Money Laundering and Anti Money Laundering 101

17 November 2015

What exactly is Money Laundering – time to add some Breeze?

Look for a simple definition of money laundering in a textbook on Financial Impropriety (I searched on Amazon and surprisingly no one has written such a textbook yet) and you would almost certainly come up with something along the following lines:

“Money laundering is the process by which the illegal nature of criminal proceeds is concealed or disguised in order to make it appear as if the proceeds had been derived from a legitimate source.”

Money laundering can therefore encompass a wide range of situations rising from involvement with the proceeds of any criminal activity through to the extreme of processes designed to obscure the original provenance of funds used to finance terrorist activities.

Somewhere captured within the spectrum of this definition would be concealing bribes and other inducements. In other words – Politicians and Business Executives are often also guilty of laundering money – in an effort to hide their ill-gotten financial gains.

In short, money laundering isn’t just a phenomenon linked purely to drug trafficking. It happens across the world in both developed and under-developed economies. It is therefore endemic.

Money laundering is very much also a “White-Collar” and an “Ordinary Man” problem. Obviously this has serious implications if you are a financial institution (like a credit union or a bank), but it has implications for other businesses too.

Imagine if someone walked into a new car dealer and tried to buy a car with a suitcase full of cash. Should the dealer’s suspicions be raised or should he take the cash and run literally straight to the bank? This scenario may seem fanciful but it does happen!

Money Laundering Picture 1








Why money laundering is a problem

The scale of money laundering activities, and their impact both direct and indirect on society should not be over-estimated. The direct consequence is of course increased crime and corruption. No surprise there! But there are other consequences many of which are paid at the national level. These include damage to the international reputation of the country and a resultant reduction in foreign direct investment.

After all, who wants to deal with a person, a company, or a country that is perceived to be corrupt?

The answer? Probably only the corrupt!

Money Laundering Picture 5










Money laundering creates an uneven playing field

Money laundering creates an uneven playing field and puts legitimate businesses at a competitive disadvantage. The mere fact that money laundering exists on the international stage increases the legal, operational, and reputational risks for individuals and businesses who are at risk to being exposed to transactions with money launderers.

Attempt to enter into a new business relationship with a bank or financial institution and you will probably be required to submit yourself to a detailed questionnaire the aim of which is to assess if there is a risk that you are attempting to launder funds through that bank or financial institution. You may think this is an intrusion into your private affairs but the fact is that banks and financial institutions have to ask these questions.

It all boils down to this simple fact: These day’s banks and financial institutions have to “know their clients”.

How do you fight the money launderers?

Reporting is the principal means by which the fight is being carried back against the money launderers. Reporting is important because it prevents crime organisations and other launderers from abusing the financial services and other sectors and so helps to support the reputation and effectiveness of the financial and business system of a country as a whole.

Meaningful and effective legislation is the first step. Continually evolving that legislation and those rules is the second.

As a guiding principle reporting should take place when the reporting entity or person knows, suspects, or has reasonable grounds for believing that a transaction may be related to money laundering or for that manner financing of terrorist activities.

Why knowing your client is so important

Application of effective Customer Due Diligence (often abbreviated to “CDD”) together with Know Your Client (“KYC”) measures is the foundation for combating all forms of money laundering and financial crimes.

In most financial institutions like Firstline both CDD and KYC models are constantly evolving to keep up with both changing financial crime trends, and the increasing regulatory requirements issued through statute by Parliament or through guidance from regulators.

It is therefore vitally important that all subject persons (for example financial institutions like Credit Unions) ensure that they have in place a procedures manual to assist their employees to identify and report suspicious transactions. In this regard it is important to remember that CDD procedures are not a “one-size-fits-all” requirement. The procedures that you put in place have to be tailored to fit the subject person’s legal obligations, based on the areas of risk, and relative to the firm’s business model and the types of clients it services.

KYC should be a core feature of an organisation’s risk management and control procedures, and be complemented by regular compliance reviews and internal audit inspection to ensure that procedures are being followed.

That’s the third step.

Why again it always seems like we come back full circle to the concept of risk

If you are wondering what constitutes a good CDD or KYC approach you have probably guessed that both are in many ways linked to the concept of risk (something that we have discussed at length in the two previous blog entries in this series).

As part of the risk management processes that should exist at any business, bank, or financial institution all clients have to be evaluated in terms of risk levels, and the entity should identify and handle properly politically exposed persons (read between the lines on this one and you can probably think of many good examples both locally and internationally).

As part of this assessment of risk, foreign (or if you like non-domestic) clients must be identified based on their country of residence, with an awareness of those countries which pose the greatest potential risk. Having done this, appropriate procedures should be put in place for identifying the real source of funds, inconsistencies in disclosure made by the client, and there should – of course –  be a sustained and continual monitoring of high risk client accounts.

To fulfil all of these obligations, a business must, by definition, have the appropriate screening procedures in place based in part on the nature of the business they conduct and the clientele they attract.

The question you need to ask if you are in business is, are you likely to be exposed to money laundering, and if so, do you have the policies and procedures in place to mitigate the risk of being associated with a money launderer?

What are those risks?

The risks of being associated with a money launderer are extensive but almost always encompass the following:

First not establishing policies and adhering to them will increase compliance risk. This is the risk of prosecution which will very likely result in the implementation of severe penalties and someone “making a jail” for failing to operate effective anti-money laundering (AML) procedures and controls.

Second there is an impact on the entities reputation (referred to as reputational risk). This is the risk of the business being publicly associated with, either a prosecution against a person suspected of money laundering, or for inadequate compliance or, (and this one has to be) even worse, having actually participated, knowingly or unknowingly, in a money-laundering scheme.

Finally there is a financial risk which in part has been referred to above. That is the risk of substantial fines for failure to comply with AML procedures.

Are you properly focused on AML?

Is it time for you to look at your businesses internal controls? Do you need to consider adopting policies to combat potential launderers? Remember that it is not just the interests of your business that you have to consider. It is the interest of the whole nation as well.

Closing thoughts

So don’t get vex with us when we ask you to fill out our forms “properly”!

And just as our usual reminder, and for the new readers:

Firstline Securities Limited offers comprehensive coverage of local and international markets with a bias for the energy sector. Firstline offers a number of unique opportunities to put surplus cash to work either as your asset manager or investment advisor. Please contact us for more details at or at 868.628.1175. We can discuss your investment needs in detail and craft a portfolio that makes sense for you. We look forward to hearing from you.

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