Global Standard AML & CFT: IBBL Perspective

Md. Siddiqur Rahman

Deputy Managing Director & CAMLCO

Islami Bank Bangladesh Limited

The Laundering Business

• ML is the worlds 3rd highest volume businessFollowed by foreign exchange and oil industry

How Much Is Laundered?

IMF ESTIMATE = 2-5% Global GDP

Amounting $800 billion to $2 trillion

Equivalent to the size of the 8th largest economy (Russia) or 3% of the total World Economy

Volume of Laundering Business

$1 trillion World Bank estimate of annual worldwide bribery.

$320 billion UN estimate of global illegal narcotics trade.

$39 billion International Labor Organization estimate of Human Trafficking value.

$30 million CIA’s estimate of Al-Qaeda's annual budget.

1.5 million Number of Suspicious Activity Reports filed in the U.S. in 2012. (FinCEN)

ML, Methods, Techniques, Risks & Impacts

Origin of “Money Laundering”Introduced in Chicago, USA in 1920;

Al- Capone and Bagchi Moran;

Front business: Cloth Laundering,

Back Linkage: Drug Trafficking;

Melted illicit fund from drug trafficking with that of their

cloth laundering;

The word “laundering” literally means “Cleaning”

What is Money Laundering?

Illegal Money Transformation/Conversion to hide Illicit source and to

evade legal issues

Receipt of white/legal money

There is a good number of definitions. Summary of all the definitions is:

Defining Money Laundering

Money Laundering Techniques

1) Bulk Cash smuggling

2) Structuring

3) Cash-intensive Business

4) Trade based Money Laundering

5) Shell Bank, Companies

6) Bank Capture

7) Real estate Laundering

8) Casino Laundering

Layering

Integration

Placement

Stages of Money Laundering Cycle

Risks of Money Laundering

Reputation Risk

• Loss of high quality depositor/borrower

• Loss of profitable business

• Unanticipated large withdrawal causing

potential liquidity crisis

Operational Risk

• Increased cost for correspondent banking

• Increased cost of CRR & SLR

• Borrowing from call money market at high

rate

Legal Risk

• Potential for law suits, adverse judgment

• Face inquiries, fine & penalties

• Regular customer may be victim & sue the

institution

Concentration Risk

• Too much investment to a single client push higher

demand

• Put banks into whole time stress

• Mismatch of asset and liability

• Against equitable justice & maqasid al Sharia'h

Impact of ML & TF

➢Increased Crime, Corruption and Violence

➢Hassle from Foreign Counterparts

➢Weaken Financial Institutions

➢Undermining the Legitimate Private Sector

➢Damage Privatization Efforts

➢Policy Mismatch (loss of regulatory control)

➢Economic Distortion and Instability

➢Loss of Revenue

➢ Distortion of Market

➢ Distortion of Exchange rate

➢ Liquidity shortfall

➢ Bubble-up of Real Sector

➢ Widening Rich-Poor gap

➢ Higher Tax rate

➢ Social Cost (Morality, Values, Violence, etc;)

AML: The Global Attention

Stringent Actions by Int’l Regulators

Terrorist Attack in 2001 Stringent Regulations Regulatory Penalties

58 AML penalties handed down globally in 2019, totaling $8.14bn

Big Names against Regulatory Penalties

In 2017, Sonali Bank Ltd. was also penalized £3.25 million by FCA

North Korea and Iran are Black listed by FATF and under sanction by different Sanctioning Authority as on 03 August, 2020

Impact: AML Non-Compliance & Penalty on Banks

To avoid:

▪ Punitive fines▪ Criminal proceedings▪ Damaged reputations ▪ International/Local Sanctioning

Increased headcount

Increased technology budget

Reputational damage

Consultancy fees

Long periods of Regulatory oversight

Attention from other Regulators

Loss of partners, clients

Regulatory Fines/Penalty

Got Regulatory Attention

US

• Department of the Treasury

• Office of the Comptroller of the Currency

• Financial Crimes Enforcement Network

• Office of Foreign Asset Control

Non Governmental Bodies

• United Nations

• Financial Action Task Force (FATF)

• Transparency International

• Global Witness

• World Bank

European Union

• European Commission

• Bank for International Settlements

Regional Governmental Regulators

• Monetary Authority of Singapore

• The People’s Bank of China

• Attorney’s General Department (Australia)

• Council of Financial Activities Control

(Brazil)

• Financial Monitoring Committee (Russia)

Global AML Legitimate Framework

Year Act

1970 Bank Secrecy Act

1986 Money Laundering Control Act

1988 Anti Drug Abuse Act

1992 Annunzio-Wylie Anti-Money Laundering Act

1994 Money Laundering Suppression Act

1998 Money Laundering and Financial Crimes Strategy Act

2001Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept

and Obstruct Terrorism Act

2004 Intelligence Reform & Terrorism Prevention Act

The global AML Compliance Standard setter

Who shapes International Compliance Standards?

Int'l Govt. & Regulatory Agencies

• The UN

• The Basel Committee

• IMF

• World Bank

• Financial Action Task Force (FATF)

International Industry Groups

• Wolfsberg Group

• SWIFT

International Standards

Introduction to FATF

Core Activities

Sets the international standards for anti-money laundering, counteringterrorist financing (AML/CFT) and combating proliferation financing

Assess compliance with the FATF standards

Study methods and techniques of money laundering (ML) and terroristfinancing (TF)

Introduction

Established by the G-7 Summit in 1989

Most powerful Inter-governmental policy-making body.

Members: 34 countries + 2 organisations (GCC &EC)

8 FATF-style regional bodies (FSRBs)

Over 190 countries have endorsed the FATF Standards (40 recommendations).

Responsibility to Implement FATF Recommendations

Investigating & prosecuting ML/TF

Freezing, seizing & confiscating criminal assets

CDD, Record Keeping, STR to FIU

Enusre that FIs, business and profession comply with AML/CFT requirement

Be Co-operative/co-ordinate AML CFT effort international level

Benefits of Complying FATF Recommendations

Transparent & stable financial system to attract foreign investment

Ensures that FIs are not vulnerable to organized crime groups

Capacity to fight terrorism & trace terrorist money

Helps to avoid risk of sanction or other action by Int'l community

Helps to avoid becoming heaven of criminals

AML Compliance: Bangladesh Perspective

Bangladesh in Global AML Compliance

▪ Bangladesh signed United Nations Convention against Illicit Traffic in Narcotic

Drugs and Psychotropic Substances, 1988 (the Vienna Convention);

▪ 1999 United Nations International Convention for the Suppression of the

Financing of Terrorism

▪ United Nations Convention against Corruption and A number of other UN

Conventions relating to terrorism

▪ Implements the United Nations resolutions relating to the prevention and

suppression of the financing of terrorist acts, particularly United Nations

Security Council Resolution 1373.

▪ Implements the United Nations Sanctions

National Initiatives to Prevent ML & TF

SL No Money Laundering Prevention Act Date Authority

01 MLPA-2002 07.04.2002 Bangladesh Gazette

02 MLPA-2009 24.02.2009 Bangladesh Gazette

03 MLPA-2012 07.06.2012 Bangladesh Gazette

04 MLPA-2015 (Amendment) 26.11.2015 Bangladesh Gazette

SL No Anti-Terrorism Act Date Authority

01 ATA-2009 24.02.2009 Bangladesh Gazette

02 ATA-2012 (Amendment) 14.03.2012 Bangladesh Gazette

03 ATA-2013 (Amendment) 12.06.2013 Bangladesh Gazette

01 Anti-Terrorism Rules 09.11.2013 Ministry of Home

Affairs

02 Money Laundering Prevention Rules 13.02.2019 Ministry of Finance

Important Sections of MLPA 2012 (Amended 2015)

Section 2 (cc): 28 predicate offensesSection 4: Offence of money laundering and punishmentSection 5: punishment for violation of freezing or attachment orderSection 6: punishment for divulging informationSection 7: punishment for non-cooperation in investigationSection 8: false informationSection 12: inevitability of the approval of Anti corruption commissionSection 23: Powers of Bangladesh BankSection 23 (3-8): punishment for reporting organizationSection 24: Establishment of Bangladesh Financial Intelligence UnitSection 25: Responsibilities of Reporting Organizations

Total number of sections 31

Punishment for Entity:

Local Regulatory Penalties for Non-compliance

Punishment for Divulging Information

Clause no-6 of MLPA-2012/(2015)

Penalty for Non-Compliance

If any reporting organization violates the provisions of sub-section (25/1), BangladeshFinancial Intelligence Unit (BFIU) & Regulatory/Controlling Authority of thereporting organization may:

(a) Impose a fine of at least taka 50 (fifty) thousand but not exceeding taka 25 (twenty-five) lacs on the reporting organization; and---

(b) In addition to the fine mentioned in clause (1), cancel the license or the authorizationfor carrying out commercial activities of the said organization or any of its branches,service centers, booths or agents, or as the case may be, shall inform the registrationor licensing authority about the fact so as to be relevant authority may takeappropriate measures against the organization.

Responsibility Reporting Organizationclause no. 25 (1) of MLPA-2015)

a) To maintain correct & complete information of the customers.

b) if any account of a customer is closed, to preserve previous records of such account

and transactions of the same for at least 5(five) years from the date of such closure;

c) to provide with the information maintained under clauses (a) and (b) to Bangladesh

Financial Intelligence Unit from time to time, on its demand;

d) if any doubtful transaction or attempt of such transaction as defined under clause (n)

of section 2 is observed, to report the matter as “suspicious transaction report‟ to the

Bangladesh Financial Intelligence Unit immediately on its own accord.

Bangladesh in the Global Compliance Index

AML Compliance Standards

Elements of Compliance Program

Governance and Enterprise-wide Controls

Policies

Policies & Standards

Procedures

Processes

Governance & Management

Issues Management

Risk Assessment

Metrics / Analytics

Personnel

Staff / Talent

Training & Communications

Roles and Responsibilities

Controls

Program Management

Compliance Testing

Independent Testing

Name Screening

(Sanctions, Red Flag, Senior Public Figure)

Customer Risk Scoring

Customer

On-boarding

PreventionKnow Your Customer

Customer Maintenance

Transaction

Monitoring/

Alerts

DetectionMonitoring & Investigations

CaseReview

Global Investigations

(Inputs from internal and external sources)

Investigations

EscalationsSuspicious Activity Reporting (SARs)

Currency Transaction Reporting (CTRs)

Reporting

Account Restrictions and Closures

Feedback loop

AML Lifecycle

AML Compliance Risk Elements

People

Process Technology

▪ Screening Mechanism (PEP, third

parties etc.)

▪ KYC diligence

▪ Transaction Monitoring

▪ Risk prioritization

▪ Independence of Function

▪ Independent testing procedures▪ Manual processes

▪ De-centralized systems impacting

monitoring & documentation

▪ Coverage & Reporting

▪ AML expertise

▪ Visibility of AML issues

▪ Management Oversight

▪ Inadequate training mechanism

Areas to be covered under AML Program

1 Risk Based Framework

2 Transaction Monitoring

3 KYC & Due Diligence

4 Screening

5 Compliance Organization

A Typical Risk Based Approach

Screening

Risk Based Approach

KYC &Customer

Acceptance

Operation Data

Analytics Mining

Transaction

Monitoring

Risk Rating

Renewals & Remediation

Customer Due Diligence

Organization

Processes

Data

Technology

Regulations

Account Activity Monitoring

Scenarios

Thresholds

Alerts

Reporting

Customer

Industry

Product

Geography

Channel

Ongoing Due Diligence

Facto

rs

AML Compliance in IBBL

Why AML Compliance is Crucial to IBBL

IBBL Deals with

⚫ 13.98 million on-boarded customers (deposit)

▪ 14% of the country’s depositors

▪ 9% of the national investment exposure

▪ 11% import and 10% export business of the country

▪ 26% of the national remittance inflow

Ranked in the top thousand Banks of the globe

Huge transactions in USD & International clearing houses

Entangled in PSI Report on HSBC in 2012

Consequences faced by IBBL for the PSI Report

De-risking of IBBL by the globally reputed Banks like Citi NA,

Standard Chartered Bank, HSBC etc.

Stagnancy in Correspondent Relationship

Difficulties in having international trade business.

Reduction of LC Commission Income

Loosing core investment businesses etc.

Response of IBBL to the PSI Report

Appointed by IBBL in 2013 and worked for IBBL

since June to December, 2013. But no remarkable

progress.

Appointed by IBBL in 2014 and worked for IBBL

since June to December 2015.

Recommended to engage an Independent

organization for AML Audit.

The Bank found that the mentions in PSI Report is far away from fact. To

convey the IBBL’s Position, appointed the following legal counselor.

Appointment of Kroll: Independent Review & Remediation Phase

US Based Leading Organization in Risk Mitigation & Response

founded in 1972.

Known as Wall Street’s Private Eye

Worked for many reputed banks in implementation of US

PATRIOT Act and Bank Secrecy Act

Manage 3rd Party Risk leveraging Kroll’s third party compliance

portal

Also recognizes the unfairly disadvantaged organizations

On the basis of the Podesta’s recommendation, IBBL found Kroll, as the

suitable Independent Organ to conduct AML Gap Analysis & Remediation

Major AML Remediation Program of IBBL

Development & Implementation of a Robust RBF

Central On-boarding for High Risk clients

Accuity Solution for Sanction Screening

Central Record Keeping

Standardization of Training Modules

Development & execution of SOP for all the Banking

Operations to Prevent ML

Highlights on SAS TM System of IBBL

Uses KYC data & RBF model to analyze the risk profile of the

customer and generates red flags for suspicious transaction;

More than 40 rules/scenarios to identify account based activities for

investigation;

Record keeping of true matches as well as false positive instances for

independent testing

Three tier users: User, Investigator, Manager

More than 10 professional handles the red flag raised by SAS TMS

Transactions are monitored based on the aggregate transactions, type,

amount, frequency and business nature of the client

Instances of Branch’s Non-Compliances

❖ Documentation related circulars and employee acknowledgement of the updates were not maintained in anappropriate manner

❖ Documentation related to in –branch AML training and updates was not maintained in an appropriate manner

❖ Records of AML/CFT circulars/communication from central bank/Branch control division are not maintainedcomprehensively at the branch level

❖ Records such as Exception Reports, Investing Register etc. as required by Central Bank guidelines notmaintained comprehensively by the branches

❖ Various critical documents/registers and exception reports are not being maintained as given in the Bank’sAML Guidelines e.g. investigation log register

❖ The 2 exception reports being prepared by the branch i.e. Wrong Type of Goods or Goods not Entered, are notbeing monitored by the BCU or BAMLCO for possible Trade Based Money Laundering indicators

❖ Existing system enables opening of accounts prior to the completion of KYC and DD process and so on………..

Challenges: Are We Ready for?

▪ Penalty?

▪ Closing of international

relationship business?

▪ Additional capital charge?

▪ Loosing the confidence of

your loyal customers &

stakeholders?

▪ Closure of your business?

▪ And Many Others……..

Thanks