S0155715 - Module 1 Understanding Money Laundering and Terrorist Financing

M odule 1
Understanding M oney
Laundering and
Terrorist Financing
Module 1
Understanding Money Laundering and

Terrorist Financing
Learning objectives
The purpose of this module is to:
explain why money is laundered

show how money is laundered by examining a variety of different techniques
involving the financial services sector
describe how the process of money laundering differs from the substantive
offence of money laundering
examine the stages of money laundering activity
evaluate the objectives of money laundering
determine the nature of terrorist financing
explain the role of the FATF and APG
examine the nature and types of sanctions.
1. Introduction: The Process of Money Laundering

It is important to understand what money laundering is both in general terms
and as it is defined in the laws that apply to you and your work.
The term money laundering is in fact misleading and imprecise, for a number
of reasons.
Firstly, often it is not money that is involved. It can be any kind of property that
directly or indirectly represents the proceeds of crime.
If property whether cash, land, shares, a painting or any other kind of property
is derived from the proceeds of someones criminal activity, then it comes within
the scope of what is meant by money laundering. This is so even if only part of the
property concerned derives from crime.
Secondly, the term money laundering suggests that criminal property starts out
in one form then goes through some sort of laundering process and comes out
in a different form. In other words, the term implies that it involves some form of
relatively complex transformation process. This encourages the view that the clients
who pose a money laundering threat know how to launder money and set out
consciously to cleanse it in some way. This view, as we will see, is encouraged by
the traditional staged interpretation of money laundering.
In fact, property can be laundered very simply without the need for a complex
laundering process to be followed. Money laundering simply means doing
something in relation to the proceeds of crime that helps someone to benefit from
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Understanding the Regulatory Environment
the crime. It need not be a clever or complex arrangement. It can be as simple as

spending stolen cash in a shop or depositing it in a bank account.
Money laundering occurs whenever there is an arrangement which involves the
proceeds of another persons crime. In many jurisdictions it also occurs where there
is an arrangement which involves a persons proceeds of their own crime.
In Malaysia and many other jurisdictions a money laundering offence can arise
wherever a person knows or has reason to believe that the property concerned
represents his or her own or anothers benefit from criminal conduct, and acquires,
possesses or uses it. Consequently a burglar becomes a money launderer as
soon as he or she completes the burglary and acquires his or her stolen property.
Regardless of whether the burglar sells the stolen property or merely uses it
personally, in the eyes of the law the property has still been laundered.
It is important to understand that to be guilty of money laundering you do not
have to be in on the crime that generated the property. In many jurisdictions you
will be guilty if you know or suspect that property represents the proceeds of
crime, and yet you get involved in dealing with the property. You do not necessarily
have to know who committed the crime, nor precisely what the crime was, nor do
you have to have made any specific agreement to help the criminal or his or her
associates benefit from the property. The crucial test is whether or not you knew
or had reason to believe (or suspect) that the property represented the proceeds
of crime.
1.1 Objective of money laundering

As far as the criminal is concerned, he or she wants to be able to benefit from the
crime and not get caught. This will require disguising the source of the property
and/or altering it into something else. It is important to the criminal not to leave a
trail leading back to the crime, or to the property derived from it.
Imagine a simple scenario in which a drug trafficker is caught red-handed by law
enforcement in possession of 250,000 Ringgit in cash. Even in the absence of any
narcotics in his or her possession, this would be very valuable evidence to law
enforcement of this persons involvement in drug trafficking. Would the situation
be any different if the same drug trafficker had managed to successfully deposit
the cash into a variety of different bank accounts and then transfer the money
into the account of an existing offshore company, wholly owned by an offshore
trust, representing it as having resulted from legitimate activity supported by false
but credible documentation? The situation would be very different, and the drug
traffickers chances of succeeding both in avoiding prosecution and benefiting
from the crimes would be greatly enhanced.
1.2 What constitutes an underlying crime?

The underlying (or predicate) crime could, for the purposes of the money
laundering laws in most jurisdictions, be any crime that can give rise to the
unlawful obtaining of property. Examples include:
fraud
theft
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counterfeiting
drug dealing
corruption or bribery
breach of sanctions
people trafficking
tax evasion.
In Malaysia all serious crimes are predicate offences for this purpose. See Anti
Money Laundering and Terrorism Financing and Proceeds of Unlawful Activities
Act 2001 (AMLATFPUAA) discussed in detail in Module 2 and evidenced in
Appendix I.
The AMLATFPUAA provides for the offence of money laundering and terrorism
financing and the measures to be undertaken for the prevention of money
laundering and terrorism financing offence. The AMLATFPUAA provides wideranging investigation powers including powers for law enforcement agencies
and Public Prosecutor to freeze and seize properties that are involved or suspected
to be involved in money laundering or terrorism financing offences, and the power
of the court to forfeit properties derived from the proceeds of serious crimes.
1.3 Who are the money launderers?

Much of what has been written about money laundering concerns organised crime
groups and the proceeds of their drug trafficking and racketeering activities. It is
true, of course, that such groups launder money, but it is important to recognise
that money laundering appears in less obvious situations, such as the private client
tax evader or the corrupt public official.
It is vital to recognise that in most jurisdictions, including Malaysia, the proceeds
of tax evasion are within the scope of money laundering. So those who enter
arrangements involving property, that is, at least in part, derived from tax evasion
may be laundering money if they have suspicion, or reason to be suspicious, that
tax has been evaded.
It is important to recognise that while the person you may think of as the money
launderer is the person who committed or arranged the original crime, in fact
anyone who assists them in the process of enabling them to use the property and
conceal its origins has played a part in the money laundering process and in the
eyes of the law may well be guilty of a money laundering offence.
1.4 What money laundering laws exist?

Laws vary from jurisdiction to jurisdiction but there are essentially two types of
criminal offence relating to money laundering: one is money laundering itself, i.e.
doing something that helps someone to benefit from the proceeds of crime; and
the other is breach of AML regulations for example failing to have systems in
place to spot the risk that you are being used to launder money, or failing to report
your suspicions to the authorities.
These are all serious offences. For people working in vulnerable sectors such as the
finance industry they can lead not only to a criminal record, a fine and the loss of a
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job, but also to imprisonment. Companies have been shut down because they were
not alive to the risks that they were being used to launder money.
It is vital that all people at risk understand that you do not have to be a mafia
accountant in a John Grisham novel to be guilty of a money-laundering
related offence.
If you set up or operate an arrangement (e.g. a trust) that enables a person to evade
tax, and to have access to the untaxed money without being caught, then it is very
likely that you are a money launderer! The Malaysia Anti Money Laundering laws
are discussed in greater details in Module 2.
1.5 Terrorism financing

Since the terrorist attacks in the US on 11 September 2001 an important money
laundering dimension has been emphasised: namely, that money laundering is also
a process by which a person may conceal the illegal application of property, for
example by providing money to fund the commission of terrorist atrocities. Even
though such property may derive from an entirely legitimate source, the fact that it
will be put to an illegal use requires it to be disguised.
Concealment of the criminal destination of clean property is, in effect, traditional
laundering of dirty money in reverse.
For this reason many measures that deal with money laundering are now referred
to under the joint heading AML/CFT, i.e. Anti-Money Laundering/Counter Financing
of Terrorism (sometimes known as CTF Countering Terrorist Financing). The
need for vigilance and effective systems is the same whether it is to guard against
involvement in classic money laundering or in terrorism financing.
2. How is money laundered?

Having identified in broad terms what money laundering is, it is imperative
that Money Laundering Reporting Officers (MLROs) understand how money is
laundered, in the broadest sense.
Where the proceeds of serious or organised crime are involved, an arsenal of
professionals is often used to assist in the laundering of the proceeds of crime.
These professionals may include bankers, trustees, lawyers, accountants and
brokers, etc. Some professionals knowingly offer laundering assistance, while
others provide assistance and turn a blind eye to the obvious; but the majority of
professionals who assist in the money laundering process do so innocently and
inadvertently. It should be noted however that any negligence in terms of failure
to spot money laundering on the part of these professionals could result in their
being prosecuted for money laundering.
Money laundering may take a variety of forms, from highly complex processes
through to the most straightforward of arrangements. It can be achieved using an
almost infinite number of methods involving, where necessary, financial services
and products.
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Traditionally the money laundering process has been analysed as having three
main stages:
i.
ii
iii.
Placement where cash derived from criminal activity is infused into the
financial system
Layering which usually involves a complex system of transactions
designed to hide the source and ownership of the funds, and
Integration which is the stage at which laundered funds are reintroduced
into the legitimate economy, appearing to have originated from a
legitimate source.
We will examine each of these three stages in more detail. It is important to

understand that not all money laundering activity involves this sophisticated a
process, but the analysis is still helpful.
2.1 Placement
Persons involved in organised crime often acquire large amounts of money in the
form of cash that is often in small denomination bank notes. When criminals are
in physical possession of cash that can directly link them to predicate criminal
conduct, they are at their most vulnerable. Such criminals need to place the cash
into the financial system, usually through the use of bank accounts, in order to
commence the laundering process.
The most obvious way to place the proceeds of crime into the banking system is
simply to deposit cash into a bank account. To this day, in certain poorly regulated
jurisdictions desperate for stable currencies, money launderers are still able to
deposit large volumes of cash (sometimes in suitcases) directly into bank accounts.
In well-regulated jurisdictions with AML legislation this activity is now extinct.
In Malaysia, for example, all cash transactions over RMS 50,000 in a day are subject
to a mandatory reporting obligation by financial service providers. As a result, more
innovative and less obvious methods of placing cash into the financial system have
been developed, including those described in the following sections.
Cash (physical currency) is outside the financial system in the sense that it is
a universally accepted form of value owned or controlled by the person who
possesses it. Cash is a form of value which can be readily passed between people
without a record being made of the transaction. Cash is utterly transferrable. Cash
can only be detected through its physical presence.
Possession of the proceeds of crime in the form of cash in large quantities is risky
because it:
provides a link to the predicate crime

is hard to explain away when detected by law enforcement or other
government agencies
requires safe storage
is susceptible to theft
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is exposed to deterioration (vermin, damp, fire and other types of damage)

may go out of date if the issuing government releases new forms of currency
may raise questions when used in large sums to pay for other assets such as
houses, cars, boats or shares etc.
When cash is placed with a business within the financial system (for example a
bank, authorised deposit-taking institution, credit union, building society or wealth
management business) then it is transformed from its physical form to data. The
data record then represents the value to which the payer is entitled as a result of
the placement of the cash.
If the payer is depositing the proceeds of crime into the financial system then
the first stage of money laundering has been achieved. The proceeds of crime
have been converted from cash, which was connected with the predicate crime
committed by the criminal, to data inside the financial system.
The following is a brief summary of some ways in which criminal property can be
placed. These methods will be discussed in more detail later in this Module.
2.1.1 Disguised deposits

Launderers often divide large amounts of cash into a number of small transaction
amounts, for instance by:
making several deposits into a single or multiple accounts on

successive days
making deposits into a number of accounts (often opened by using false
identities) at different branches of the same bank
using different banks and then consolidating the accounts
depositing cash into the accounts of third parties such as lawyers, real estate
agents, brokers and security firms, or
depositing cash with the assistance of corrupt bank staff who themselves
manipulate the deposits to make them appear as if they are below the
reporting threshold.
Most jurisdictions require people moving monetary instruments of any value to

provide information about the instruments to the required authorities, if asked.
2.1.2 Use of monetary instruments

Launderers purchase monetary instruments, such as money orders, postal
orders and travellers cheques. In this way they convert cash into financial
instruments for relatively small amounts (which are easily transportable) and
then deposit them elsewhere.
2.1.3 Intermingling
Money launderers often attempt to conceal the origin of criminally derived cash
by mixing it with legitimately generated cash. They do so by using the services of
lawful business enterprises that they own or control.
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Cash takings of lawful businesses may be augmented by the proceeds of crime

before being deposited into the financial system, disguised as the turnover or
income of the lawful business. Businesses, which by their very nature generate
large quantities of cash (such as retail outlets, restaurants, bureaux de change,
taxi services) are popular businesses for this type of activity. They are able to
absorb additional amounts of cash without arousing the suspicions of bankers
or auditors.
A cheaper, although riskier, alternative is for a launderer to establish what is known
as a front company. This is a company that is incorporated on paper, but that does
not genuinely trade. The launderer opens an account in the name of the front
company and deposits criminally derived cash into it, representing the money as
the profits of the front company.
2.1.4 Asset purchases

Money launderers may also use the cash proceeds of their criminal activities to buy
assets, rather than placing the cash directly into the banking system. Virtually any
asset will suffice for this purpose, although real estate, gold and precious metals,
art, motor cars and antiques are popular items because they hold substantial value
and are readily tradable.
Following acquisition, these assets may then be sold and converted into bank
transfers for the value, thereby bringing the proceeds of crime into the financial
system. The risks with this approach arise from:
cash reporting obligations that might directly apply

records that the seller may keep of the assets it sells
questions that may be asked by the sellers bank regarding the large cash
deposit that it makes following the sale.
Money launderers will search for sellers of such assets who want cash for their own
reasons (for example tax evasion). Such sellers are involved in committing a second
predicate crime (tax evasion) and begin their own process of money laundering
with the cash involved in the tax evasion.
Other countries have similar reporting requirements. In the USA all businesses
are required to file an Internal Revenue Services form for all goods and services
purchased with cash of an amount in excess of USD10,000. In Australia a similar
requirement exists for transactions over AUD10,000.
Parts of Europe, including the UK are moving in a similar direction, albeit with a
different European approach. The Third EU Directive requires all member states
to incorporate purveyors of high value commodities within their national AML
strategies in respect of sales involving cash of more than 15,000. As a result, the
UK Money Laundering Regulations require dealers in high value goods to choose
either to decline all cash transactions over 15,000 or to register as money dealers
with HM Revenue & Customs and be subject to the full panoply of obligations
under the Regulations.
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Purchases made over the Internet, arranged through sites such as eBay and settled
in cash through face-to-face meetings, are obviously vulnerable to being used to
launder criminal property.
2.1.5 Personal investment products and small general insurance policies

Money launderers may seek to purchase personal investment products, such
as units in managed investment schemes, with cash. For the smaller money
launderer this may merely be a savings scheme; for the more sophisticated it may
be the prelude to cancellation within the cooling-off period and the receipt of a
redemption cheque which will be used in the layering process. Similarly, general
insurance paid for by cash may also be the prelude to cancellation within the
cooling-off period and a request for a refund cheque.
Money launderers accept as a fact of life that they may pay fees and charges
through early redemption of investments or insurance policies. This reverse form of
arbitrage may be seen as a necessary cost of the process of money laundering.
2.2 Layering
Once cash has been successfully placed in the financial system, launderers can
engage in an infinite number of complex transactions and transfers designed
to disguise the audit paper trail and thus the source of the property. One of the
primary objectives of the layering stage of the laundering process is to confuse any
criminal investigation and place as much distance as possible between the source
of the ill-gotten gains and their present status and appearance.
At a very early point in the layering process funds are often transferred to accounts
outside the jurisdiction where they were initially deposited. This puts the funds
beyond the reach of the law enforcement agencies of the jurisdiction in which
the original criminal conduct occurred and therefore requires international
co-operation between law enforcement agencies. Historically this was a simple
matter of instructing a bank to make a wire transfer to another account in the
other country. More recently, following enhanced banking due diligence, increased
ingenuity has been required. One example of such ingenuity is that the launderer
will now set up trading companies around the world which trade, or appear to
trade, one with the other. Some swiftly produced documentation from a laptop
and there is more than enough information to satisfy the bank that the transfer
is legitimate and justified. Thereafter the launderer may use any financial service
or product in an attempt to achieve as many layers as possible. The methods by
which a number of financial services products may be used for this purpose will be
examined in Module 5 later.
2.3 Integration
Integration is the final stage of the process, whereby criminally derived property
that has been placed and layered (and therefore cleaned) is returned to the
legitimate economy. It is perhaps better described as reintegration. At this stage
the funds appear to have a legitimate origin. Examples of reintegration methods
include the following.
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2.3.1 Loan agreements

Funds may be transferred from offshore to onshore accounts controlled by
the launderer and made to appear as if they are a loan made by the
offshore company.
2.3.2 Sham transactions

Payments made from offshore to onshore accounts controlled by the launderer are
made to appear to be the proceeds of a genuine transaction. The offshore company
may appear in its correspondence to be distributing the proceeds of, for instance,
a real estate deal, or royalty payments for the exploitation of intellectual property.
However the reality is that there is no substance behind the claimed transactions.
Alternatively, the offshore company may appear to be purchasing goods or services
from the launderer, shown on sham invoices at inflated prices.
It can immediately be seen why money laundering regulations place so much stress
on the necessity for financial services providers to find out, and demand proof, of
their customers claimed business activities and the origin of their funds.
2.3.3 Inheritance
Funds held in one jurisdiction on behalf of the launderer may be transferred to
another jurisdiction and be purported to represent a gift or inheritance.
2.3.4 Redemption of life policy or similar investment

This method involves the launderer in placing funds with an insurance company
and some time later en-cashing the property (or borrowing against it) so that a
cheque from the insurance company has the appearance of emanating from a
legitimate source. Single premium investment bonds are sometimes used: in this
case the criminal pays the early surrender penalty and withdraws the investment,
receiving an insurance company cheque.
2.3.5 Purchases of real estate

Real estate is a popular vehicle for laundering criminal funds. Criminals will
buy property for their own use, e.g. as residential homes or second properties;
as business or warehouse premises; and as investment vehicles to provide
additional income. Real estate may also provide a way of avoiding confiscation;
for example, if a money launderer rents a property from a company registered
offshore, which, in turn, is owned by the launderer, it may not be possible to link
the launderer or his criminal funds with the company and the property. Financial
sector firms lending against property that has been acquired partly with criminal
funds, or where the repayments are being made out of the proceeds of crime,
increase their vulnerabilities.
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Diagram 1 Overview of a Typical Money Laundering Scheme1
3. Limitations of the Staged Interpretation of

Money Laundering
The three-stage interpretation of money laundering has its roots in a time when
money laundering was a crime which it was thought could be committed only in
respect of predicate crimes that generated large volumes of cash that needed to
be cleaned, such as the sale of drugs. This is clearly not the case today.
Because the three-stage analysis was emphasised heavily in early money laundering
guidance, a common and dangerous misconception has grown up that you are not
money laundering unless you participate in all three stages of the process. This is
not true. Any involvement in criminal property at any stage can suffice.
All that is required is for a person to contribute to the process by dealing in some
way with another persons direct or indirect benefit from crime. Money laundering
as an activity (but not necessarily as an offence) occurs whenever there is any form
of arrangement involving the proceeds of crime. The importance of understanding
this cannot be overstated.
The following simple example serves to illustrate the point.
Example
A is a fraudster.
A manages to defraud his employer of RM50,000, all of which is diverted to a
bank account held with W.
A divides the benefit into two tranches of RM20,000 and one tranche of RM10,000.
1.
https://www.unodc.org/unodc/en/money-laundering/laundrycycle.html.
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One tranche of RM20,000 is invested into a mutual fund managed by X. The

second tranche of RM20,000 is used to bolster an existing portfolio of equities
that are managed on a discretionary basis by Y.
The tranche of RM10,000 is wire transferred to an account held with a branch
of Z in a small, not well regulated, jurisdiction which A subsequently collects in
person and uses to pay a holiday hotel bill while on vacation.
Have W, X, Y, Z or the hotel laundered As proceeds of crime? The answer is that they
all have. Though individually they have not successfully laundered the money in the
wider sense, they have all contributed to a successful laundering process. As such
they may each be at risk of being prosecuted for the offence of money laundering,
depending upon what can be proved about what they knew or suspected about
either the source of As property or As conduct.
4. How Common Is Money Laundering?

Unlike the underlying predicate (criminal) offences, money laundering consists
of a series of actions, each perhaps innocent in itself, but which when combined
attempt to distance the proceeds from their criminal origins. Be under no illusion as
to the prevalence of money laundering as you work through this manual and your
course. For example, consider three interesting anecdotal comments about money
laundering as a social phenomenon.
In general, if you walk two kilometres in any direction from the main
central railway station in any major city, you will pass within arm's length
of a property that is owned by, managed by, or is being constructed by
dirty money.
At some point in the past 30 days you probably did business, knowingly or
unknowingly, with a money launderer or otherwise came into contact with
dirty money.
Three out of four US bank notes in circulation are micro-tainted with an
illegal substance.
5. Use of Intermediaries
Where the proceeds of serious or organised crime are involved, an arsenal of
intermediaries and professionals are often used to assist in the laundering of the
proceeds of crime. These may include bankers, trustees, lawyers, accountants,
brokers, etc. Some professionals knowingly offer laundering assistance, while
others provide assistance and turn a blind eye to the obvious; and many assist in
the money laundering process innocently and inadvertently. The Financial Action
Task Force (FATF) recommendations 22 and 23 cover the requirements in terms of
guidelines for these professions. (See Appendix II.)
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6. Terrorism Financing (TF)

6.1 Definition of Terrorism Financing
It is important to remember what terrorism financing is both in general terms
and as it is defined in the laws that apply to you and your work. The definition of
terrorism financing affects:
the scope of the AML/CFT programme of a reporting entity

the process of identifying terrorism financing risks and
what is reportable to the Financial Intelligence Unit (FiU).
The simple definition we will use in these materials is that terrorism financing (TF) is
the provision or collection of funds with the intention that they should be used
(or in the knowledge that they are to be used), in full or in part, in order to carry
out acts that are associated with the support of terrorists or terrorist organisations,
whether to further their causes or to commit acts of terrorism.
6.2 What is the difference between money laundering and

terrorism financing?
As stated in the overview in section 1.5 above, terrorism financing may involve
funds or value derived from the proceeds of crime2 or may involve legitimate
funds earned from employment or conduct of legitimate business transactions.3
By contrast, money laundering will always involve funds or value derived from the
proceeds of crime.
The purpose of terrorism financing is to finance illegal terrorist activities, or support
persons engaged in illegal terrorist activities or who intend to engage in such
terrorist activities. In contrast, the purpose of money laundering is to break the
connection between the proceeds of crime and the original crime.
The common elements that money laundering and terrorism financing share are
that both involve:
money or other forms of value

the movement of money or value, for example, from one person to another,
one account to another, one institution to another, one country to another,
one asset class to another
people who are keen to disguise the source and destination of funds.
Even so, experience shows that some of the specific techniques employed by the
money launderer are drastically different from those involved in terrorist financing.
The objectives of the money launderer and those of the terrorist financier differ. Put
simply, while both need to achieve a disconnect between the source of funds and
their entry into the financial system, the money launderer seeking to achieve
2.
3.
The Taliban has financed its military efforts through the sale of opium.
The July 2005 bombings in London were funded almost entirely from wages earned by
the perpetrators.
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long-term benefits from his crime is prepared to obtain these in a wide variety
of forms, for example from the enjoyment of property assets through to the
long-term benefit from the income generated by a portfolio of securities. The
terrorist financier is not interested in these outcomes. Her or his objective is far
simpler to provide funds to those involved in supporting or committing acts
of terrorism.
As a result, money laundering involving significant sums tends to involve long-term
strategies, large amounts and the use of legal vehicles that break the audit trail
and that are interwoven with combinations of financial institutions forming various
parts of the money laundering process.
6.3 Observed TF typologies

Observed TF methods include:
fund movements predominantly based on banking institutions as the

primary mover of the funds
the involvement, usually, of legitimate funds
short-term fund movements and relationships (in exceptional instances
this may consist of even one-off or dual transactions)
the involvement, in general, of smaller amounts.
Detected terrorism financing has had no characteristics different from the

usual financial transactions performed by peers. The difficulties for financial
institutions and law enforcement agencies in being able to identify, mitigate
and prevent terrorist financing activities lie in the normality, speed and simplicity
of the transactions.
A note of caution: while terrorist financing that has been detected has typically
involved smaller amounts this is not a golden rule, especially when it comes to the
financial resources required in order to support sophisticated training, political and
religious propaganda and support networks.
Terrorist financiers operate at both ends of the spectrum and, like money
launderers, are constantly changing their techniques to avoid detection.
Terrorism financing is notoriously difficult to detect.
6.4 Some terrorism financing techniques

Reported typologies and case studies have indicated that funds used to support
terrorist activity, either domestically or offshore, have included:
formal bank transfers using the Society for Worldwide Interbank Financial
Telecommunication (SWIFT) system for international funds transfers
formal, non-bank remittance service providers
informal, cultural-based remittance arrangements; these systems
predate formal banking systems and often provide a cheaper and faster
service with little or no paper trail involved; in some countries, informal
arrangements can also reach more remote areas than the formal bank
and non-bank systems
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cash couriering, whereby passengers physically carry cash as they travel

to another country. The lack of records and the ability to conceal cash on
the person, in luggage or within other items makes this activity difficult to
detect. If individuals are aware of reporting thresholds, the amounts they
carry may be less than the cross-border movement reporting threshold. The
Bali bombings in 2002 were supposed to have been largely funded by cash
smuggling of Australian dollars into Indonesia.
Other terrorism financing techniques include:
opening and operating an account in a false name

conducting transactions using the names of other individuals or groups
providing or having access to the accounts of other individuals or groups
providing access to bank accounts both onshore and offshore, particularly
via electronic means
allowing third parties to operate accounts anonymously using automatic
teller machine (ATM) networks
obtaining loans, especially through fraudulent applications, where the funds
are used for purposes other than those stated or where the borrower has no
intention of repaying the loan
using online international funds transfer systems, especially in combination
with false identification
sending money through apparently legitimate charities.
6.5 The FATF Guidance

Immediately after the 11 September attacks in the US the FATF issued eight
special recommendations in recognition of the importance of taking action to
curb terrorism financing. The FATF has issued a document entitled Guidance for
Financial Institutions in Detecting Terrorist Financing Activities,4 which provides some
information on the detection and avoidance of the facilitation of terrorist financing
activity. In October 2004, the FATF introduced a ninth special recommendation
dealing with cash couriers. In February 2012 these recommendations were
integrated into the revised FATF 40 Recommendations.
6.6 United Nations Security Council Resolutions

A number of United Nations Security Council (UNSC) resolutions require UN
member states to:
4.
freeze the funds, other financial assets and economic resources on

their territories that are owned or controlled by persons or entities
designated by the UNSC for this purpose (sanctions-designated persons
or entities), and
ensure that any funds, financial assets or economic resources are prevented
from being made available by their nationals or by any persons or entities
within their territories, to or for the benefit of sanctions-designated persons
or entities.
See Appendix 3 of the FATF Guidance for Financial Institutions in Detecting Terrorist
Financing Activities.
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In addition, the UNSC has established a terrorist asset freezing regime, by obliging
UN member states to apply the asset freezing measures to: persons who commit,
or attempt to commit, terrorist acts or participate in or facilitate the commission
of terrorist acts; entities owned or controlled directly or indirectly by such persons;
and persons and entities acting on behalf of, or at the direction of such persons
and entities. Unlike the UN sanctions regimes above, the UNSC does not designate
persons and entities for the purpose of the terrorist asset freezing regime.
Many countries publish a list of all persons covered by the above resolutions.
Financial institutions need to check their customers against such lists in order to
have a defence against criminal charges in the event that they have dealt in the
assets of any person on the list.
7. Significance of International Initiatives

and Developments
Although the reporting entity you work for today may not have international
links, understanding the relationship between the Malaysian AML/CFT framework
and international frameworks is an essential part of developing knowledge and
expertise in AML/CFT.
Knowledge of the circumstances in which certain relationships and transactions
can expose an organisation and its employees to the jurisdiction and laws of other
countries is important. Such awareness should enable the AML/CFT Compliance
Officer to influence and apply enhanced due diligence measures and controls
where appropriate.
Sections 8 and 9 describe two of the more inuential international and regional
bodies in the anti-money laundering arena.
It is relevant to understanding
the ML/TF risks represented by other countries, customers from other

countries and transactions with other countries
likely trends and changes internationally which may affect the Malaysian
AML/CFT framework
international expectations of Malaysian reporting entities in addition to the
Malaysian AML/CFT requirements.
When discussing each of the international bodies we have ended each section with
comments on the relevance to Malaysian AML/CFT Compliance Officers.
8. The FATF
The FATF was established in 1988 by the G-7 countries to examine and develop
measures to combat money laundering. It is an intergovernmental body that
sets standards, and develops and promotes policies to combat money laundering
and terrorism financing. The current mandate of the FATF was extended in 2012
to 2020.
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As at December 2016 it had 37 members: 35 countries and governments and two

regional bodies; and 27 associate members seven FATF-style regional bodies and
22 other international organisations or bodies. Reporting entities may decide to
use membership of FATF as one factor in measuring a country's money laundering
and terrorism financing risk. Details of the FATF members can be found on the FATF
website at http://www.fatf-gafi.org
The FATF Secretariat supports the Task Force and President. The FATF Secretariat
(currently 17 people) is housed administratively at the OECD. They are separate
organisations, however, and the FATF is funded from member contributions not
by the OECD.
The priority of the FATF is to ensure global action to combat money laundering
and terrorist financing, and concrete implementation of its 40 Recommendations
throughout the world. Starting with its own members, the FATF monitors countries
progress in implementing AML/CFT measures; reviews money laundering and
terrorist financing techniques and counter-measures; and promotes the adoption
and implementation of the 40 Recommendations globally.
8.1 FATFs 40+9 Recommendations

The FATF initially developed 40 Recommendations in 1990. The Recommendations
were revised for the first time in 1996 to take into account changes in money
laundering trends and to anticipate potential future threats. In 2003, following
the events of 9/11, the 8 Special Recommendations were added to deal with
terrorist financing and a further 9th Special Recommendation dealing with
cash couriers was subsequently added, producing what was commonly referred
to as the FATF 40+9 or FATF 49. In February 2012 the Recommendations were
revised and reorganised to cover all the areas of the existing Recommendations
but within a total of 40 Recommendations, returning us to the original FATF 40
Recommendations. The FATF has also elaborated various Interpretative Notes,
which are designed to clarify the application of specific Recommendations and to
provide additional guidance.
Malaysia is a member of the Asia/Pacific Group on Money Laundering (APG) (see
section 9 below) and was examined in 2007 regarding its compliance with the
(then) FATF 40+9 recommendations as part of the third round of AML/CFT mutual
evaluations. Mutual evaluations are so-called because they involve examination
by experts from other FATF member countries of a members compliance with the
Recommendations (see section 8.4).
8.2 Criteria for FATF Membership

As of December 2016, the FATF5 comprises of 35 member jurisdictions and
2 regional organisations, representing most major financial centres in all parts of
the globe. Malaysia became a member of the FATF in February 2016.
5.
The full list and updates are available on the FATF website: http://www.fatf-gafi.org/pages/
aboutus/membersandobservers/.
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FATF Members
Argentina
Gulf Co-operation Council
Norway
Australia
Hong Kong, China
Portugal
Austria
Iceland
Russian Federation
Belgium
India
Singapore
Brazil
Ireland
South Africa
Canada
Italy
Spain
China
Japan
Sweden
Denmark
Republic of Korea
Switzerland
European Commission
Luxembourg
Turkey
Finland
Malaysia
United Kingdom
France
Mexico
United States
Germany
Netherlands, Kingdom of
Greece
New Zealand
Table 2.1: List of FATF members

The basic criteria for national membership of the FATF are to:
be fully committed politically to:

implementing the 40 Recommendations within a three-year time frame, and
being subject to annual self-assessment exercises and two rounds of
mutual evaluations
be a full and active member of any relevant FATF-style regional body (FSRB)
or be prepared to work with the FATF to take the lead in establishing such a
body where one does not exist
be a strategically important jurisdiction
have previously made the laundering of the proceeds of drug trafficking
and other serious crimes a criminal offence, and
have previously imposed a legal obligation upon financial institutions to
identify customers and to report suspicious transactions.
FATF Observer
Israel and Saudi Arabia have observer status at FATF.
FATF Associate Members
Asia/Pacific Group on Money Laundering (APG)

Caribbean Financial Action Task Force (CFATF)
Council of Europe Committee of Experts on the Evaluation of Anti-Money
Laundering Measures and the Financing of Terrorism (MONEYVAL)
Eurasian Group (EAG)
Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG)
Financial Action Task Force of Latin America (GAFiLAT) (formerly
known as Financial Action Task Force on Money Laundering in
South America (GAFiSUD))
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Inter Governmental Action Group against Money Laundering in

West Africa (GIABA)
Middle East and North Africa Financial Action Task Force (MENAFATF)
8.3 What the FATF Does

The FATF performs the following tasks.
Setting international AML/CFT standards: the FATF develops international

AML/CFT standards as well as additional interpretative notes, guidance and
best practices.
Monitoring compliance with AML/CFT standards: the FATF monitors the
compliance of its members with the FATF 40 Recommendations through a
peer or mutual evaluation process.
Promoting worldwide application of the FATF standards: the FATF
encourages the universal implementation of FATF standards by supporting
FATF-style regional bodies (FSRBs) in all parts of the world and through
partnerships with international and regional organisations.
Encouraging compliance of non-FATF members with FATF standards: the
FATF urges non-member countries to implement AML/CFT standards
through its cooperation with the FSRBs, as well as through mechanisms
designed to encourage countries to adhere to international standards, such
as the non-cooperative countries and territories initiative (NCCT now
seemingly defunct as all countries and territories now cooperate), and
technical assistance-needs assessments.
Studying the methods and trends of money laundering and terrorist
financing: the FATF examines current typologies on a continuing basis to
ensure that its AML/CFT policymaking is relevant and appropriate in dealing
with the evolving threats.
The mandate of the FATF was renewed in 2012 for an eight-year period to 2020.
The current mandate
deepens global surveillance of evolving criminal and terrorist threats

identified by the FATF
responds to new threats that affect the integrity of the financial system,
such as proliferation finance
builds a strong, practical partnership with the private sector, which is at
the front line of the global fight against money launderers and terrorist
financiers, and
supports global efforts to raise standards, especially in low-capacity countries.
8.4 The FATF Mutual Evaluation Process

The FATF mutual evaluation process forms a central pillar of the FATFs
work. All FATF member countries are expected to implement each of the 40
Recommendations. Annual assessments require each member state to complete a
questionnaire designed to provide an indication of the extent of its adherence to
the 40 Recommendations.
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The mutual evaluation exercises are searching and provide a more accurate
indication of a member states practical adherence to the 40 Recommendations.
The mutual evaluation reports are public documents released on the FATF website.
Through the mutual evaluation process the FATF has shown that it is prepared
to take meaningful action against member states that do not conform to the
principles contained within the 40 Recommendations.
In September 2015, the FATF and APG published the Mutual Evaluation Report of
Malaysia. Since then, Malaysia has worked to develop an action plan for addressing
key effectiveness issues identified during the evaluation. Based on the commitment
demonstrated by the action plan and the continuing progress in efforts to improve
its AML/CFT, the FATF Plenary agreed to grant membership to Malaysia and
continue to monitor progress through the enhanced follow-up process.
Malaysia underwent a National Risk Assessment in November 2014. The National
Risk Assessment (NRA) is an assessment of the countrys exposure to prevailing
crimes (domestic and foreign) and vulnerabilities of various sectors to money
laundering and terrorism financing risks. It is an initiative undertaken under the
ambit of the National Coordination Committee to Counter Money Laundering (NCC).
The assessment is based on sources such as statistics and reports from various
agencies, surveys conducted among law enforcement agencies and reporting
institutions and credible external report. The findings are validated by the NCC.
Results of the NRA will be communicated to the reporting institutions, supervisors,
regulators and law enforcement agencies to assist in prioritising the deployment of
resources to tackle high-impact risks in a more effective and targeted manner.
The initiative would assist Malaysia in:
i.
ii.
iii.
applying the appropriate national AML/CFT strategy and policy response

proportionate to the identified risks;
focusing on real and identified threats; and
prioritising the resources towards areas with highest impact.
8.4.1 Non-Cooperative Countries and Territories (NCCTs)

The FATF, in 2000, commenced an initiative of identifying non-cooperative
countries and territories (NCCTs) following a review.
This review followed an evaluation process conducted through four regional review
groups covering the Americas, Asia/Pacific, Europe and Africa, and the Middle East.
The review concentrated upon offshore financial centres, the number of which
has increased markedly in recent years, leading to concerns about poor levels of
regulation and banking secrecy.
The following jurisdictions were subjected to the review process: Antigua and
Barbuda, the Bahamas, Belize, Bermuda, the British Virgin Islands, the Cayman
Islands, the Cook Islands, Cyprus, Dominica, Gibraltar, Guernsey, the Isle of Man,
Jersey, Israel, Lebanon, Liechtenstein, Malta, the Marshall Islands, Mauritius, Monaco,
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Nauru, Niue, Panama, the Philippines, Russia, Samoa, St Kitts and Nevis, St Lucia, St
Vincent and the Grenadines.
Serious systemic problems were identified in the following jurisdictions, which were
then labelled as NCCTs by the FATF: the Bahamas, the Cayman Islands, the Cook
Islands, Dominica, Israel, Lebanon, Liechtenstein, the Marshall Islands, Nauru, Niue,
Panama, the Philippines, Russia, St Kitts and Nevis, St Vincent and the Grenadines.
As a result, the FATF applied its Recommendation 21 to each of the NCCTs. The
Recommendation states that:
Financial Institutions should give special attention to business relations and
transactions with persons, including companies and financial institutions, from
countries which do not, or insufficiently, apply these Recommendations.
The FATF monitored the progress of remedial action by the NCCTs on a quarterly
basis and published a series of progress reports.
The NCCT exercise proved to be a useful and efficient tool. Of the 23 jurisdictions
designated as NCCTs in 2000 and 2001, Myanmar (Burma), the last country
designated as an NCCT, was removed from the list in October 2006.
Since 2001 the FATF has not reviewed any new jurisdictions under the NCCT
process. Instead, in February 2010, it replaced this process with a new approach of
naming countries under one of the following categories. In the latest FATF Public
Statement in October 2014, FATF has identified and classified the following:
Jurisdictions subject to a FATF call on its members to apply counter-measures

because of the substantial ML/TF risks arising from these countries. Iran
and Democratic Peoples Republic of Korea were the only countries in this
category as at February 2013 and updated October 2014.
Jurisdictions with strategic AML/CFT deficiencies that have not made
sufficient progress in addressing the deficiencies or have not committed
to an action plan developed with the FATF to address the deficiencies. The
FATF calls on its members to consider the risks arising from the deficiencies
associated with each jurisdiction. As at October 2014 these countries are
Algeria, Ecuador, Indonesia and Myanmar.
Jurisdictions which have strategic AML/CFT deficiencies for which they have
developed an action plan with the FATF. While the situations differ among
each jurisdiction, each jurisdiction has provided a written high-level political
commitment to address the identified deficiencies. As at October 2014
these countries are Afghanistan, Albania, Angola, Cambodia, Guyana, Iraq,
Kuwait, Lao PDR, Namibia, Nicaragua, Pakistan, Panama, Papua New Guinea,
Sudan, Syria, Uganda, Yemen and Zimbabwe.
Jurisdictions no longer subject to the FATF's on-going global AML/CFT
compliance process as at October 2014 these countries are Argentina, Cuba,
Ethiopia, Tajikistan and Turkey.
The effect of a FATF call for sanctions by its members against a country for failing to
make sufficient progress can be devastating to a developing country. Previously in
August 2006, the Nigerian Economic and Financial Crime Commission valued the
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investment lost by Nigeria during the period when it was designated as an NCCT,
under the old NCCT regime, as $60 billion.
The FATF no longer publishes an annual typologies report. Instead it has replaced
this with reports on emerging trends and technologies. All these reports can be
found on the FATF website.
8.5 Relevance of the FATF to Malaysian AML/CFT Compliance Officers

The FATF:
publishes the 40 Recommendations, which form the basis for the AML/CFT
laws in Malaysia
publishes a methodology for examiners, which helps them to interpret the
40 Recommendations
publishes reports on money laundering in various sectors as well as, in the
past, publishing annual typology reports
publishes mutual evaluation reports on countries compliance with the 40
Recommendations; these reports are relevant to understanding the ML/TF
risk represented by these countries.
When the FATF changes a recommendation, this will ultimately be reflected in

changes in laws in Malaysia.
9. The Asia Pacific Group on Money Laundering

The FATF Regional Style Body for the Asia Pacific region is the Asia Pacific Group
(www.apgml.org). It has 40 active members making it the largest FATF-style regional
body in the world. In addition, 10 members of the APG are also members of the
Financial Action Task Force, namely: Australia; Canada; India; People's Republic of
China; Hong Kong, China; Japan; Korea; New Zealand; Singapore; and the United
States. The full list of members is available from the APG website.
The Asia Pacific Group on Money Laundering (APG) is an autonomous and
collaborative international organisation founded in 1997 in Bangkok, Thailand.
Some of the key international organisations who participate in, and support
the efforts of, the APG in the region include: the Financial Action Task Force,
International Monetary Fund, World Bank, OECD, United Nations Office on
Drugs and Crime, Asian Development Bank and the Egmont Group of Financial
Intelligence Units.
The APG has five important functions.
To assess compliance by APG members with the global AML/CFT standards

through a robust mutual evaluation programme.
To coordinate bilateral and donor-agency technical assistance and training
in the Asia Pacific region in order to improve compliance by APG members
with the global AML/CFT standards.
To participate in, and cooperate with, the international anti money
laundering network primarily with the FATF and with other regional
anti money laundering groups.
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To conduct research and analysis into money laundering and terrorist

financing trends and methods to better inform APG members of systemic
and other associated risks and vulnerabilities.
To contribute to the global policy development of anti-money laundering
and counter terrorism financing standards by active Associate Membership
status in the FATF.
A Secretariat has been established to serve as the focal point for APG activities.
It is located in Sydney, and its funding, as well as funding for all APG activities, is
provided by all APG members in accordance with a specific funding formula based
upon the individual GDP for each member.
9.1 Relevance of the APG to Malaysian AML/CFT Compliance Officers

The APG does:
APG members conduct mutual evaluations of other APG members

compliance with the 40 Recommendations. These reports are relevant to
understanding the ML/TF risk represented by these countries.
The APG issues information about member countries that are under
remediation requirements regarding their AML/CFT programmes.
The APG provides information about emerging typologies relevant to the
Asia Pacific area.
The APG undertakes assistance and education functions so that APG
members may improve their AML/CFT frameworks.
10. International Sanctions

10.1 Introduction
Sanctions are extremely wide ranging and the term is often broadly used to
encompass diplomatic, sporting, trade or economic sanctions as well as flight or
admission restrictions. They are imposed either by a UN Security Council resolution
under the UN Charter or by individual States or supranational governmental
bodies, such as the EU.
The recent turmoil in the Middle-East has seen a flurry of sanctions designations
from around the globe. Sanctions are an important weapon in the arsenal of the
international community for several reasons; they can be used:
To encourage a change in the behaviour of a target regime or country.

To apply pressure on a target country or regime to comply with
set objectives.
As an enforcement tool when international peace and security has been
threatened and diplomatic efforts have failed.
To prevent and suppress the financing of terrorists and terrorist acts.
Sanctions measures can vary from comprehensive sanctions prohibiting the

transfer of funds to or from a country and freezing the assets of the government,
the corporate entities and residents of the target countries to targeted asset freezes
on individuals and entities.
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There are two supra-national bodies working in this area. The lead force is the
United Nations Security Council who issue enforcement measures to maintain or
restore international peace and security. UN states typically adopt UN Sanctions
by incorporating them into local legislation. Some examples of states targeted by
the UN are Afghanistan, Cote dIvoire, Democratic Republic of the Congo, Iran, Iraq,
North Korea, Lebanon, Liberia, Sierra Leone, Somalia and Sudan.
The European Union apply sanctions within the framework of the Common Foreign
and Security Policy. EU Sanctions can target governments, non-state entities or
individuals. They can consist of trade restrictions, financial restrictions or visa or
travel bans. Financial sanctions include prohibitions on investment, payments and
capital movements, the withdrawal of tariff preferences or bans on provision of
specific financial services. These sanctions apply to all persons and entities doing
business in the EU including nationals of non-EU countries and to EU nationals
and entities incorporated under laws of an EU Member State when doing business
outside the EU. Rules on infringement are set out under each Member States
national laws.
10.2 International Sanctions and the Office of Foreign Assets

Control (OFAC)
There are instances where a single countrys regulatory initiatives can impact upon
financial businesses globally. For example in the US, the Office of Foreign Assets
Control (OFAC) of the US Department of the Treasury administers and enforces
economic sanctions programmes primarily against countries and groups of
individuals, such as terrorists and drug traffickers. These programmes of activities
are based on US foreign policy and US national security initiatives and allow OFAC
to impose controls on transactions and freeze foreign assets under US sanctions
that are based on United Nations mandates and involve close cooperation with
other governments.
The US sanctions programme is not only the most comprehensive, but the one with
most bite. In stark contrast to the UN, it does not suffer to anything like the same
degree with difficulties in respect of implementation, monitoring and enforcement
which result from a multilateral response, slim economic and personnel resources
and dependency on member states cooperation. Additionally, it carries aggressive
financial penalties for breaches.
OFAC has power to impose fines and penalties for non-compliance with its
regulations and the levels of fines can be high even where persons have voluntarily
reported instances of non-compliance. Depending on the OFAC programme
breached, criminal penalties can include fines ranging from $50,000 to $10,000,000
and imprisonment ranging from 10 to 30 years. In addition and again depending
on the OFAC programme, civil penalties can be imposed that range from $11,000 to
$1,000,000 for each violation.
As part of its sanctions programmes OFAC publishes country sanctions lists as well
as lists of individuals and companies referred to as Specially Designated Nationals
or SDNs. Those on the list are individuals or companies owned or controlled by,
or acting for or on behalf of, targeted countries, as well as individuals, groups,
and entities, such as terrorists and drugs traffickers, designated under sanctions
programmes that are not country-specific.
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OFACs jurisdiction is wide and requires compliance with its regulations by all
US persons, including all US citizens and permanent resident aliens no matter
where they are located, all persons and entities within the US, together with all US
incorporated entities and their foreign branches. Certain OFAC programmes also
require foreign persons in possession of goods of US origin to comply.
In recent years the OFAC has aggressively extended the reach of its attempts to
regulate, for example, non-US banks. Despite the fact that US sanctions do not
apply to non-US banks outside the US, whenever any currency payment is in US
dollars, such that it has to be cleared through New York, this is now treated as
sufficient basis to engage the OFAC regulations.
As noted above, breach of the US sanctions regime can carry substantial financial
penalties. Fortunately, these are usually easy to predict and manage particularly
as they are often negotiated between the company in breach and the US
government. If they were the only penalties, the decision about the level of internal
regulation to impose would be a simpler cost-benefit analysis. However, there are
also hidden costs to being found in breach. Most prominent amongst these is the
reputational damage which accrues. In order for managers to accurately calculate
both the justifiable cost of compliance procedures and the best steps for dealing
with an accusation of breach, it is vital that these costs are considered separately
and on their own merits.
OFAC administers and enforces economic sanctions based on laws passed by the
US Government and goes beyond the UN targeted states and include states such
as Burma, Cuba, the Western Balkans, Belarus and Zimbabwe. OFAC publishes a list
of Specially Designated Nationals and Blocked Persons (SDN List), which holds over
6,000 names of companies and individuals from around the world. OFAC requires all
US persons to comply with its regulations and the definition covers all US citizens
and permanent residents regardless of where they are based. All US entities and
foreign branches must comply, as should subsidiaries that are owned or controlled
by US companies. Breaches can result in substantial civil and criminal penalties.
Firms should be particularly mindful of OFAC sanctions if:
They employ United States citizens or permanent aliens

Transact in US dollars
Enter into transactions involving United States operations or accounts; or
Have United States offices, subsidiaries, branches or agencies or a
relationship with a United States firm.
Some OFAC sanctions measures, for example those in place in respect of Iran, also
specifically apply in respect of foreign financial institutions.
Example
Lloyds TSB agreed to pay an unprecedented penalty of US$350 million in 2009
in lieu of criminal prosecution in the US for processing prohibited payment
transactions made by its client through non-affiliated US correspondent
banks. Lloyds was technically not a US person and none of its actions that
caused prohibited transactions took place in the US; but its actions caused
its non-affiliated US correspondent banks to breach OFAC regulations. The
extraterritorial aspects of this case are important to note.
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OFAC has jurisdiction over business imposed under the provisions of the US
International Emergency Economic Powers Act (IEEPA) and Trading with the
Enemy Act (TWEA). These cover corporations organised under US Law, including
foreign branches of US companies. This would apply to US firms with branches
in Malaysia.
Institutions should have written policies and procedures in place to deal with
sanctions screening. Regular reviews and updates of sanctions policies and
procedures should take place to ensure they remain fit for purpose and are
effectively enforced. Training of staff on sanctions, particularly those involved in
taking-on and monitoring clients is an on-going process. It is important that firms
screen clients when new sanctions notices are released.
To ensure that your screening program is effective it is important to think about
variables such as:
Different spellings of names (e.g. Abdul, Abdullah, Abdel)

Name reversal (first/middle names written as surnames and vice versa)
Shortened names (e.g. William/Bill, Robert/Bob/Bobby etc)
Maiden names
Removing numbers from entities; and insertion/removal of full stops
and spaces.
The following case study illustrates the dangers of not monitoring the automated
systems you have in place:
Example
In August 2010 the UK FSA levied a fine of 5.6 million on the Royal Bank of
Scotland Group (RBSG) for failing to have adequate systems and controls in
place to prevent breaches of UK financial sanctions.
The FSA stated that RBSG had failed to establish and maintain appropriate and
risk-sensitive policies and procedures relating to:
1.
2.
3.
Customer due diligence measures and on-going monitoring;

Internal control; and
the monitoring and management of compliance with, and the internal
communication of, such policies and procedures, in order to prevent
funds or financial services being made available to designated persons
on the list of financial sanctions targets maintained by Her Majestys
Treasury sanctions list (HMT List).
RBSG had failed to implement and properly oversee systems used to screen
relevant customers and payments against the HMT List despite being one of the
largest processors of foreign payments among UK banks. RBSG failed to screen:
a.
b.
c.
any incoming payments to customers,

Sterling payments made by customers (except those going to US based
institutions); and
Euro payments made by customers (until 9 June 2008)
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Another key issue that is particularly of note was their failure to effectively
monitor the fuzzy logic name-matching features of their screening software.
This meant that names that had been mis-typed, translated or had common
name variations were not picked up when they ran matches against the HMT
Sanctions list. Their systems had only been calibrated once and could not
cope with various name orders combined with initials. For example, if the name
John Smith, appeared as Smith, J. they would have missed the match on the
sanctions list. In some cases, the software only looked for exact matches for
company names.
The UK FSA recommended that firms regularly review the effectiveness of their
systems and ensure that their screening software provider is responding to
issues with the same levels of priority so that any problems are swiftly resolved.
The decision notice also highlighted the groups failure to hold sufficient
information on beneficial owners and directors of its corporate customers. In
many cases the names were not screened against sanctions and they did not
monitor these entities on an on-going basis. The FSA deemed that they had
failed to effectively manage the risk of such complex corporate structures.
Source extract: Mind the Gap, by Naomi Cohen, www.KYC360.com.
It is recommended that senior management are involved in formulating and
overseeing policies and procedures for sanctions. Documented policies and
procedures should be in place and regularly reviewed. It is good practice for an
independent review of procedures to be carried out periodically by staff who are
not involved in overseeing the firms systems and controls for financial sanctions.
All clients, including corporate customers such as directors and beneficiaries and
third party payees should be screened against sanctions lists.
In July 2011 the US Federal Reserve issued an unprecedented cease and desist
order on the RBS Group. They were given 60 days to improve their systems. In
regards to due diligence procedures they were required to provide an:
acceptable written customer due diligence program designed to reasonably
ensure the identification and timely, accurate, and complete reporting by any
of the U.S. Branches of all known or suspected violations of law or suspicious
transactions to law enforcement and supervisory authorities, as required by
applicable suspicious activity reporting laws and regulations. At a minimum, the
program shall include:
a.
b.
c.
d.
The scope and frequency of transaction monitoring;

a methodology for assigning risk ratings to account holders, including
affiliates, that considers factors such as type of customer, type of product or
service, and geographic location;
appropriate risk-based customer due diligence with respect to all customers,
including affiliates, and as applicable, enhanced due diligence procedures;
monitoring and investigation criteria and procedures to ensure the timely
detection, investigation, and reporting of all known or suspected violations
of law and suspicious transactions;
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e.
f.
a timetable to implement improvements to suspicious activity monitoring

systems and processes; and
measures to ensure that transaction monitoring and suspicious
activity reporting functions that are outsourced to affiliates of the
U.S. Branches or third-party vendors are performed as to meet
regulatory requirements.6
Within 60 days of the order they needed to provide a written plan to:
enhance each branchs compliance with OFAC Requirements. At a minimum, the
written plan shall include:
(a)
(b)
(c)
(d)
(e)
(f )
A methodology for assessing OFAC risks presented by the specific product

lines (including cross-border payment processing), customer base, and
nature of transactions conducted at, by, or through each branch;
appropriate screening procedures for identified high-risk areas;
procedures to ensure that customer files contain complete documentation
of all OFAC checks performed;
oversight and effective management of any OFAC compliance functions that
are outsourced to affiliates of the U.S. Branches or any third-party vendors;
effective training for all appropriate U.S. Branches personnel and for
appropriate personnel of affiliates that perform OFAC compliance-related
functions for the U.S. Branches in all aspects of OFAC Requirements and
internal policies and procedures, and updating of training on a regular
basis; and
independent testing of compliance with OFAC Requirements.
Firms should ensure that they have clear internal and external policies for
dealing with a sanctions match and clear lines for reporting the issue. They
should also ensure that they have procedures in place for investigating potential
matches and keep records of any false positives that may arise. Senior management
should be involved where a target cannot be easily verified and of any breaches
that occur.
If a firm finds a target match on a sanctions list it should investigate the match and
determine using their CDD information on the client if they are an exact match to
the sanctioned entity. If there it is an exact match or if there is any doubt the firm
must report the match to the relevant authority as soon as possible.
10.3 US Comprehensive Iran Sanctions, Accountability and Divestment

Act 2010 Energy Sanctions (CISADA)7
On July 1, 2010, President Obama signed into law the Comprehensive Iran
Sanctions, Accountability, and Divestment Act of 2010 (CISADA). The Act amends
the Iran Sanctions Act of 1996 (ISA) which requires sanctions be imposed or waived
for companies that are determined to have made certain investments in Irans
energy sector. CISADA expands significantly the energy-related activities that are
sanctionable and adds new types of sanctions that can be imposed. These new
authorities address the potential connection between Irans energy sector and
its nuclear program that was highlighted in UNSCR 1929. They support an effort
6.
7.
US Federal Reserve, 27 July 2011.

http://www.state.gov/.
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to increase pressure on Iran to return constructively to diplomatic negotiations

to address the international communitys concerns about Irans non-compliance
with its international obligations (including those under the relevant UNSCRs, the
Nuclear Non-Proliferation Treaty, and the IAEA Safeguards Agreement.) The United
States is resolved to make full use of ISA and the other authorities in CISADA as
additional tools in our efforts to convince the Iranian Government to change its
strategic calculus, comply with its full range of nuclear obligations, and engage in
constructive negotiations on the future of its nuclear program.
Breaches of the Act can attract Sanctions that include the following prohibitions.
1.
2.
3.
4.
5.
6.
7.
8.
9.
Export assistance from the Export-Import Bank of the United States;

Licenses for export of U.S. military, "dual use", or nuclear-related goods
or technology;
Private US bank loans exceeding $10 million in any 12-month period;
If the sanctioned person is a financial institution, designation as a primary
dealer in USG debt instruments or service as a repository of USG funds;
Procurement contracts with the United States Government;
Foreign exchange transactions subject to U.S. jurisdiction;
Financial transactions subject to U.S. jurisdiction;
Transactions with respect to property subject to U.S. jurisdiction;
Imports to the United States from the sanctioned person.
10.4 International Sanctions Risk

The risk and consequence of undertaking business with a sanctioned person can
be considerable in both reputational and financial terms.
For example, in January 2006 the US Office of Foreign Asset Control announced that
it, together with Board of Governors of the US Federal Reserve, had imposed a $40
million penalty against ABN AMRO Bank, N.V., arising from findings that ABN AMRO
had participated in transactions that violated OFAC Iranian and Libyan sanctions. The
essential facts of the violations as reported by OFAC were that between December
2001 and April 2004, ABN AMROs overseas breaches removed or revised references
to entities in which the Governments of Libya and Iran had an interest before
forwarding wire transfers, letters of credit and US dollar cheques to ABN AMRO
branches in New York and Chicago.
Other banks faced similar penalties in what became known as the strip club as
the banks had stripped out information from the wire transfers to attempt to
conceal the fact that they were dealing with sanctioned entities. Banks ensnared
in this particular scenario included Lloyds TSB8, Barclays and the Australia and New
Zealand Bank Group Ltd. Credit Suisse AG agreed to pay a fine of $536 million in
global settlement of violations of U.S. economic sanctions and New York State law.
That may sound like a massive fine and it is one of the largest doled out by OFAC
however in reality the Swiss bank got off lightly it could have faced a base penalty
under OFACs guidelines of $1.7bn.9
As listed earlier, firms should be alive to the risks posed by OFAC sanctions.
8.
9.
Lloyds TSB is Busted by Uncle Sam for Stripping, Stephen Platt Article 2009.
Informer, Volume 2/Issue 13/Spring 2010.
29
Module 1
Other recent examples of economic sanctions violations and penalties include:
Credit Suisse $536 million in 2009

JP Morgan Chase & Co $88.3 million in 2011 (OFAC)
Barclays Bank plc $298 million in 2010 (OFAC)
Standard Chartered $340 million in 2012 (OFAC)
Credit Suisse $536 million in 2009
ING Bank N.V $619 million in 2012 (OFAC)
HSBC $1.9 billion in 2012 (OFAC)
BNP Paribas $8.9 billion in 2014 (OFAC)
10.5 International financial sanctions Terrorist Financing

International action against terrorist financing has focused on:
sanctions to cut off money flows to individual terrorists and

terrorist organisations
standards to stop the financing of terrorism, and
technical assistance to help countries develop the measures and
infrastructure necessary to root out the funding of terrorism.
United Nations Security Council (UNSC) Resolution 1267 requires Member States to
freeze the funds, other financial assets and economic resources of persons listed at
the UN on suspicion of association with al-Qaeda or the Taliban. UNSC Resolution
1373 requires similar action to be taken against persons suspected of committing,
attempting to commit, participating in, or facilitating acts of terrorism.
The United Nations Counter-Terrorism Implementation Task Force (CTITF)10,
established by the Secretary-General in 2005, is comprised of 34 UN and
international entities. CTITF works to ensure overall coordination and coherence
in the counter-terrorism activities of the United Nations system and to support
Member States efforts in the implementation of the UN Global Counter-Terrorism
Strategy (A/RES/60/288) adopted in 2006. CTITF provides for the delivery of this
focused and coherent assistance mainly through its Working Groups and other
initiatives, and strives to ensure that the Secretary-Generals priorities are integrated
in its work, including respect for human rights, as expressed in the Human Rights
Up Front action plan. CTITF also seeks to foster constructive engagement between
the United Nations system and international and regional organizations, civil
society and the private sector, where appropriate, on the implementation of
the Strategy.
The United Nations Global Counter-Terrorism Strategy, which brings together
into one coherent framework decades of United Nations counter-terrorism policy
and legal responses emanating from the General Assembly, the Security Council
and relevant United Nations specialized agencies, has been the focus of the
work of CTITF since its adoption by the General Assembly in September 2006
(General Assembly resolution 60/288). While the primary responsibility for the
implementation of the Global Strategy rests with Member States, CTITF ensures
that the UN system is attuned to the needs of Member States, to provide them with
the necessary policy support and spread in-depth knowledge of the Strategy, and
wherever necessary, expedite delivery of technical assistance.
10.
http://www.un.org/en/terrorism/ctitf/index.shtml.
30
Module 1
In the UK, Part III of the UK Joint Money Laundering Steering Group (JMLSG)
guidance outlines sanctions requirements and procedures in detail. The global
community responded rapidly to the human rights abuses in Libya at the start of
2011 when the UN Security Council passed Resolution 1970 on 26 February 2011.
It introduced financial sanctions against those persons involved in or complicit in
ordering, controlling, or otherwise directing, the commission of serious human
rights abuses against persons in the Libyan Arab Jamahiriya, including by being
involved in or complicit in planning, commanding, ordering or conducting attacks,
in violation of international law, including aerial bombardments, on civilian
populations and facilities; or acting for or on behalf of or at the direction of
such persons.
The EU adopted Regulation 204/2011 on 2 March 2011, which implemented UNSCR
1970 (2011). The Regulation also provided for the EU to list, separately to the UN,
persons involved in or complicit in ordering, controlling, or otherwise directing, the
commission of serious human rights abuses against persons in Libya, including by
being involved in or complicit in planning, commanding, ordering or conducting
attacks, in violation of international law, including aerial bombardments, on civilian
populations and facilities. As members of Gadhafis regime melted away from his
control some names have been removed.
The aggressive crackdown in Syria has also led to the global community calling
for sanctions against the regime for human rights abuses. The EU adopted Council
Regulation (EU) No 442/2011 on 9 May 2011. The Regulation included assetfreezing measures on certain persons identified as being responsible for the
violent repression of the civilian population in Syria and targets key leaders of the
regime. The UK passed The Syria (Asset-Freezing) Regulations 2011 to bring the EU
regulations into effect.
In Malaysia, to counter the financing of terrorism, Sections 66C and 66D of the
AMLATFPUAA empower the Minister of Home Affairs (Minister) to make orders
for the implementation of measures to give effect to resolutions adopted by
the United Nations Security Council (UNSC; the Charter of the United Nations
(Charter) confers on the UNSC primary responsibility for the maintenance of
international peace and security. Pursuant to Article 41 of the Charter, the UNSC
may decide on measures not involving the use of armed forces to be employed to
give effect to its decisions, and may call upon the Members of the UN (including
Malaysia) to apply such measures), and to obtain information on possession or
control of terrorist property.
On November 26, 2014, Malaysia's Prime Minister, Najib Razak11, urged the country's
parliament to adopt stronger legal safeguards against terrorism. In particular, he
expressed concern about Malaysian citizens returning home with extremist views
after having fought beside Islamic State (IS) militants in Syria and Iraq, noting that
39 citizens had already joined IS and that its radical ideology should not be allowed
to spread. Also on November 26, the House of Representatives (Dewan Rakyat) of
Malaysia's Parliament unanimously approved the government white paper tabled
by the Prime Minister, entitled Toward Combating the Threat of Islamic State.
11.
Malaysia PM Proposes Anti-Terrorism Law (Nov. 26, 2014); Teks Ucapan Pembentangan
Kertas Putih Ke Arah Menangani Ancaman Kumpulan Islamic State [Speech on
Presentation of White Paper to Address the Threat of the Islamic State], Office of the
Prime Minister website.
31
Module 1
The white paper points out the need to combat not only the threat posed by the
IS but also the alleged involvement of Malaysian jihadists within the group. It also
calls for a specific anti-terrorism law to be adopted and for the current relevant
laws, the Security Offences (Special Measures) Act 2012, the Prevention of Crime
Act, and the Penal Code, to be reinforced.
Learning outcomes
By the end of this module you should:
understand that money is laundered to disguise its origins in criminal activity and
to protect the criminals from detection and prosecution
appreciate the diverse routes by which money can be laundered and the way
in which finance professionals can wittingly or unwittingly commit money
laundering offences
be aware of the staged interpretation of the money laundering process while
being able to explain its limitations
understand the core obligations/recommendations placed on a reporting entity
by FATF
understand the differences and similarities between money laundering and
terrorism financing
be able to describe some typologies and techniques of terrorist financing
be able to evaluate the roles of the FATF and APG
understand the nature and types of sanction that can be imposed.
32

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M odule 1

Understanding Money Laundering and

explain why money is laundered

1. Introduction: The Process of Money Laundering

Understanding the Regulatory Environment

the crime. It need not be a clever or complex arrangement. It can be as simple as

1.1 Objective of money laundering

1.2 What constitutes an underlying crime?

Understanding the Regulatory Environment

1.3 Who are the money launderers?

1.4 What money laundering laws exist?

Understanding the Regulatory Environment

1.5 Terrorism financing

2. How is money laundered?

Understanding the Regulatory Environment

We will examine each of these three stages in more detail. It is important to

provides a link to the predicate crime

Understanding the Regulatory Environment

is exposed to deterioration (vermin, damp, fire and other types of damage)

2.1.1 Disguised deposits

making several deposits into a single or multiple accounts on

Most jurisdictions require people moving monetary instruments of any value to

2.1.2 Use of monetary instruments

Understanding the Regulatory Environment

Cash takings of lawful businesses may be augmented by the proceeds of crime

2.1.4 Asset purchases

cash reporting obligations that might directly apply

Understanding the Regulatory Environment

2.1.5 Personal investment products and small general insurance policies

Understanding the Regulatory Environment

2.3.1 Loan agreements

2.3.2 Sham transactions

2.3.4 Redemption of life policy or similar investment

2.3.5 Purchases of real estate

Understanding the Regulatory Environment

Diagram 1 Overview of a Typical Money Laundering Scheme1

3. Limitations of the Staged Interpretation of

Understanding the Regulatory Environment

One tranche of RM20,000 is invested into a mutual fund managed by X. The

4. How Common Is Money Laundering?

Understanding the Regulatory Environment

6. Terrorism Financing (TF)

the scope of the AML/CFT programme of a reporting entity

6.2 What is the difference between money laundering and

money or other forms of value

Understanding the Regulatory Environment

6.3 Observed TF typologies

fund movements predominantly based on banking institutions as the

Detected terrorism financing has had no characteristics different from the

6.4 Some terrorism financing techniques

Understanding the Regulatory Environment

cash couriering, whereby passengers physically carry cash as they travel

Other terrorism financing techniques include:

opening and operating an account in a false name

6.5 The FATF Guidance

6.6 United Nations Security Council Resolutions

freeze the funds, other financial assets and economic resources on

Understanding the Regulatory Environment

7. Significance of International Initiatives

the ML/TF risks represented by other countries, customers from other

Understanding the Regulatory Environment

As at December 2016 it had 37 members: 35 countries and governments and two

8.1 FATFs 40+9 Recommendations

8.2 Criteria for FATF Membership