CMFAS M5 Chapter 8: Money Laundering

Key sections covered:

1. Customer Due Diligence
2. Record Keeping
3. Suspicious Transaction
4. Internal Policies
5. Terrorist Financing

DEFINITIONS

• AML/CFT - means anti-money laundering and countering the financing of terrorism;
• CDD – means customer due diligence;
• FATF - means the Financial Action Task Force; is an inter-governmental body founded in 1989 by the G7. The purpose of FATF is to develop policies to combat money laundering and terrorist financing. [Source: Wikipedia]
  
• STR - means suspicious transaction report;
• STRO - means the Suspicious Transactions Reporting Office, Commercial Affairs Department of the Singapore Police Force
• Beneficial Owner as defined in the MAS Notice on Prevention of Money Laundering and Countering the Financing of Terrorism means the natural person who ultimately owns or controls a customer or the person on whose behalf a transaction is being conducted and includes the person who exercises ultimate effective control over a body corporate or unincorporate.

GUIDELINES TO FINANCIAL ADVISERS
The Notice contains principles that serve as guidelines for the conduct of business:

1. A financial adviser must exercise due diligence when dealing with customers.
2. A financial adviser must conduct its business in conformity with high ethical standards.
3. A financial adviser should cooperate with law enforcement authorities to prevent money laundering and terrorist financing.

1. CUSTOMER DUE DILIGENCE (CDD)

A financial adviser shall perform CDD measures when:

1. the financial adviser establishes business relations with any customer;
2. there is a suspicion of money laundering or terrorist financing;
3. there are doubts about the accuracy or adequacy of any information obtained.

In non-face-to-face situations, the financial adviser shall:

1. put in place policies to address any related risks that may arise;
2. shall carry out CDD measures that are as stringent as face-to-face situations

When a financial adviser acquires the business of another financial institution, the acquiring financial adviser shall perform CDD measures on the customers acquired at the time of acquisition EXCEPT where:

1. there are no concerns about the adequacy of the information;
2. any due diligence conducted has not raised any doubts about the adequacy of the AML/CFT of the acquired institution.

Verification of customers:

1. A financial adviser shall complete verification of the identity of the customer and beneficial owner before business relations are established;
2. A financial adviser may establish business relations before verification if:

• the deferral of verification is essential in order not to interrupt business operations; and
• the risks of money laundering and terrorist financing can be effectively managed.

3. If business relations are established before verification, the financial adviser shall complete such verification as soon as possible.

Other pointers:

1. If CDD Measures are not completed, the financial adviser shall terminate the business relationship and consider if the filing of an STR is warranted.
2. In the case of joint accounts, a financial adviser shall perform CDD measures on all holders as if each were individual customers.
3. A financial adviser shall perform CDD measures on its existing customers after assessing materiality and risk.

A financial adviser may perform Simplified CDD measures:

1. if it is satisfied that the risks of money laundering and terrorist financing are low
2. but not in relation to customers that are related to countries known to have inadequate AML/CFT measures
3. in relation to a customer that is a financial institution supervised by the Authority (other than holders of money changer’s and remittance licences)

A financial adviser shall perform Enhanced CDD measures in addition to the standard CDD measures for “high risk” category of customers such as:

1. Politically Exposed Persons (PEP) – for example, persons with prominent public functions in a foreign country, heads of state and senior military officials.
2. customers assessed to have a higher risk for money laundering and terrorist financing.
3. persons from countries known to have inadequate AML/CFT measures.

Performance of CDD Measures by Intermediaries:

1. A financial adviser may rely on an intermediary to perform CDD measures if:

• the financial adviser is satisfied that the intermediary has adequate measures to comply with AML/CFT requirements;
• the intermediary has not been precluded by the Authority;
• any information needed can be relayed to the financial adviser without delay

2. The financial adviser shall not rely on an intermediary to conduct ongoing monitoring of customers.
3. Where a financial adviser relies on an intermediary to perform CDD measures, it shall document the basis except where the intermediary is a financial institution supervised by the Authority.
4. For the avoidance of doubt, the financial adviser shall remain responsible for AML/CFT obligations to Notice.

2. RECORD KEEPING

(a) A financial adviser shall maintain documentation on its business relations and transactions with customers such that:

1. legal requirements are met;
2. any transaction can be reconstructed to provide evidence for prosecution of criminal activity;
3. the Authorities and auditors of the financial adviser are able to assess transactions and level of compliance; and
4. the financial adviser can satisfy any enquiry from Authorities for information.

(b) A financial adviser’s record retention policies with regard to customer:

1. keep records for at least 5 years following the termination of business relations;
2. keep records for at least 5 years following the completion of transactions.

(c) A financial adviser may retain documents as originals or copies in any form provided they are admissible as evidence in a Singapore court of law.

(d) A financial adviser shall retain records for as long as needed such as in accordance with any request from STRO or other authorities.

3. SUSPICIOUS TRANSACTIONS REPORTING

• A financial adviser shall keep in mind the legal provisions regarding Corruption, Drug Trafficking and Terrorism regarding transactions suspected of being connected with money laundering or terrorist financing, including the following:

1. establish a single reference point within the organisation to whom all staff are instructured to promptly refer all transactions suspected of being connected with money laundering or terrorist financing, for possible referral to STRO via STRs; and
2. keep records of all transactions referred to STRO, together with all internal findings and analysis done in relation to them.
   

• A financial adviser shall submit reports on suspicious transactions to STRO, and extend a copy to the MAS for information
• A financial adviser shall consider if any circumstances are suspicious so as to warrant the filing of an STR

4. INTERNAL POLICIES, COMPLIANCE, AUDIT AND TRAINING

• A financial adviser shall implement internal policies to help prevent money laundering and terrorist financing and communicate these to employees.
• The policies shall include CDD measures, record retention, detection of suspicious transactions.
• A financial adviser shall take into consideration money laundering and terrorist financing threats that may arise from the use of new technologies.

5. TERRORIST FINANCING

Key Concepts of Notice:

• Money laundering is a process intended to mask the benefits derived from criminal conduct so that they appear to have originated from a legitimate source.
• The CDD function may be outsourced to third party but the financial adviser remains fully accountable.

Stages of money laundering:

1. Placement - physical disposal of the benefits of criminal conduct;
2. Layering - separation of the benefits from their source by creating layers of financial transactions designed to disguise the audit trail; and
3. Integration - provision of apparent legitimacy to the benefits of criminal conduct such that laundered funds return to the economy as “legitimate business funds”.

Placement: Disposal of bulk cash

• Smuggling bulk currency
• Mix illicit proceeds with legitimate deposits
• Deposit amounts in small denominations
• Subdivide bank or commercial transactions

Layering: Disguise origin of initial deposit through:

• Multiple transfers
• Multiple transactions

Integration: Use layered funds to purchase clean, legitimate assets

Terrorism seeks to compel governments into a particular course of action or seeks to intimidate the public. Sources of terrorist financing may be legitimate or illegitimate. Terrorist financing involves amounts that are not always large and the associated transactions may not necessarily be complex given that some sources of terrorist funds may be legitimate

Non-Face-to-Face Verification

As a guide, financial advisers should take one or more of the following measures to mitigate the risk associated with not being able to have face-to-face contact when establishing business relations:

1. telephone contact with the customers at a residential or business number than can be verified independently
2. confirmation of customer's address through an exchange of correspondence or other appropriate method
3. subject to the customer's consent, telephone confirmation of the customer's employment status with the customer's employer's personnel department at a listed business number of the employer.
4. confirmation of the customer's salary details by requiring the presentation of recent bank statements;
5. certification of identification documents by lawyers or notary publics presented the customers;
6. requring the customer to make an initial deposit using a cheque drawn on the customer's personal account with a bank in Singapore; and
7. any other reliable verification checks adopted by the financial adviser for non-face-to-face provision of financial advisory services.

Compliance

The responsibilties of ALM/CFT compliance officer should include the following:

1. ensuring speedy and appropriate reaction to ALM/CFT related matter
2. advising and training on development and implementing internal policies, procedures and controls on AML/CFT;
3. carrying out ongoing monitoring and sample reviewing of accounts for compliance.
4. promoting compliance with MAS Notice and Guidelines on AML/CFT.
   

SUMMARY

1. Definition of Money Laundering: A process intended to mask benefits derived from drug trafficking or criminal conduct so that it appears to originate from a legitimate source

2. The 3 stages of Money Laundering in the following order; Placement, Layering and Integration.

3. Verification of personal customers. If applicant and insured are different people, the applicant’s identity needs to be verified.

4. Non face-to-face identification procedures should be at least as stringent as those of face-to-face verification.

5. For Group Polices

• It is the identity of the holder of the master policy that has to be verified
• Clubs, societies and charities - constitution of the applicant to be produced
• Shell Companies, Trust, Nominee and Fiduciary Accounts – must obtain satisfactory evidence of beneficial owners

6. Record Keeping

• Setting Document Retention Policy (retention period: 5 years)
• Methods of Retention

7. Systems of Reporting Suspicious Transactions

• Licensees are required to set up a system for reporting suspicious transactions.
• It is the obligation of the employees to report suspicious transactions.

8. Compliance and Training

• Internal Audit should monitor the effectiveness of the measures taken to combat money laundering.
• New staff must be trained in specific areas of Money Laundering.
• Refresher training should be held at least once every 2 years.