Chapter 2 The Basics: Money Laundering, Terrorist Financing and Sanctions

What is Money Laundering? 1. Ability to conceal the true origin of illicit gains and loose trail of the ownership to make them appear legitimate is Money Laundering. 2. Money laundering is an act of integrating criminally*1 derived profits into legitimate mainstream financial system. 3. Money Laundering is the process of making dirty money look clean. FATF Recommendation 3, states countries should criminalize money laundry*5 based on Vienna convention and Palermo convention. “Palermo Convention” defined Money laundering as: Palermo Convention (2000): The Conversion or transfer of property*3, knowing it is derived from a criminal offence, for the purpose of concealing or disguising*4 its illicit origin or of assisting any person who is involved in the commission of the crime to evade the legal consequence of his actions. § The conversion or transfer of property, knowing it is derived from a criminal offence. § The concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to,or ownership of property knowing that it is derived from a criminal offense. § The acquisition, possession or use of property, knowing at the time of its receipt that it was derived from a criminal offense or from participation in a crime. Example: A is a drug dealer. He sells $500 of illegal drugs to B. To avoid a police investigation, he gives C the money and asks him to hide it. C takes the money and hides it under his mattress. C has entered into an arrangement with A which involves As proceeds of crime. FATF 40 Recommendations United Nations The FATF Recomendations Vienna Palermo *1 What is a criminal activity? Criminal Activity = Predicate offences (There are 21 categories of predicate offences) FATF recommendation 3 explains: Predicate offences are all those offences that are serious offences or linked to a threshold*2 of category of serious offences or to the threshold of penalty of imprisonment or a combination of both. 21 categories of offences 1. Participation in an organized criminal group and racketeering 2. Terrorism including terrorist financing 3. Human and migrant – smuggling and trafficking. 4. Sexual exploitation including children 5. Trafficking in narcotics and psychotropic substances 6. Arms trafficking 7. Trafficking in stolen or illicit goods 8. Corruption and bribery 9. Fraud 10. Counterfeiting currency 11. Counterfeiting and piracy of products 12. Environmental crime 13. Murder, grievous bodily Harm (GBH) 14. Kidnapping, hostage and illegal restraining 15. Robbery or theft 16. Smuggling (including custom or excise duty evasion) 17. Tax crimes (both direct and indirect included in 4th AML directive) 18. Extortion 19. Forgery 20. Piracy 21. Insider trading and market manipulation 6thAML Directive on 3rd Dec 2020 (Implementation by 3rd June 2021) have included Environmental and cybercrime as 22nd predicate offences. It also includes aiding and abetting Money laundering, and self – laundering as a criminal act. *2 what is Threshold approach? Threshold approach: FATF explains threshold should be offences with maximum penalty or imprisonment of over 12 month or a minimum 6 months. *3 what is Property? Any property/assets tangible or intangible derived wholly or partly regardless of its value from proceeds of crime. *4 what is concealing and disguising? Disguising the source, changing the form, and changing the jurisdiction where predicate offence was committed while maintaining control over it. ※Key: Money Trail – Analysis and linking the funds to the criminal activity. ※Key: Disguise the source, change the form, and retain control. Businesses at risk include: ► Financial service business - Banks, Investment businesses, Insurance Companies ► Professional advisors - Lawyers, accountants ► Trusts, Charities and Foundations ► Money Transmitters – MSBs , Fintechs ► Betting and Gambling Firms- casinos ► Real Estate agents ► Retailers of high value goods - antique dealers, jewelers, dealers in precious metals ► New Payment Methods such as Virtual currencies (cryptocurrencies) An important prerequisite in the definition of money laundering is “knowledge.” In fact, FATF’s 40 Recommendations on Money Laundering and Terrorist Financing state that the intent and knowledge required to prove the offense of money laundering may be inferred from “objective factual circumstances.” Several jurisdictions may also consider legal principle of “willful blindness” in money laundering cases to prove knowledge. UK Legislation: Primary Legislation covering offence of Money Laundering - POCA 2002 (Proceeds of Crime ACT) POCA 2002 makes the following offence of money laundering as criminal offence with maximum of 14 years in imprisonment and/or fine Section 327: Act of concealment (Conceal, disguises, converts, transfers, remove) Section 328: Act of arrangement- meaning entering into or becoming a part of an arrangement, knowing or suspecting*6 that it is facilitating in acquisition, retention, use or control of criminal property by self or on behalf of another Section 329: Acquisition, use or possession of criminal property without adequate defense*6. Section 330-331-332: failure to report is a criminal offence. Section 333(A): Tipping off – when we disclose to the person or an associate of the person or to a person who is known to the person against whom a report has been filled under section 327 or 328, and would likely prejudice any investigation. Section 335 Appropriate Consent: Once the disclosure is made following classify as receiving appropriate consent. Part 3 Section 335: notice period of seven (7) working days if we have not received the refusal to do the act from the authority to whom the disclosure has been made Or Part 4 section 335: if the refusal to do the act has been received before the expiry of the notice period and the moratorium period of Thirty-one (31) working days has expired. Working days: excluding Saturday and Sunday, Christmas day and bank holidays. In summary, individual can be implicated for the crime of money laundering, not only if they are directly involved in concealing, disguising, converting, transferring or removing the criminal property – Part 7 Article 327, Proceeds of crime Act 2002 (POCA), but also, if they knew or ought to have suspected or/and have failed to report, or becomes concerned in the arrangement to acquire, retain, use or control on behalf of other. – Article 328- 329, (POCA 2002). POCA 2002 Test of Suspicion: Liaqat Ali, Bhatti Vs crown – Were tried for conspiracy contravene section 49(2) of the Drug Trafficking Act 1994, contrary to section 1(1) of the Criminal Law Act 1977. Section 327 simplifies and replaces S.49 of the Drug Trafficking Act 1994 and S.93C of the Criminal Justice Act 1988. See (Archbold 2006 33-11) http://www.bailii.org/ew/cases/EWCA/Crim/2005/87.html *6 Knowing or suspecting (Adequate defense): The Court of Appeal confirmed the test of suspicion as set out in the cases of Shah v HSBC Private Bank (UK) Ltd, Da Silva and K Limited: suspicion was a purely subjective matter, and absent any allegation of want of good faith, did not have to be a reasonable one. - a suspicion does not have to be on reasonable grounds, just that the possibility has to be 'more than fanciful'. R V Da Silva: The words "suspect" and "suspicion" meant that the defendant had to think that there was a possibility, which was more than fanciful, that the relevant facts existed. A vague feeling of unease would not suffice, but the statute did not require the suspicion to be clear or firmly grounded or based upon reasonable grounds. – Even a fleeting thought. http://www.bailii.org/ew/cases/EWCA/Crim/2006/1654.html K Limited vs nat west : The court would not grant an injunction requiring a bank to pay money to a customer's order, where the bank had reported a suspicion of money laundering and sought consent, nor would the court permit cross-examination as to the grounds for the bank's suspicion; it was a subjective test and there was no legal requirement that there should be reasonable grounds for suspicion. The bank had adopted the correct procedure to avoid a tipping off offence, when application was made for the injunction, by instructing solicitors to write pursuant to section 333 (2) (c) and (3) of the Proceeds of Crime Act 2002 identifying the bare fact that the bank had made a disclosure to Customs. http://www.bailii.org/ew/cases/EWCA/Civ/2006/1039.html Shah Vs HSBC : Court of Appeal decision following claim for failing to carry out customer’s instructions following notification to SOCA struck out; suspicion was a purely subjective matter, and absent any allegation of want of good faith, did not have to be a reasonable one. The Court of Appeal confirmed the test of suspicion as set out in the cases of Da Silva and K Limited - a suspicion does not have to be on reasonable grounds, just that the possibility has to be 'more than fanciful'. http://www.bailii.org/ew/cases/EWCA/Civ/2010/31.html Shah Vs HSBC : The claim for alleged negligence/breach of contract in reporting of money laundering suspicions failed in the High Court of Justice QBD on 16 May 2012. http://www.bailii.org/ew/cases/EWHC/QB/2012/1283.html ※Criminal Activity *1 that generates profits ※Threshold *2 that holds maximum penalty. ※Property *3 tangible or intangible ※Launder *4 process to lose its connection/trail ※ money Laundry*5 to the underlying criminal activity. Stages of Money Laundering: *5 What Is Laundering? Laundry: the process of concealing and disguising is called laundering, traditionally it is done by: Placement This is the first stage where the illicit gains are placed in financial system directly or indirectly, i.e. physical money is placed in the financial infrastructure in a bank, casino, local or international shop or (currency exchange). It is conducted by investment in financial and non-financial assets. In this stage, the proceeds derived from criminal Activity is infused into the financial system. Criminals enter the business ecosystem as a customer, investor, or vendor. As Cash and bearer negotiable instruments– provides anonymity, flexibility to use immediately or at a later stage or next criminal activity. Basic Typologies: § Bulk Cash Smuggling. – Concealed and smuggled High Volume Cash. § Cash Couriers – Discreate Smaller amounts on person. These includes abuse of cash and bearer negotiable instruments (BNI). Some currencies are more attractive to criminals and terrorist financiers due to their universal acceptance is wider. More importantly due to the global nature of financial sector it makes it difficult to identify and differentiate a legitimate and honest transaction from the suspicious criminal activity. Bearer negotiable instruments (BNI) includes: travelers cheques, negotiable instruments including cheques, promissory notes and money orders. Other instruments not yet made reportable or are not included in the definition of BNI – Gold coins, Casino Chips, Prepaid cards, access devices. § Third Party accounts: cash is broken into smaller lots and deposited into 3rd party accounts with financial institutions or via DNFBPs (Designated non-financial business profession) e.g. These accounts are opened in the name of family, friends and associates. Control could be retained on these accounts by online access or providing power of attorney to accounts. § Cash intensive businesses: Criminals might open front companies to fool the authorities. these businesses act as fronts (Shell companies, Front companies etc.), They would then deposit high volume of cash in low denominations as daily earnings. Comingling/ blending the illicit funds with funds from legitimate earnings, meaning they start mixing dirty money with the clean one. Eg. Of these businesses are convenience stores, casinos, MSB’s, jeweler stores, Used car dealerships, car wash, retail stores, travel agencies etc § Smurfing - The money launderer gives a sum of cash to an individual known as a ‘smurf’. The ‘smurf’ deposits the cash in small amounts into several accounts, probably held at several different banks. The deposit amounts are small enough that they do not attract attention or suspicion. Once the money is deposited, the placement stage is complete. § Insurances / Investments: A banker, independent financial advisers or brokers who knowingly accepts deposits from criminals or are persuaded to believe that the cash is of legal origin help criminal purchase different types of insurance and investment policies for cash. At a selected moment, the policy is surrendered, and a redemption cheque or funds transfer is received from the issuer. § Breaking up amounts (below the reporting threshold) like the securities brokers who would put investment into different tranches to divide it to thwart any suspicions. § Loans The most obvious form of laundering money is to purchase big assets in cash or against loan and then making the loan repayments. Once the transaction takes place, tracing back the source of income can be a challenge. Further Reading Global Threat National Risk Why Cash Is still ECB ends Production & Assessment Assessment 2020 King issuance of Euro 500 National Risk 2018 Layering The second stage in the money laundering process is referred to as ‘layering’. The separation of illicit proceeds from their source by layers of financial transactions intended to conceal the origin of the proceeds for eg. § Money transfer, moving funds from one financial institution to another or within accounts at the same institution. § Investment in financial products which have good liquidity, and which can be bought and sold easily (e.g. unlisted stocks and shares) § Reselling high value goods and prepaid access/stored value products. § Purchase and sale of real estate – apartments, houses, flats, commercial premises or investing in other legitimate businesses. § Using shell companies and shell banks, i.e. entities that have no real function, no real place of business and no real business operations, but which exist in name only as a conduit for the receipt and distribution of money use of the international financial markets to buy and sell securities and move money across international borders while obscuring the ultimate beneficial owner and assets. § Transfer of the money to a business, ostensibly as a ‘loan’ with documents such as loan agreements and receipts to support the illusion that the loan is real. § Transfer of the money overseas or to other accounts under the guise of money destined for a specific purpose (e.g. education overseas of a family member) § Using fictitious business transactions to move money around (e.g. giving money to suppliers against invoices raised for goods that were never issued; or raising invoices to customers in respect of sales that never took place) § Transferring money to companies overseas in payment for non-existent shipments of imported goods These are a complex web of transactions to move money into the financial system, usually via offshore techniques. Once the funds have been placed into the financial system, the criminals make it difficult for authorities to detect laundering activity. They do this by obscuring the audit trail through the strategic layering of financial transactions and fraudulent bookkeeping. Its purpose is to confuse and delay any criminal investigation by creating multiple financial transactions to conceal the original source and ownership of the illegal funds. Integration Integration is the final stage of the process. Once the proceeds of criminal activity have been transported, consolidated, placed, and layered they will, by the end of the process, have all the appearance of legitimately earned wealth, Supplying apparent legitimacy to illicit wealth through the re-entry of the funds into the economy in what appears to be normal business or personal transactions. For eg. § Purchasing luxury assets like property. § Artwork, jewelry, or high-end automobiles § Getting into financial arrangements or other ventures where investments can be made in business enterprises. § Repatriating the funds back into the country where the crimes were committed, so that they are available to the ultimate criminal beneficial owner. The ‘dirty’ money is now absorbed into the economy, for instance via real estate. Once the ‘dirty’ money has beenplaced and layered, the funds will be integrated back into the legitimate financial system as ‘legal’ tender. Integration is done very carefully from legitimate sources to create a plausible explanation for where the moneyhas come from. This money is then reunited with the criminal with what appears to be a legitimate source. At this stage, it is very difficult to distinguish between legal and illegal wealth.

It is important to note that, in reality, there is often an overlap in these three stages of money laundering. As in some cases of financial crimes, there is no requirement for the illegal funds to even be ‘placed’. Pertinent consequences of Money Laundering: ► Increased Exposure to Organized Crime and Corruption: When a country is seen as a haven for money laundering, it will attract people who commit crime ► Weakening Financial Institutions: Money laundering and terrorist financing can harm the soundness of acountry’s financial sector. They can negatively affect the stability of individual banks or other financialinstitutions. ► Effect on Foreign Investments: Although developing economies cannot afford to be too selective about thesources of capital they attract, there is a dampening effect on foreign direct investment when a country’s commercial and financial sectors are perceived to be compromised and subject to the influence of organized crime ► Reputation Risk for the Country: A reputation as a money laundering or terrorist financing haven can harm development and economic growth in a country. ► Loss of Tax Revenue: Of the underlying forms of illegal activity, tax evasion is, perhaps, the one with themost obvious macroeconomic impact. Money laundering diminishes government tax revenue and, therefore,indirectly harms honest taxpayers ► Risk of International Sanctions: In order to protect the financial system from money laundering and terrorist financing, the United States, the United Nations, the European Union, and other governing bodies may impose sanctions against foreign countries, entities or individuals, terrorists and terrorist groups, drug traffickers, and other security threats. In the United States, the Office of Foreign Assets Control (OFAC) of the US Department of the Treasury administers and enforces economic and trade sanctions ► Reputational Risk: The potential that adverse publicity regarding an organization’s business practices and associations, whether accurate or not, will cause a loss of public confidence in the integrity of the organization. ► Legal Risk: The potential for lawsuits, adverse judgments, unenforceable contracts, fines and penaltiesgenerating losses, increased expenses for an organization, or even the closure of the organization. AML/CFT Compliance Programs and Individual Accountability Guidance has been issued and laws have been passed seeking individual accountability at the senior levels of regulated financial institutions. in 2015 a memorandum on “Individual Accountability and Corporate Wrongdoing,” was issued by the US Department of Justice’s Deputy Attorney General, Sally Quillian Yates. It came to be known as “The Yates Memo” It reminds prosecutors that criminal and civil investigations into corporate misconduct should also focus on individuals who perpetrated the wrongdoing. In the United Kingdom, the Financial Conduct Authority (FCA) published final rules for the Senior Managers Regime (2015), which stresses upon individual accountability within the banking sector. In relation to financial crime, the Senior Managers Regime requires a financial institution to give explicit responsibility to a senior manager, such as an executive level Money Laundering Reporting Officer (MLRO), for ensuring that the institution’s efforts to combat financial crime are effectively designed and implemented. The senior manager is personally accountable for any misconduct that falls within the institution’s AML/CFT regime. Case Study From 2003 to 2008, Thomas Haider served as the Chief Compliance Officer for MoneyGram, a money services business (MSB) specializing in money transfers. As part of his responsibilities, Mr. Haider was responsible for ensuring that MoneyGram had an effective AML/CFT program that requires timely reporting of suspicious transactions. He was also in charge of MoneyGram’s Fraud Department. During that time, there were thousands of complaints placed by customers who reported that they were victims of “lottery” or pre-payment fraud and instructed to remit money to fraudsters via MoneyGram agents in the US and Canada. Although receiving a wealth of information from complainants Mr. Haider and MoneyGram’s Fraud Department did not conduct an investigation of the complaints or the outlets from where the complaints were generated. An investigation would have allowed Mr. Haider to suspend or terminate any agent participating in the illegal activity. According to a December 2014 FinCEN Assessment of Civil Penalty, Mr. Haider failed to implement an appropriate AML program, conduct effective audits, or terminate known high-risk agents. As a result of FinCEN’s investigation, Mr. Haider was removed from his employment at MoneyGram in 2008 and was individually assessed a $1 million Civil Money Penalty in 2014. FinCEN also sought to bar Mr. Haider from working in the financial services industry. Terrorist Financing Terrorist financing - is using the financial system to facilitate the funding of terrorist acts, and to disguise both the origins and intended purpose of the funds used. Note: generally used acronym CFT Stands for Countering the Financing of Terrorism or . Terrorist use the financial system to support terrorists or acts of terrorism Counter- Terrorist Financing (CTF) Money laundering and terrorist financing bear many similarities, but there are some key distinctions. With money laundering, the basic aim is to hide the criminal origin of the funds. The amounts in question are typically large and hence easier to detect. With terrorist financing, the key difference is that the funds passing through the financial system need not have a criminal origin, even though quite often they do. They can stem from a variety of different sources, many of them legitimate at the point of acquisition. Another main difference according to UNDOC is money laundering is circular in nature with money eventually ending up with the person who generated it , on the other hand Terrorist financing is linear, with money generated being used to propagate or to conduct terrorist activities. Terrorist financing can be divided as: The money laundering process Cash entry Laundering ‘Clean’ ‘Ordinary’ to financial process disguises funds ‘Lawful’crime system criminal origin emerge expenditure Back end Time continuum Front end The terrorist financing process Entry to Laundering Cash Multiple financial process disguises siphoned Terroristdonations systems criminal purpose off crime Back end Time continuum Front end

• Raise

• Store

• Move

• Use

Money LaunderingTerrorist Financing Source of Funds Proceeds should come from illegal source: Eg: Tax evasion, Human Trafficking etcSource of funds could be legitimate as well Eg: donation from salary to fund a terrorist Organization. Destination of Funds The money generated from illegal proceeds benefits or goes back to the Launderer. The Recipient is the person or group of persons involved in Money LaunderingThe money generated from legitimate or illegitimate source goes to fund Terrorism. The Recipient is a Terrorist or a Terrorist Organization Purpose of activity To generate ProfitTo support Terrorists or a Terrorist Organization, fund their activities, purchase weapons, conduct training etc. Stage 1 of terrorist financing The methods used to obtain, collect and/or disguise funds for terrorist movements or causes have included: § Donations from charities sympathetic to the terrorists’ cause (possibility of set up by the terrorist group itself exist), or from charities whose administrators have sympathizer who then divert legally obtained charitable donations to the terrorist cause. § Criminal activities including drug trafficking, people trafficking, gun running, counterfeiting operations, fraud, identity theft, etc. § Voluntary payments from ethnic diaspora (both legal expatriates and illegal immigrants) § Funds extorted from ethnic diaspora under threat of exposure to the immigration authorities or harm to their families § Legitimate business activities carried out by front companies, or ‘donor’ businesses sympathetic to the terrorists’ cause. Stage 2 terrorist financing The methods used to fund specific terrorist attacks have included: § ATM and credit card withdrawals on personal accounts – used to retrieve money from accounts in one country from a point of retrieval in another country § Use of the Hawala banking system, which is largely unregulated and as such allows for anonymous movements of money between jurisdictions § Physical movement of funds in cash or traveler’s cheques or NPM (New Payment Methods) either by the terrorists themselves or via couriers § Use of company structures and commercial banking operations to transfer money across borders § wiring of funds between accomplices in different parts of the world, either using their own accounts or those of sympathizer’s. Case Study The 9/11 terrorist were able to use US and global financial institutions to hold, move and retrieve their money undetected. In essence, 19 hijackers opened 24 accounts and few kept funds in foreign accounts that they accessed in the United States through ATM and credit card transactions. The hijackers received funds from facilitators in Germany and the United Arab Emirates as they transited Pakistan before coming to the United States. It is estimated that the total plot cost al Qaeda in the range of $400,000–$500,000. The hijackers spent money primarily for flight training, travel and living expenses. Account Profiles: § Accounts were opened with cash/cash equivalents in average amounts of $3,000 to $5,000. § Addresses used usually were not permanent addresses, but rather were mail boxes and were changed frequently. § The hijackers often used the same address and telephone numbers on the accounts. § Twelve hijackers opened accounts at the same bank. Transaction profiles: § Some accounts directly received or sent wire transfers of small amounts to and from foreign countries such as United Arab Emirates (UAE), Saudi Arabia and Germany. § The hijackers made numerous attempts to withdraw cash in excess of the limit of the debit card. § Numerous balance inquiries were made. § After a deposit was made, withdrawals occurred immediately. § Overall transactions were below reporting requirements. § Funding of the accounts was by cash and overseas wire transfers. § ATM transactions occurred with more than one hijacker present (creating a series of trans- actions involving several hijackers at the same ATM). § Debit cards were used by hijackers who did not own the accounts. International activity: § While in the United States, two of the hijackers had deposits made on their behalf by unknown individuals. § Hijackers on all four flights purchased traveler’s checks overseas and brought them into the US Some of these traveler’s checks were deposited into their US checking accounts. § In 1999, this same hijacker opened an account in UAE, giving a power of attorney over the account to the same individual who had been wiring money to his German account. § More than $100,000 was wired from the UAE account of the hijacker to the German account of the same hijacker in a 15-month period. In an attempt clarify terrorist financing and offer recommendations to the global financial community, FATF has issued guidance to identify techniques and mechanisms used in financing terrorism. The report, entitled “Guidance for Financial Institutions in Detecting Terrorist Financing,” was published on April 24, 2002, and described the general characteristics of terrorist financing. And Then in February 2008 issued typology report on terrorist financing. 2002 Guidance 2008 Typology Report Introduction to Sanctions What are Sanctions? Kofi Annan (Former Secretary General-UN) said Sanctions are a necessary middle ground between war and words. Sanctions are restrictions used by international, regional or domestic authorities to stop or disrupt or an attempt tostop financial crime, terrorism, human rights, and development of nuclear weapons or ‘proliferation’. They are used to attempt to change the behavior of a targeted country or regime where diplomatic efforts have failed, or to restrict the funding of individuals, entities or groups Sanctions can be imposed against: Countries orJurisdictions Individuals Industry Sectors Entities Trading activities Iran, Syria, North Korea, Cuba Fo eg: Politicians, Terrorists or anyonewho assists the targeted individuals Aimed at key sectors to prohibit financial dealings Company, Ships orAircraft owned or controlled by a Sanctioned individual or Countryprohibit all direct or indirect import/export, trade brokering, financing or facilitating against mostgoods, technology and services Prohibit large numberof activitiesThese individuals are collectivelyknown as SDN - 'Special Designated Nationals' Known as Sectoral Sanctions Indicators Involved in financialcrime or TerrorismImposed on regimes responsible for humanrights violation and nuclear proliferation apply to individuals, Entities, Government agenciesIssued by US and EU against Russia on Oil and Gas, sea drilling and Banking sectors Types of Sanctions: Targeted Sanctions: Imposed on Individuals or leaders of a Country Sectoral Sanctions: Imposed on a sector Comprehensive Sanctions: imposed on trading activities Sanctions measures generally impose one or a combination of the following restrictions: Embargoes: Prohibitions on the import and export of goods and services to a target country. Embargoes may apply to specific business sectors or products, such as technology services or weapons. Business restrictions: Prohibitions on trade, investment and business relationships with target countries, individuals, and organizations. Asset freezes: Measures that freeze the foreign-held assets of target countries, organizations, and individuals. Travel bans: Measures that prohibit sanctioned individuals from travelling from their country of residence to countries that abide by the relevant sanctions measures. Recommendation 6 requires countries to implement ‘targeted financial sanctions régimes’ to prevent and suppress terrorism and terrorist financing pursuant to the various UN Security Council Resolutions, for the purpose of freezing terrorist funds and denying their availability to designated persons and entities. Recommendation 7 requires that countries also implement targeted financial sanctions régimes aimed at preventing, suppressing and disrupting WMD proliferation pursuant, again, to UN Security Council Resolutions. Embargo -An embargo is a commercial barrier that prevents commerce or trade with a single nation or a group of countries in a certain way. An embargo prohibits a country from dealing with another country for a certain product, sector, or even all items,implying that they would not import or export any products from that country. -There are two types of embargos: Import embargo: A person or a company would not be able to import goods from a specific nation, such as the United States put an embargo on Cuba. Export embargo: When a firm or any product manufactured by that company is embargoed, it cannot export to theembargoed nation. This would be similar to the

Sanction

Embargo

What is means

Sanction refers to athreatened penalty for disobeying a law or rule.

An embargo is a commercial barrier that prevents commerce or trade with a single nation or a group of countries entirely or partially.

Types

Tariffs Quotas Embargoes

Non- Tariff Barriers

Asset freezes and seizures

Import embargo Export Embargo

Sanctions List and screening:

Before a financial institution starts doing business with a new customer or engaging in certain transactions (e.g., international wire payments), these firms should perform screening against the following lists published by International bodies and local jurisdictions (mentioned above):

Lists in the public domain and available to all banks eg. OFAC, UN, EU, HMT

Local lists used only in specific jurisdictions

Global lists that are not available in public domain

Internal lists maintained within the FIs

This is to make sure that the business is not conducted with any entity or individual (in any capacity) who are subject to sanctions and there are no payments processed.

Sanctions’ control is a regulatory requirement at all stages of the Client Life Cycle including screening of Employees,Vendors, all third parties, all payment activity and prospective Clients.

All firms are required to report confirmed matches to the sanction lists to the regulatory bodies.

The firms should review the appropriateness of their screening system regularly to ensure that it is updated and effective.

Name screening

Prior to 9/11, the sanctions lists produced by international or national authorities focused mainly on specific countries or regimes, with the aim of prohibiting fund transfers to the sanctioned country and freezing the assets of the government, businesses and residents or else targeted known political figures.

Since then many individuals and organisations suspected of having terrorist links have been added to the lists.

Initial and subsequent screening

Financial institutions are required to run all new accounts of any sort against the current updated versions of the relevant lists, and similarly to screen all existing accounts on a regular basis.

Wire transfers should also be screened to establish that no person or entity whose name appears on a list is the recipient of the funds. Institutions must have systems and software that can Screen relevant lists. Use of such systems is not mandatory under the EU Third Directive, although it is required of banks in the US.

Name match vs target match

‘name match’, where name of an account holder has matched with the name of a target included on a list.

‘target match’, where the organisation is satisfied that the account held is that of the actual target of the financial sanctions, that is, the suspected ‘bad guy’.

Action when information is inconclusive (False positives)

Full details of any target matches should be reported to the authorities and any affected accounts frozen immediately.

However, target match are a relative rare. It is more likely that a name on the database has matched with an entry on a sanctions list but there are no conclusive evidence that it is the same person or organisation (Fuzzy Logic).

In that case it is required to look more closely at the KYC information and customer profile on record, so as to assess it against the details available on the list.

In situations where the available facts are inconclusive, or there are also those situations where erroneously it has been determined, that the customer is the person named on the list – the dreaded ‘false positive’ scenario.

In such circumstances it is essential to demonstrate that even with the wrong outcome, full correct procedure was followed and all checks with any other parties involved (e.g. with a remitting bank) were carried out.

It is vital to keep clear records of the decision-making process leading up to any action taken.

Sanctioned Countries

Iran

North Korea

Russia/Ukraine

Cuba

Syria

Venezuela

Balkans

Belarus

Burma

Central African Republic

Congo

Crimea region of Ukraine

Hong Kong

Iraq

Lebanon

Libya

Yemen

Zimbabwe

South Sudan

Somalia

Sanctions Regime:

Unites Nations (UN) Sanctions:

UN sanctions are imposed through known UN Security Council Resolution (UNSCR).

UN has sanctions list pertaining to jurisdictions and hundreds of entities and individuals.

UN also publishes names of individuals and organizations involved in terrorism, specifically ISIS, the Al- Qaeda and the Taliban.

Under these sanctions, the UN member nations are required to freeze the funds and economic resources of any legalpersons named in this list and report any suspected name matches to the relevant authorities.

UN consolidated List of Sanctions includes all individuals and entities subject to measures imposed by the Security Council. https://scsanctions.un.org/consolidated/

European Union (EU) Regime:

Apply to all EU countries and citizens

While UN sanctions are generally incorporated, EU develops their own Sanctions regime

Applies sanctions or restrictive measures in pursuit of the specific Common Foreign and Security Policy (CFSP) objectives set out in the Treaty of the European Union.

EU Consolidated List of Sanctions -Includes all designated persons subject to financial sanctions under EU. https://www.sanctionsmap.eu

Note: UK is no longer part of the EU and therefore EU sanctions will not be applicable to the UK.

UK Sanctions Regime:

The Office of Financial Sanctions Implementation (OFSI) helps to ensure that financial sanctions are properly understood, implemented and enforced for the United Kingdom.

OFSI is a part of the HM Treasury and enables financial sanctions to make the fullest possible contribution to the UKs foreign policy and national security goals

UK Sanctions list can be found here: https://www.gov.uk/government/publications/financial-sanctions-consolidated-list-of- targets/

United States:

The Office of Foreign Asset Control (OFAC) is a department of the U.S. Treasury .

Enforces economic and trade sanctions imposed by the U.S. against countries and groups of individuals.

Applicable to all U.S. citizens and permanent resident aliens regardless of where they are located, all persons and entities within the United States. In the cases of certain programs, foreign subsidiaries owned or controlled by U.S. companies also must comply.

Programs administered by OFAC have included sanctions on Iran, North Korea, Cuba, Syria, and Russia.

OFAC publishes lists of individuals and companies who own/control/act on behalf of targeted countries. It also lists individuals, groups, and entities, such as terrorists and narcotics traffickers designated under programs that are not country-specific.These are known as ‘Specially Designated Nationals’ or SDNs.

Office of Foreign Assets and Control: https://home.treasury.gov/

Other jurisdictions:

Depending on individual political regimes, countries may establish their own domestic sanctions.

Firms are required to identify and comply with the sanction’s obligations imposed by the country of location or that apply to them on account of their nationality or place of incorporation.

Case Study

In 2014, OFAC reached a record $963M settlement with BNP Paribas SA (BNPP), Paris, France, following a $8.9B penalty imposed for apparent violations of US sanctions regulations. The settlement resolved OFAC’s investigation intoBNPP’s systemic practice of concealing, removing, omitting, or obscuring references to information about US-sanctioned parties in almost 4,000 financial transactions routed to or through US banks between 2005 and 2012 in apparent viola-tion of US sanctions involving Sudan, Iran, Cuba and Burma. BNPP’s methods for processing sanctions-related payments to or through the US included removing references to sanctioned parties, replacing sanctioned parties withBNPP’s name or a code word, or otherwise structuring the payments in a matter that did not identify the involvement ofthe sanctioned parties in the transactions.

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