Anti-Money-Laundering, Counterterrorism Financing and Financial Crime


I have an hour to
cover a topic that really represents the change– a social change, really. It’s the development
of an entire new field in terms of careers in banking. In this day and age
when there is not a whole lot of secured,
continuous employment, this is the field
that is going to be. Because we’re just at the
start of an entire new sector. So what are we going
to cover today? So basically,
we’re going to look at what is the world of
money laundering, what are the global national
standards, what is money laundering, and challenges
to preventing it, some case studies, and
then my closing thoughts. I want to get
through this as much as possible so that it would
allow you to ask questions about things that I think
are of most interest to you. And hopefully, some of
the cases I’ve selected will be of interest to you. Some of the things
that you are going to have to learn about
if you were to leave this room at the end of today– there are a couple
of acronyms I want you to get familiar with
because this is going to be a part of your
life, whether you are a professional in the field,
or as a customer of a bank. And I don’t think many
people in the world are not customers of a
bank, although that’s a whole new topic about
financial inclusion. You would be interested to
know that in the United States, US postal service did a
study a couple of years ago that estimated one out
of every four households, that’s 25% of US
households, do not have access to a bank account. Were you aware of that? It doesn’t have to do with the
money laundering prevention efforts, but that’s an
interesting discussion altogether, and that’s a global,
social issue that the World Bank is working on. It’s one of my favorite
areas of focus in the work that I do now. So what are some of these terms? Like Social wealth, you’re
going to be dealing with that; CTF Counter-Terrorism Financing,
or combating the financing of terrorism into
money laundering; AML– this is an important
acronym to remember, AML, because for those of you who
sits on the boards of banks– one of the compliance officers
did a board presentation where they used the word
AML assuming everybody knew what it was. And after 30 minutes in,
one of the board directors says, what does this have
to do with asset liability management, which is ALM. So then I start
saying, you know, let’s not assume everybody
know what AML stands for. FATF– Financial
Action Task Force– I’ll explain what that is. In the US, currency
transaction reporting, suspicious transaction
reporting– and the US calls it suspicious
activity reporting– I’ll explain that. Financial institutions, CB–
for Correspondent Banking, and Customer Due Diligence,
Enhanced Due Diligence. So if you walk out of
here today and say, those are things I learned,
that’s really great. So first, to understand
what is money laundering, you need to understand what is
defined as a predicate crime. So that’s practically
everything under the sun– racketeering, terrorism,
financing, trafficking, human trafficking, drug
trafficking, arms, corruption, bribery, fraud, forgery,
counterfeiting, basically any crimes that’s indicated as
a crime in that jurisdiction. The newest one is this
one, which is tax crimes. So tax evasion was added
as a predicate offense for money laundering prosecution
in 2012 as a global standard. Each country has
had different types of application of
this requirement, and I’ll explain that later. So how big is this problem? The world of
transnational crime– the first official
estimate was in 1998 by the International
Monetary Fund, which estimates about 2% to 5%
of global GDP, or $900 billion US, think about that. How much dirty money flows
around the world economy? The latest report
that was updating it was the United Nations Office on
Drugs and Crime Report in 2011, which puts it very
consistent with IMF numbers. 3.6% of global GDP
is illicit proceeds running around the world. What percentage of that
is laundered money? So $2.1 trillion in the
global economy, money laundered– $1.6 trillion. To put this number
in context, if you look at the global
economies, the GDP of each of the countries– I highlighted the ones
that are prevalent to me because I’m based out of Asia– it’s Hong Kong; China,
which at the time was the third largest economy,
which have since of course surpassed Japan; and the other
piece of data from this report I want to highlight– I’m waiting for
this to respond– is the socioeconomic cost
of illicit drug proceeds. This report talks about what
the impact of the economy is. So the ratio of
socioeconomic costs to the economy from $1
of illicit drug proceeds, it’s a 2 to 1 ratio globally,
and the United States is 3 to 1 So every $1 of dirty
money from drugs, it costs our society three
times to address all the issues associated with that. The last piece of data from this
report that’s really depressing is that less than 1% of
these proceeds of crimes are overseas. So criminal organizations– if
you think about what they do, and if you look at global
enforcement statistics irrespective of
country, more than 95% of all crimes you look
at that are committed is actually profit driven. The rest is what they
call crimes of passion. So when you think about
these proceeds of crime, the banks have a lot
of resistance to this. They are being asked to
detect illicit money, but what’s happening to us
is that we, as a society, need to recognize the
very social ills that we want to be protected
from that we don’t want in our communities. They thrive on the
ability to launder these proceeds of crime. And for them,
imprisonment is just a part of committing
these criminal acts. Because less than 1% of
these proceeds overseas– that means that they go to
jail, and then they come back and they can enjoy the proceeds
of crime– that $2 million home or whatever it is. So what are the guiding
bodies in this space? The Financial Action Task Force
is a global international body of members. So think of the United Nations,
where countries belong in it based on political sovereignty. Because the
financial action task was as focused on money
laundering prevention, counterterrorism
financing, everything related to those two areas– countries are recognized
on an issues base. So that’s why even though you
will have Hong Kong, which is now part of China, are
never listed separately from the United Nations. You will have them listed
separately in the ATF. They were part of
the ATF in 1991. China, on the other hand,
was only admitted to the ATF as a member in 2007. So it’s an interesting
time for China to be seen as a global power. But in this space, actually one
of their– it’s one country, three systems if you
include Macau as well– but Hong Kong is actually one
of the major financial centers in the world. So the Basel Committee is
another international body of banking supervisors. The Wolfsberg
Principles is made up of the 13 global banks, the
European Union directives. This is the only international
body whose requirements on AML is actually mandatory. So all members of
the European Union, once the EU directive
is put into effect, they must enact it
within two years. So the latest one is the
EU directive, the fourth EU directive. Then, Other laws in the US that
have extraterritorial reach. So while the US Patriot Act and
the Office of Foreign Assets Control, OFAC, which is relating
to the sanctions program, is US-based, but it has
extraterritorial reach. Why? Because when I go through the
example of what correspondence banking does, it
involves the processing of US dollar payments. That’s where the
extraterritorial reach of US laws and regulation
come into play. And last, not least, but
this [? Edmonds ?] Group is basically a group of
Financial Intelligence Units. So if you think
about– every country has it in the United States. It’s FinCen, other countries
have the JFIU and so forth. But their objective is to gather
suspicious activity reporting and then return
back to the industry to advise them what are the
trends that are coming out. Where are the
risks to the banks? So I’m highlighting four
key national regulations because these are the four
major financial centers. Outside of the US and
London, the other two major financial
centers is in Asia– Hong Kong and Singapore. In fact, Singapore
just surpassed Hong Kong as the third largest
financial center in the world. So what are the regulations? In the US, it’s the Bank
Secrecy Act of 1970. So for those of you who work in
this space or you’re customers in this space, one
of the things you are going to get familiar
with is the BSA officer. This is their job. In the UK, quite a number of
laws that have been revised, like the Proceeds of Crime Act
2002 that was amended in 2013 and so on and so forth. In Hong Kong, the Anti-Money
Laundering Ordinance of 2012 went into effect. It doesn’t mean that
the countries who have recent laws– doesn’t
mean that they have not been complying with
the AML requirements. It’s just that they didn’t have
a dedicated law to that fact. In Hong Kong, that was one
of the criticisms they had. As a member of
the ATF, they were evaluated through the mutual
evaluation process, which basically is like having a bank
examiner come into the country and evaluate how were you
doing on your AML compliance. The last piece, of
course, is Singapore’s monetary authorities. Singapore is the
primary regulator, relating to Notice 626. So what is money laundering? There are three stages to it. The first one is placement. Dirty money. So the predicate crimes
[? in the ?] [? beginning, ?] proceeds of crime
needs to be laundered. Placement means it has to be
introduced into the system somehow. Because the objective of
laundering is to disassociate the original funds from
the ultimate beneficiary. You put it in the system,
and then you layer it. What does layering mean? I had this question from
one of my professors yesterday when I was
catching up with him. He said, well, as a criminal,
I’m not going to say, I’m a criminal, and I’m
going to go in and put in money in the bank. I’m going to use other
means of disguising it. So this is the big
challenge for banks because oftentimes, they have
nominee shareholders, nominee companies, nominee
lawyers and accountants. Everybody remembers
the Firm, right? With Tom Cruise? I am your lawyer. I cannot talk about anything. I will forever be your
lawyer– that kind of thing. Well, the US was, actually,
in part of their assessment last year, will
continuously be criticized for not including
lawyers as part of the anti-money
laundering requirement. Because what’s critical
to our legal system is the tenant of
attorney-client privilege. The interesting thing
is, in Europe, they carve out financial transactions
so their attorney client privilege does not extend
to financial transactions. So you must report it. But the US does not. And different jurisdictions
have different ways of addressing this
particular issue. So when you’re talking about
money laundering activities, the truth is, the biggest
challenge to the bank is, the bank looks at you,
you represent everything that makes them
feel comfortable, they give you account access. The challenge is, are
you still the same person that operates that
account thereafter? So one of the things
that we have to determine is, how are they layering this? Is it moving through
multiple accounts? Here it talks about moving
money through various accounts around the world. Sometimes it doesn’t have to. Even just moving through
different accounts within the same big bank,
like HSBC, hiding it through different accounts. Part of it is because
the money launderers’ criminal organizations take
advantage of the fact knowing that global banks don’t
work consistently, let alone moving from bank to bank
within the same country. Or the worst part– or the
most challenging part– is when that money is
moved from one jurisdiction to the other, at which
point the data privacy controls of each jurisdiction
is going to prevent any kind of cooperation. So one of the big objectives of
the Financial Action Task Force is to push for international
cooperation in this space. The last piece is integration. They’ve laundered the
money, you see it is clean, and now it comes
out, and it gets integrated into the economy
like it’s normal money. So I have a question for you– if you have $1 million to
invest, what’s your objective? Maximize money, right? Return on investment. What does that mean
for the economy? It means inefficient
allocation resources. You’re going to put money
where it makes you money, it creates jobs, tax revenue– all the positive
things for the economy. What if that money
was dirty money? [INAUDIBLE] Dirty money comes from
illegal activities. So any country that has defined
it– so at the beginning, we talk about trafficking– human trafficking
forgery, piracy, so anything that’s considered
a criminal activity in that country,
proceeds from that is subject to money laundering
prosecution, or should be. So if it’s dirty money,
what’s your objective? [INAUDIBLE] Well, if it’s dirty money,
you want to clean it. So the way to clean it is
not actually– if you really think about it, a lot of
the challenge of detecting money laundering activity has
to do with legitimate company activities mingle with
dirty money, right? The front companies that we
see a lot and we think about. If you think about it, one
of the biggest challenges is small/medium enterprises– the mom and pop shops– the
one that’s a keystone to the US economy– frankly, are very
vulnerable to this. Because what they
do is, they can act like a legitimate
business, but the actual money flows that go through it– who’s auditing it, frankly? [INAUDIBLE] Right! You have tax returns, but– [INAUDIBLE] –be explained under
audit explained somehow. Did you [? do this ?]
[? at a casino? ?] Or did you [INAUDIBLE] proceeds from your
business activity or what? If you have a tax return, you
can reconcile cash receipts back to a tax
return of some sort. But back that tax return is
predicated on the fact that– if you were the tax authority,
and I ask this question in Asia a lot– if you’re the
tax authority, if you see a company reporting
increased revenue but the expenses may be
consistent or slightly increase, is the taxman or
woman going to say, excuse me, you just grew your business
by 100%, is your cost of goods sold commensurate
with that growth? Am I going to come and
make sure that, yeah, you know, you did have an
increase of 1,000 customers, so that means x number of
beans had to be purchased. You’re not doing that. All you care about
is the bottom line. Well, more revenue
less expenses mean I have more reportable income. [INAUDIBLE] Exactly, right. So there is an inherent conflict
of interest in the system that you think is
supposed to authenticate. [INAUDIBLE] I don’t want any of my cash
being taxed if I could help it, but if I had to give up
[INAUDIBLE] clean it and stay clean, [? then ?] [INAUDIBLE] So, you’re right. Criminals don’t
want to pay taxes. But for them, paying taxes
is part of the process of legitimizing it. That’s the piece
that is challenging for folks to understand. They think, well,
criminals, they’re trying to disguise
everything else; but actually, for
them, paying taxes is one sure way in making
sure that they actually get access to the
financial system without raising any red flags. So of course, they
will never file a tax returns that grows the
business like 100% every year, right? It’s just enough to keep
laundering the money, but no one is
actually going to go and say, well, you know what,
I’m going to do an audit. I want to make sure that
your expense receipts justify the expenses you’ve listed
in your tax returns, so that explains why your
operating income has gone up by x. [INAUDIBLE] Yes. [INAUDIBLE] Because if I am running a
service-related business that collects cash and not checks
that pass through my checking account, then I can
put half the cash into my bank account
for my business, that I collect as a
[INAUDIBLE] doing services. I can put half the cash into
my pocket and not report that. That’s true. That is true. Your thinking is
based on the premise that your tax authority
is operating efficiently and that it works well, right? So in my work– so I’ve been doing this for 10
years now based out of Asia, and I don’t know if you’re
familiar with the developments. So part of that objective of
determining where the cash is, India went through a
demonetization effort last year trying to move
money back into the system. So there was this story– a real case– he didn’t think he
would be found out, but it was. So the Indian government
had a limitation about how much cash each
person could deposit. It was like $50,000
US equivalent. And he’s a legitimate
businessman. He just simply wanted to
keep a lot of things in cash. As it turns out, he ran
out of family members who could deposit
money on his behalf. And instead of
putting in the rest, he actually had all these
Indian rupees sitting in his one room in his house– equivalent of $6 million US. I don’t know if you
know the exchange rate, but the Indian rupee is 60
to the US dollar, or now 68. He burned it. Rather than putting it
back into the system, he burned it because he did not
want to raise any red flags. Of course, he raised red
flags elsewhere, right? [AUDIENCE LAUGHTER] How many of you
send money overseas? Anyone? So for those who do,
even in your basic– say you send money
from your savings account to checking account. And in your eyes,
on online banking, you click and it
shows up right away. There’s a whole element of how
banks process their payments that impact money laundering
activities detection. But for overseas, this
is the biggest challenge for the global economy– is how money moves
around the world. In fact, a lot of the
laundering activities is actually predicated
on the ability to move money around
the world because they know the countries don’t
cooperate the way they need to. And so they find
gaps in the system to move these money flows. So corespondent banking–
you are sitting in the US and you want to send some money
to your family in Singapore, right? Let’s put it the
other way– someone wants to send money to the US. Let’s say you have
a business in Asia. You need to pay
money to services that you ordered as
a company in the US, so you need to make that
payment in US dollars. But of course, you’re
based in Singapore. You don’t have the US dollar. And let’s say that
bank that you bank with don’t have a presence
in the US, so you require the correspondent
banking relationship. That means you go to a
US-based institution and say, can you process
this payment for me? So in this case, you have the
gentleman in the Netherlands. He needs to make his bank pay
money to someone in New York. So he goes to his bank in
Amsterdam and [? FAS ?] [? Bank ?] is the
corresponding bank. He sends his
instructions over here, and then [? FAS ?] [? Bank ?]
has relations with [? Fine ?] bank, which is the provider of
banking services to the auto parts supply. If you think through
each of that process from a money-laundering-detection
point of view and what that requires the banks to
be able to figure out– what’s a money
laundering transaction versus a non-money
laundering transaction? They’re just zeroes and ones. How do you detect the
difference between something that is clean and not clean? And we’ll go into that. But that’s basically
correspondent banking relationships. Now why is this critical
to the global economy? Predominant payments
in the global economy is in US dollars. The only clearing house of US
dollar is in the United States. So everyone around
the world, when they need to make
payments– it is what we call the operational
[? currency ?] of businesses around the world–
the US dollar. It comes back to
the US, and that’s why it poses a lot of risks to
the financial system in the US, because you have to provide
these corresponding banking services. That’s why you have a
lot of foreign banks who apply for banking
license in the US, not because they think the
US is a great growth market, but because one of the critical
elements of their business is to be able to
process US dollar. OK, I’m waiting
for this to reply– OK, so from your perspective,
what are you going to see? This is what the banks
have to focus on now in this world of anti-money
laundering counterterrorism financing. KYC, Know Your Customer,
Customer Due Diligence. How many of you opened
an account recently in the last five years? Do you notice the
types of questions that are being asked that were
really never asked before? Before it was your
driver’s license, proof of address, and that’s it. But now, they said, well, why
do you want an account with us? What are you going to
use this account for? What is the exact expected
transaction volume? What is the expected
transaction amounts? So this is what they
are trying to determine. Why is that the case? Let’s say a customer
comes to the bank, and the [? customer ?] says,
why do you need this account? The customer says,
it’s to receive salary. OK, you just got a
job, you just moved here, you need a bank account. That’s fine. But the bank has to be able to
determine that, in fact, what he said or she said
is in fact what he’s going to use the account for. So what are the basic
parameters of a salary account? For example, how
much incoming money? How frequently
should they get it? How often do you get paid? Let’s be generous. Weekly. Four times. Forget about the
outward payments. Where should the
money be coming from? Well, if you live in Amherst
and you start getting money from Russia, that’s
a bit of a problem, because it’s a salary account. Unless you told the
bank in the beginning that you’re a consultant, and
you travel globally– perhaps they build that
into your profile. But the objective of the
KYC, Know Your Customer, and Customer Due
Diligence program is, you identify the customer. So they give you
the documentation, now they have to verify it. Because you know how much
fraudulent documentation there is in this world? You can get it practically free. And then the due diligence
piece of it is, all right, I built a profile, I’m
comfortable with this customer, they told me what
I’m comfortable with. But do you really
know your client yet? No. Not until you start monitoring
the activities in that account. So for us who are
compliant, good people, I know it gets
people nervous when I go around talking about
money laundering prevention and like, what, do they
assume that everybody is doing something illegal? That’s not the case at all. What we’re trying to do, as
a society, is basically say, money isn’t just money. There’s an ethical
way of earning money, and then there’s
an unethical way. Because if we don’t– as the US banking system or any
banking system in any country is the backbone of
the economy– if they don’t do their part
in detecting it, you’re basically– everything
you want to spend money on– law enforcement
and stuff, it’s not going to do the job because
that dirty money is just going to keep growing and growing. So a number of things like
due diligence and then name screenings– so
sanctions and all that is little more technical
but, ultimately, the bank needs to be reassured that every
customer they have on board is someone who
they say they are. So one of the biggest challenges
to money laundering prevention is actually what they
call mule accounts. So the mom, the pop, the
kids who open the account, and the bank says, I
built this profile, but until they actually
monitor their activities, you don’t really know for
sure that that account is in fact used the way it
was supposed to be used. And we’ll see it in
some of the cases. So let me give you an
example of a complex approach to money laundering
activities relating to international trade. They call this the black
market peso exchange. Peso is a Colombian currency. This is an instance
where you can move– you can launder money without
ever actually moving the cash. It’s called the
transfer of value. So why is this called
the peso exchange? It’s basically saying, if you
were a criminal organization in your country, you perpetrate
all these criminal activities in the other country,
how do you bring that money home to
support your operations? And in this case, we’re using
the example of drug proceeds for the Colombian drug lords. But if you are a criminal
gang operating in China, and you needed to
bring that money to support back to your
criminal activities in China, then it’s called a black
market renminbi exchange. So the key thing
is, here, you have the drug cartels [? selling ?]
money in the United States in US dollars. How are they going to bring
that US dollar back to Colombia? Now cash smuggling,
still, is a big challenge. But this is an instance
where no cash after we crossed the border– the drug cartel
takes their money, they find an exchange broker–
in this case a peso broker– exchange for US
dollars and peso. On the other side, there is
a legitimate businessman. He just bought goods and
services in the US dollar. He needs to settle those
invoices in US dollars, so he goes to an
exchange broker. Now you ask yourself,
well, why is he going to an exchange broker
rather than his own bank? Because an exchange broker will
likely give them better rates. So he gives his clean money
to the exchange broker. And what happens
is that the brokers on either side of the
continent just net it out. So they have the
dirty US dollars that’s already in
the financial system, they help him settle his
invoices, at the same time, the broker on this side
takes his clean peso money and gives it to the
cartel, and the money never crossed the border. Now the biggest thing
is, how do you actually know this is happening? How do you know it’s
actually happening? At any part of the
steps of this process, can you actually see that
this is a money laundering mechanism? The only way you
actually know is at the point when the
broker and the United States settles the invoice for
the Colombian businessmen. Why would you know? Because there is no actual
economic relationship between the broker
and the provider of the services to this guy. Basically, it’s called
third-party payment. Why is somebody else paying
services for something they don’t have a
relationship with? And that’s the hardest
thing to detect in my field is how to determine
third-party payment. If you think about it, you buy
an insurance policy, right? When you make your
premium payments, is the insurance company
saying, I want to make sure the Hue Dang who owns this
policy is the one who’s making the money for Hue Dang? By definition, you can’t. All they see is amount,
policy number, credited. It’s only after the fact that
they say, wait, wait, wait, wait– this account
isn’t coming from Hue, it’s coming from somebody else. But at this point, the monies
are gone through the system. So third-party payment is
really, really challenging. For those of you who think about
the payment processing elements of it, the Swiss system is
what they use to move money around the federal wire here. By definition, there’s no
way for them to say, well, I want to make sure that Hue
is sending money to herself or not. We don’t. We want to credit
it because that would be a huge
impact on the economy if everybody has to
check everything. What happens if they
misspell my name? H-U-E. Isn’t really
easy to spell, right? They could say H-U,
or H-U-G-H, right? Because they think it’s “Hugh.” But the criminal takes
advantage of this. This is how they
launder their money. So I want to highlight one
thing about terror and crime. So proceeds of crime– money laundering prevention–
the three components that tie terrorist financing and
money laundering activities– you have the suspect–
so the criminal, the criminal act, and money. In money laundering, the
suspect commits the act. So by definition,
the money is dirty. It’s proceeds of crime. In terrorist financing,
the suspect– their objective isn’t the money. Their objective is
the act of terror. So this money actually
could be dirty or clean. That’s why nonprofit
organization charities have been such a
target for determining terrorist activities. Because by definition,
a nonprofit organization has the trust of society. It was set up to do good. So the review and tracking and
monitoring of all nonprofit is not the same
level as businesses. So this is the biggest
challenge for banks, because banks set up
their detection scenarios based on money laundering
activities– big sums of money. But terrorist
financing activities don’t require a lot of money. The Bali bombing in
Jakarta a few years ago only took $70,000 US, but most
banks’ detection scenarios is somewhere above $100,000. So how do you do this
work where you’re trying to prevent money
laundering activities and at the same time detect
terrorist financing activities? And this is where the
cooperation between law enforcement, and companies,
and banks have to take place. OK, so I wanted to go into
this summary of fines. I want to give you an idea
of how big the penalties have been in the last few years. Coutts bank is a big bank–
so this is in Hong Kong. I highlight the Hong Kong
because they were fined for not following the KYC/CDD. The amount of money– so the big
one here for the US is here– HSBC was $1.9 billion in 2013. BNP Paribas– we thought
$1.92 billion was quite a bit, until you came along
with BNP Paribas, who was fined $8.9 billion US dollars. So like it or not, you
are in this world where banks have to comply with this. But I think its a
good thing for us, socially, to make this statement
that money isn’t just money. And I want to
highlight this thing. JP Morgan was fined $2.6 billion
for the Madoff Ponzi scheme. Everyone’s familiar with that. I want to go into that in
a little more detail now. I want to talk
about how he did it. OK, I’m waiting for
this to respond. OK, so everyone knows
about Bernie Madoff, right? $65 billion over 30 years. So what did he do exactly? So when I talk about
banking processes and how payments get
done, he had access to JP Morgan’s
703 account, which is a concentration account. This is where money payments
are all concentrated together moving in and out
of each account. What did he do? At any given point in time,
he had like 10 accounts open. He would, on the day
one of one month, put money into this account. On the 25th, he would
move to this account and basically kite it. So let’s say you put $1
million on day 1 of January. January 25th, he moved maybe
$900,000 through this account, and then moved it into
account number two. While that money is sitting
in account number one, it generated interest income. You ask yourself, how
could he prove all these to his investors that he was
making money on actual paper? I mean, in this day and
age of internet banking, how often do you actually
call your bank and say, my address has changed? But in the old days,
when you moved, there were two places
you want to make sure you knew where you were. One of them was your
bank, because you wanted to know your bank statements. So he had bank statements
demonstrating earned income. And so basically,
that’s what he did. And every time an
account was closed, he was able to move one. But by having access
to this account, he could disassociate
himself and from the bank from the various accounts
he held within JP Morgan. I bring this up because
that $2.6 billion dollar fine
[? only– ?] I believe it was intended to go
back to the victims fund, but still, that’s a very small
portion of the $65 billion that he perpetrated
over thirty years. And the key thing is,
the concentration account is an internal account. So how would a customer know
about an internal account? This is not something
that’s public knowledge. So it begs the question,
who is involved, right? The banks pay the fine for sure. But the question is,
any accountability? And it’s a difficult
one, because it was taken over such a long period. And the reason JP
Morgan was fined was actually JP
Morgan’s UK office filed a suspicious transaction
report about activities, but for whatever reason,
did not share with the US office, the headquarters. And that’s when the
US regulator says, you guys should have been
communicating with each other. This all came to
light in 2008 right before the global
financial crisis. But there were
folks in the SEC who had noticed it for a
long time, and nobody wanted to believe it. So what did this guy say when
he was sitting in prison? These are his convictions
and three counts of money laundering. He says, “I’m not a banker,
but I know that $100 billion going in and out
of a bank account is something that should
alert you to something.” No remorse whatsoever. He’s in jail for the rest
of his life for sure. But that basically
says, like it or not, the banks have a role in
preventing these kinds of illicit, ill-gotten gains. So to give you some context
on some of the cases that talks about, again, Hong Kong– knowing your customer– Hong Kong had a case where
a 22-year-old high school drop out working as a factory
delivery man opened up an account with
an initial deposit of like 500 Hong Kong
dollars, which is like, less than $100 US. And within eight months, he
transferred, by internet– he never showed up
at the bank again– over 13 billion
Hong Kong dollars, which is about $1.5 billion US– 4,800 deposits and
3,500 transfers out. And he received 10 and
1/2 years in prison. The next one had to do
with an elderly woman who lives in public housing. The interesting thing is,
she processed $5 million, which is almost $800,000
US over a period of three years, $17,000 plus
transactions with the account. The accounts were closed,
but during the prosecution– during her trial–
her [? defendent ?] said, well, she’s
an elderly woman. She doesn’t know
what she was doing. She didn’t know about
this AML requirement because the law,
the official law, only went into effect
in April 1, 2012. So you know what
prosecution did? Brought up a police officer who
took pictures of her apartment. And on her sofa were clearly, in
English and Chinese, Anti-money Laundering Ordinance. So he said, how can you
say you didn’t know? Here’s evidence in your
house on your sofa– stuff about the regulations
and what money laundering activities is prohibited. Then this one is interesting– 2010– so this is
like seven years ago, well before the official
law went into effect. This gentleman is a
money service business. He processed quite a few– over 3,000
transactions as a money remitter, but the
article wrote that he was put in seven and
1/2 years in jail, even though the
prosecution could not prove that his funds
were of illicit gains. They simply proved that he did
not do his Know Your Customer or Customer Due Diligence. It was a message to
be sent that this is something you need to ask. You need to know your
customer and ask them where their source of
funds and wealth come from. So this should be interesting. When I first mentioned
this in the US when they came to
light, back in 2011– this is a case relating
to a police officer in Hong Kong who makes a monthly
salary of 23,000, which is about almost $3,000 US a month. And what triggered
it was, he was depositing over a million
Hong Kong dollars, which is $150,000, in the
Hong Kong Jockey Club, which is the racing
horse account. But he only spent less
than $200 in trading, and he did it over
a three-year period. So during prosecution,
they wanted to know where his
money was coming from. And he first said, oh, well,
I own a house, and I sold it. But of course, they
checked and found out that he never
owned any property. Then he said he had a business,
which they checked and also was able to find out that
he did not own or register any business. Because he couldn’t prove
where his source of wealth is coming from, by definition,
he was laundering money. He was the front man, so he
got three years in prison. Now if you think
about what that means, you as a customer of
a bank going forward– you’re going to have to explain
unusual patterns of activity. It doesn’t mean the
bank assumes that you’re doing anything illegal. Understand what they are
doing is figuring out why is the typical pattern of activity
associated with this customer has now [? sent ?] [? an ?]
[? outlier. ?] Why all of a sudden? And it’s very easy. Let’s say you got an
inheritance money. Now the challenging piece
for the financial situation is this piece having
to do with, you’re not supposed to tip
off your customer about any potential
illegal activities, but you are supposed to
find out from your customer if something unusual
is happening. So how do you determine
whether you’re tipping off? Because tipping off means
prison time for the banker. There’s individual liability
associated with that. So this piece of, when do
you ask the customer, well, can you prove this money? I think a big red flag is
when the customer says, no, I’m not going to
tell you anything. You should expect
[? some further ?] quick follow-up from the banks. So 1MDB– everyone
heard about this? This is the big
Malaysian sovereign fund. The Prime Minister of Malaysia
was involved in it somehow. The reason I bring this
up has to do with the fact that this is a
case that involved a lot of jurisdictions– Singapore, obviously
Malaysia, the US, the Swiss– and basically,
what it meant was, if you look at what ended up
happening to the banks that were part of this
in Singapore had to do with two Singapore banks. BSI, they lost their
banking license– and I bring this up because in
this world of money laundering prevention and terrorist
financing detection, things the banks used
to think was OK to do was, in fact, now being
looked at in different lens. So those different lens
actually require you to explain. Three bankers were sent
to jail in Singapore, and it’s because at the time,
their boss says, go ahead and do it, no questions asked. And now it’s looked
at differently in this current world. So what banks are
trying to figure out is, where is the line in terms
of making sure that you’re not only doing what’s right
now, but also anticipating where the world is going
to be 10 years from now. Will you be held accountable
for something that looked OK, and then 10 years from now,
actually it did not look OK? I don’t think this
is going to work– Oh, good. So India had it’s fine as well. It’s a big thing for India
to fine 10 million US dollars in an economy where the per
capita income is $80 a day. It fined, actually, 22 banks
for ineffective KYC/CDD. And then I want to talk
about why I’m here. So I have the association,
which is currently made up of over 45,000 members
globally in 175 countries. Mind you, 175
countries– that’s bigger than the number of nations
in the United Nations. And my objective is really
to help build the community because these four key
pillars– the government sector, the industry,
the Banking Association, work in universities–
so I do a lot of lecturing in universities. I was at an event in Macau
a couple of weeks ago, and we talked about
raising awareness for those working in banking
or financial services. But this gentleman
talked about– actually we need to start doing
about even earlier than that– he said you need to
capture them right after you graduate from high
school because, he said, what’s happening is that young
kids are approached by friends, strangers, saying,
hey, you’re graduating, you open up an account
for me and I’ll give you a nice graduation gift. And these kids don’t
know any better. They said, what’s the big deal? I opened up an account, and
I let someone else use it. . So raising awareness
about what this space is and why we’re doing what we do– for me, my two
biggest passions– especially based in Asia, I’ve
lived here for now 20 years– is corruption, money,
and trafficking money. To me, those are evil
things that take place. Corruption is unequal
access to the resources of a country in which you
belong and have equal access to. Trafficking– human
trafficking, drug trafficking– but the human trafficking–
that’s just pure evil. And my association
works very closely with a lot of nonprofits who are
trying to make banks understand that money isn’t just money. It’s an extraordinary war. I mean those of you know– I think a CNN project on
Polaris and the entire human trafficking work– is very challenging for banks. Because banks, if you think
about human trafficking, you think, oh, it
must be obvious. It’s not obvious. If you think about, for
example, the seafood we eat and how those
ships get people to live year in and year out on a boat. They’re not there by choice. And President Obama
closed a loophole in some of the import relating
to that couple of years ago. It was great. But money laundering
activities really is something that we don’t think about. We just think of money. But the elements in which that
is not legitimately earned– the element that is part of the
fabric of the criminal world that has been integrated
into our world which we, as law abiding citizens,
should not tolerate it. And banks should
not be inadvertently facilitating their activities
by simply saying, well, my job– we are just financial
intermediaries. So that’s it. We have time for questions. [APPLAUSE] OK. Anyone? Yes, sir? [INAUDIBLE] –investigations into how
much of this illicit money is making its way into
politics [INAUDIBLE] Well, I think the amount of
money flows of corruption money is depending on
the jurisdiction. It’s bigger in some
than in others. My objective is to bring
in the key stakeholders however long it takes them. So in Asia, it’s in
varying stages of adoption, recognizing the importance of
money laundering detection. And I will say that there are
some countries where they have what they call accepted
level of corruption. Everybody acknowledged
that it’s an informal line, and then once you exceed that,
we’re going to come after you. So banks have different ways of
identifying potential exposure to corruption money. For them, one of the terms
that I didn’t include was “politically
exposed person.” So these are bank accounts
held by political officials. And the idea is
that you recognize that if someone is
designated as a PEP, that means there should
be enhanced due diligence and enhanced monitoring to
figure out where the money is. We’re not saying those
who are designated as a PEP is a corrupt official. We are just saying
that in their position of high political office,
the potential exposure to corruption money is there. And so then, the bank must
do its job to detect it. So there are a lot
of corruption monies running around the world. [INAUDIBLE] The PEP? Yeah. Definitely. They should be, and they are. But the question is, what
is the bank [? exactly ?] going to do about it? I answer this
question in this way. So in the United States, all
publicly traded companies are largely held by
the public, right? But in Asia, a lot of
publicly traded companies are actually not
publicly traded, right? There’s a tycoon– some family. So you’re looking at ultimate
beneficial ownership. So in the United States,
FinCEN, the US FIU, just issued an ultimate
beneficial ownership Customer Due Diligence rule that
will go into effect next year, basically making
sure that you understand who has ultimate control of the funds. And in Asia, the conglomerates– I mean, in South Korea,
you have the chaebols, and you have the big families
that control everything. So even if you do your customer
due diligence and you say, OK, well, he’s a PEP, but
who actually has control? It may never be visible. And let’s say you can
actually do all the scaling and figure out
where they all sit, but you know it’s that matriarch
or patriarch who really has control, even on
paper, even if they’re like disassociated
10, 20 levels away. So that’s the challenge– at what juncture? Yes, sir? You had a list of
all the banks that were up there that had a fine. I think it’s perhaps important
to note that those weren’t always situations where the
banks knew that they were actually participating in
the anti-money laundering, they just happened to be
the vehicle that was used. And perhaps for their own
lack of due diligence, maybe they had one person
in the bank that knew. But it’s not as if there’s a
whole bunch of corrupt banks out there. No, no no– so let
me just be clear. So the examples that
are highlighted– their fined because it’s
systemic, like the BNP element of the BNP Paribas– $8.9 billion– was
actually– a lot of it was sanctions related. They actually, deliberately,
tried to advise clients how to, basically, avoid the
sanctions requirement. But I think that when
you see these fines, it reflects a systemic element. We’re not saying they
are corrupt banks, but there are flaws
in their system. The second point is that
[INAUDIBLE] people notice here that the United States shut
down– or didn’t shut down, but they eliminated the way
real estate transactions were done in Miami and
New York last year. Because Miami real
estate was actually being financed by a lot of
illicit drug money out of South America, and New
York’s real estate was being financed by
money coming out of Russia. And it was for this very reason
that you’ve been talking about. We really want to
know your customer, instead of [? have ?]
[? someone ?] [? else ?] [INAUDIBLE] Yeah. I noticed on [INAUDIBLE]
were the two casinos. I can see why, obviously,
with all the cash– are casinos a major point
for money laundering, still? So that’s a very
interesting question. So I’ll answer you by
addressing the [? HSBC ?] case. In the [? HSBC ?] case– which
is the subcommittee senate hearings– on that case, you
can actually google and find some of the hearings. In their final report,
they highlighted five high-risk customers,
and one of them was Zhenli Ye Gon, who
was a Mexican Chinese national, who basically
did all the drug stuff. So the reason that
I bring this up is because the Las Vegas Nevada
Gaming Commission decided, I’m going to see
whether the casinos had any exposure to him. And as it turns out, Sands
was, which was why they– in part of their
review process– it discovered that Ye Gon
actually came in and played with millions of dollars. And so Las Vegas Sands was
fined over $80 million for that. Now you will see this–
when I work with casinos, they always say, no one
comes to the casinos to launder money
because our objective is for you to lose money. Why would you want to
come [? around ?] here? So I want to introduce
this thought to you– the concept of money
laundering is to gain benefit from illicit proceeds. With that, you apply it to
casinos, they lose the money but they gained the benefit
from playing from it. The enjoyment derived
from illicit proceeds– still exists. Because I encountered this. I do a lot of work
with jurisdictions that have big casinos,
and they always say, well, nobody comes
to launder money here. Well, it depends on how
you define laundering. And if you look at laundering
in its purest sense, it’s gaining benefit
from ill-gotten gains that you are not entitled to. Yes? They were not [INAUDIBLE] Yes, Yes, Yes but they still– [INAUDIBLE] Yeah. Yes? [? Do ?] [? you ?] [? have ?]
[? an ?] [? idea ?] how they were first [INAUDIBLE]
deposit money, but then they were getting rid
of these larger bank notes. How effective was that [? in ?]
[? your ?] [? figuring ?] [? out ?] money laundering? Their objective really
wanted to know where the money flow was coming from. And because a lot of
money being kept in cash, you can’t really track it. And so I think it was
effective in that regard. In terms of the benefit–
the demonetization efforts– they still need
time to figure out what that’s going
to do for them, but certainly, giving
the large money notes. I mean, the euro– the 5,000 euro notes they’ve
been discussing about getting rid of it for a long
time but, actually, one of the European nations
really resisted getting rid of the [? big ?] [? notes ?]
because they’re still a largely cash-based economy, and nobody
wanted to walk around with a credit card. They wanted the [? big ?] note. Yeah, Yeah. Yes? [INAUDIBLE] –there’s no such
thing as privacy. So you still have your privacy,
is that what you’re asking? My objective is to
raise awareness with you as a customer of a bank. When you are being
approached by your bank for any [? outlier ?]
activities, understand they’re not there to say, I know
you’re doing something illegal, they are trying to do their job. But it’s part of a whole social
change that’s taking place in the same way the
movement of– you know, minority shareholder
rights of 20, 25 years ago. This is what we’re trying to
do as a society in saying, no, we’re not going to turn
a blind eye just because it is money. We’re going to ask you where
this money is coming from. You know the Panama
Bay papers and monies hidden offshore and all that? There’s nothing wrong
with estate planning. There’s always been an
existence for trusts to transfer wealth and all of that. The question is, where do you
go from estate planning, tax efficiency, tax avoidance, tax
referral, then tax evasion? And that’s the world
we live in now. We’re trying to
ask that question, and all the countries–
there are 104 countries that have signed up on what
they called the Common Reporting Standards, which basically
means that countries are going to share financial
data with each other to make sure you don’t find
the gaps in their systems. And at the end the day, it’s
about a level playing field, right? You play by the rules,
so should everybody else. Why should someone get benefit
because the system isn’t set up to detect their activities? [INAUDIBLE] There are other
avenues of providing financial services that
don’t include the bank, and that’s another challenge. You have large immigrant
populations who don’t– because banking
services are expensive– they’re not exactly
very convenient. So you have money remitters
and money service businesses that exist in the
economy for a reason. But if you’re an immigrant,
you’re transferring– sending money over $100, $200– you’re not going to
use a bank for that. It’s too expensive. Because a bank fee for
a transfer is $30, $50! That’s half your pay! So in an ideal world,
you want them all to be part of the
formal system so you can identify where the leaks are. We’re definitely a long
way to go from that. Yes? [INAUDIBLE] Yeah, so digital currency
is another big challenge. At the moment, the
US IRS treats bitcoin as under sort of a tax
jurisdiction as opposed to money laundering. But that’s a whole new world,
because digital currency means no jurisdictional observation. It’s all technology based. It’s all hidden. And different companies are
taking different views on it, like, for example
bitcoin exchanges are not permitted to have accounts
in China, for example. That’s the Chinese
government’s stand, but the bitcoin
providers believe it is a valuable part
of the global economy. So it’s still being discussed. [INAUDIBLE] 10,000. [INAUDIBLE] Yes. [INAUDIBLE] Yes. [INAUDIBLE] Payment platforms. [INAUDIBLE] PayPal. [INAUDIBLE] What’s the question? It’s about the advent of
technology and online payments and now being able to
transact a lot of things digitally and online
without using cash. So I’m actually speaking
at a panel in London at the end of this
week about technology and the role of
financial technology and what it does in terms of
the efforts in money laundering prevention. You’re right. And then the banks are
struggling with that because they’re moving at
such a fast pace in terms of this space. I don’t know that we have
the answer to that one just yet but, definitely,
the risk is there for sure. Yes? Related to that,
[INAUDIBLE] and yet there’s a growth of all sorts
of FinTech firms here, both in the United
States and elsewhere. And oftentimes, they’re run
by, essentially, entrepreneurs and internet gurus, who really
don’t know banking policy, and their lending– it’s my impression, but they’ll
be no specific evidence, that they actually could
be committing instant money laundering without being aware. We are working with that. So part of our community
building effort is making sure we reach
out to key stakeholders the likes of Facebook and
other online social platforms. They are also building payment
and other financial transaction capabilities, so we
are engaged with them as well to make sure that
they’re not inadvertently– in their push for
technology advancement– that they don’t find themselves
in trouble by not knowing what they’re doing. Yeah. Yeah. OK, there’s [? another ?]
[? sentence. ?] [APPLAUSE] Thank you. [APPLAUSE]

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