Why financial services businesses are exposed to the threat of money…
Why financial services businesses are exposed to the threat of money laundering
Letters of credit
A letter of credit is a guarantee by a bank on behalf of its customer that a payment will be made if certain contractual obligations are met under a trade finance agreement.
international trade, premised on the back of manufactured documentation.
purposes, because they assist in the creation of a false picture of legitimate
They are vulnerable to being used for international money laundering
Also known as parallel loans, back-to-back loans are generally arrangements where loans in one currency are set against loans in different currencies.
Loans can be abused in two ways.. A launderer can deposit criminal money into a bank or manage successfully to acquire another form of property with it, such as an apartment or car, which is then used as security for the granting of apparently clean loan proceeds by banks or credit institutions.
Alternatively, a launderer can take out a loan on security of legitimate property and then repay it either monthly or in whole using criminally derived property.
The underlying clients then use the credit cards at will and the bills are settled directly by the CSP, without even the need for the credit card bills to be sent to the place of residence or country in which the underlying client resides.
A common practice is for over-obliging corporate service providers (CSPs) to arrange for credit cards to be issued to underlying clients in the name of companies on the back of references provided by the CSPs to banks or credit card companies.
Credit card bills can then be paid using criminally derived money that has been deposited in banks other than the card issuing bank. Sometimes criminals pay more criminally derived money into the card account, bringing it into a credit position, and then use the card to pay for legitimate goods and services.
Such bills or drafts are often used in money laundering schemes because:
the small physical size of high denomination bank bills makes it easier carry funds across borders.
they break the money trail, and
Bank bills are bills of exchange issued or accepted by banks, and recognised as orders to pay specified amounts to the holders of the bills either:
at a set date in the future – time drafts, or
on presentation of the bill – sight drafts.
Generally omnibus accounts are used where one financial institution, usually a bank, places pooled money (belonging to a number of underlying customers) on a fiduciary deposit with another banking institution. This type of account is seen as low risk where the depositing bank is effectively regulated in its home jurisdiction for money laundering purposes.
Correspondent bank accounts
The USA PATRIOT Act imposed significant changes on correspondent banking practices conducted by US banking institutions, including:
the prohibition on entering into correspondent relationships with foreign shell banks (defined as banks with neither a physical presence in any country nor an appropriate affiliation with a regulated, non-shell bank) and`
the following of reasonable steps to ensure that correspondent accounts held by foreign banks are not being used to provide banking services indirectly to foreign shell banks.
Many money laundering investigations have shown that wire transfers are part of the stock-in-trade of money launderers, because they:
quickly and effectively facilitate cross-border movements of money, and
make such money more difficult to trace.
Bank safety deposit boxes
Safety deposit facilities can be used by criminals:to store securely actual assets such as cash or bearer shares that represent the benefit derived from their crimes, or
to store evidence of the existence of assets derived from crime, such as details of numbered accounts or passbooks.
Client money accounts (CMAs)
The risks associated with client accounts are increased when the professionals claim ‘legal privilege’.
Receiving bank likely to be happy – the source of funds is a solicitor.
Solicitor’s bank sends the money to the criminal account
Criminal asks for the money back.
Criminal sends a payment to a solicitor’s client account ‘In error’ (perhaps even pays in cash)
Client money accounts are used by professionals, such as lawyers and accountants, to deposit funds that are actually the property of their clients. This is often referred to as funds being beneficially owned by the underlying client.
Client money accounts present a particular danger where the professional in whose name the client money account is held is not regulated for money laundering purposes. In this situation the professional may not always use the highest standard of controls and so there is the possibility that criminals will use this weakness as an easy gateway into the system.
This is because the client can place funds into an account without necessarily providing evidence of his or her own identity.
The danger here is that the lack of activity can lead to a false sense of security because the bankers feel that such accounts pose no risk or very little risk as there are few or no transactions.
This is reinforced by the bankers’ assumption that the client has left the money on deposit untouched in order to earn as much interest as possible – which is often what legitimate depositors do with such accounts.
A study by the United Nations Office on Drugs and Crime suggests that the total annual amount of money laundering is equivalent to 2.7 per cent of global GDP, or US$1.6 trillion in 2009, of which illicit drugs account for a fifth of all crime proceeds. The report also observed that less than 1 per cent of global illicit financial flows
are currently seized and frozen.