses it often against fraudsters, tax evaders, persons engaged in foreign corrupt practices, and other financial criminals. The law’s more than 220 "specified unlawful activities (SUA)" are a prerequisite to prosecution and a catalogue of financial crimes. These are also known as predicate offenses. It permits government civil actions and the appointment of "federal receivers" by US judges to pursue stolen assets worldwide, armed with US government financial data and assistance from US treaty partners.
The law may be used only if the proceeds of at least one designated underlying crime are present in the laundering transaction. Without the proceeds of at least one of more than 200 SUAs, no prosecution for money laundering can proceed.
It is important to note that not all the listed SUAs are US crimes. Certain foreign crimes are included among the SUAs and may serve as the basis of a prosecution if their proceeds are part of a US transaction or are conducted with a US entity.
The law asserts “extraterritorial jurisdiction” if the “conduct … is by a US citizen or, in the case of a non-United States citizen, the conduct occurs in part in the United States” and more than $10,000 is involved.
The SUAs include virtually every US crime that produces money or an economic advantage, including fraud, corruption, bank fraud, copyright infringement, embezzlement, export violations, illegal gambling, racketeering and even environmental crimes.
The SUAs include some foreign crimes, such as bribery of a foreign official, embezzlement from a government, “misappropriation, theft, or embezzlement of public funds” by a foreign official,
fraud against a foreign bank, extortion, narcotics offenses, kidnapping and robbery. They also include violations of the Foreign Corrupt Practices Act and the Trading with the Enemy Act. By including violations of the Foreign Corrupt Practices Act, the money laundering law raises the specter that a company or an individual could be accused of both offenses simultaneously. Each violation is deemed to stand on its own.
It is also possible for an individual or company to violate the money laundering law as well as US and other national laws that prohibit transactions with nations, organizations and individuals that have been sanctioned and with whom transactions are prohibited. Such is the case with the Office of Foreign Assets Control of the United States, an agency that is often called OFAC. A unit of the US Treasury Department.
Structures That Hide Beneficial Ownership
Beneficial ownership is a key concept in the financial crime field. In simple terms, a beneficial owner is someone who ultimately controls and enjoys the benefits of an asset without being the nominal owner of that asset. A person or group can be the beneficial owner of a financial account, security, physical property or nearly any other asset. A more complete discussion of beneficial ownership, especially as it relates to financial accounts, can be found in Chapter 11, Compliance Programs and Controls.
Beneficial ownership of assets and accounts thus allows financial criminals to control illicit funds, assets or property while obscuring the criminal’s connection to them, and distancing the 40
proceeds from their source. Most sophisticated financial crime schemes will take advantage of one or more mechanisms and structures to conceal the perpetrator’s beneficial ownership of criminal proceeds. Several of the more common of these are described below.
Shell companies have no physical presence, normally with concealed owners, and sometimes project the image of being a solid normal business with funds that are legitimate. For the most part, they are companies that exist only on paper. They can hold bank accounts and conduct financial transactions while providing no signs that they are a shell. Shell companies usually conduct no business themselves.
There are many legitimate reasons to form a shell company. In some instances, shell companies can make it easier to invest overseas, help shield a company from liability, or transfer profits to reduce taxes in a way that is completely legal.
However, many characteristics of shell companies also make them highly attractive to financial criminals. Typically, they are easy and inexpensive to incorporate, and in many jurisdictions they can be established anonymously through attorneys and third parties called “company formation agents.” In some jurisdictions, shell companies can be formed online, through company formation agents and with little to no information collected on the beneficial owners behind the shell company, for less than $1,000.
Most importantly, shell companies are an anonymous or at least concealed vehicle to access the international financial system. To further obscure ownership, many financial criminals will operate through layers of shell companies, which can make it very difficult to trace funds or assets back to the ultimate owner. Consequently, shell companies have become a fixture of financial crime schemes of all varieties. Almost any money laundering, fraud or corruption operation of any sophistication will now involve at least one shell company at some point the process. Historically, certain nations and jurisdictions have become popular locations to form shell companies. There is often an overlap between these jurisdictions and those labeled as “secrecy havens.” As previously mentioned, discerning beneficial owners behind shell corporations can be very difficult when conducting due diligence or investigations. One potential source of information is the corporate registry for a given jurisdiction, many of which are accessible online. The information that can be obtained from such registries varies substantially between jurisdictions, but it can include details like the company name, the name of the company formation agent, company directors or board members, and sometimes a physical address for the company.
While this information may not be particularly revealing in and of itself, it can provide leads that can be useful for discovering the company’s true owner. A 2012 survey of law enforcement agencies in the European Union, for example, found that company directors and shareholders were one of the most useful leads for unearthing beneficial owners behind shell companies in criminal investigations. Shelf Companies
A similar concept to a shell company, the shelf company is a corporation that has no activity or business. The name refers to how these companies are formed and then left to “age,” or “put on a shelf.” Some shelf companies may be completely inactive for years before being sold off to a buyer.
There are a number of reasons why buyers may want to purchase a shelf company, and some are completely legitimate. In many jurisdictions, it is simply easier to purchase a pre-existing company than to set up a new one.
In other cases, a businessperson may have an easier time gaining interest from investors, securing loans, or winning government contracts with a company that appears to have been in business for several years as opposed to a newly formed one. However, those same qualities of apparent legitimacy and longevity are what make a shelf corporation appealing to financial criminals.
A nominee is a person, company or entity into whose name assets, securities or property is transferred, while leaving another person or entity as the real owner. Nominee accounts are common among securities broker-dealers, who can hold securities for their customers and trade them much more easily. Like all the structures listed here, nominees can be used for legitimate purposes. A nominee’s ability to conduct transactions at a distance from the owner of assets, however, makes nominees a useful avenue for money laundering, particularly the later stages like layering and integration.
In general terms, a front is a company or organization that is established and controlled by another company or entity, but that gives the impression it is not affiliated or connected to the entity controlling it. In the financial crime context, fronts are often seemingly legitimate businesses with a physical presence and actual operations, but whose primary purpose is to launder criminal proceeds. An example is a restaurant formed by an organized crime ring that, while open for regular business hours and serving customers, mainly exists to take in money