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ISSN 2311-9438 (Online) ISSN 2073-8005 (Print)
Monetary System and Currency Circulation
TECHNIQUES FOR IMPLEMENTING ANTI-MONEY LAUNDERING PROCEDURES Vladimir V. BEREZANSKYa, Larisa A. CHALDAEVAM, Anatoly A. KILYACHKOVc
a Ernst & Young, Moscow, Russian Federation [email protected]
b Financial University under Government of Russian Federation, Moscow, Russian Federation [email protected]
c Ernst & Young, Moscow, Russian Federation [email protected]
• Corresponding author
Article history:
Received 5 June 2015 Accepted 15 June 2015
Keywords: anti-money laundering, banking transactions, suspicious transactions, principle of algorithmic hierarchy, taxonomical approach
Abstract
Manipulating the banking system for purposes of money laundering is a relatively new phenomenon. This problem was first identified in 1986 in the United States, when it was classified as a criminal offense. In Russia, anti-money laundering measures are regulated with Federal Law No. 115-FZ On Counteracting Money Laundering and the Financing of Terrorism (7 August 2001, as amended). Given the high-speed, digitized nature of banking transactions, the technology for countering money laundering should be no less sophisticated; and the speed of detecting suspicious transactions should be commensurate with that of the underlying bank transactions. The Central Bank of Russia is now highly experienced in identifying mechanisms and schemes for money laundering. Reviewing the typology of the Central Bank of Russia for suspicious transactions, we have categorized them as follows: multi-parameter, complex, dynamic and multivariate. In order to construct an algorithm for detecting suspicious transactions, it is important to adhere to a correct sequencing (hierarchy) of operations. We also propose to supplement the principle of algorithmic hierarchy with a taxonomical approach. Adapting our proposed taxonomic approach to formulating a typology of parameters characterizing suspicious transactions, in combination with the principle of hierarchical analysis, will create an effective and efficient algorithm for identifying suspicious money laundering transactions.
© Publishing house FINANCE and CREDIT, 2015
Manipulating the banking system for purposes of money laundering is a relatively new phenomenon. This problem was first identified in 1986 in the United States, when it was classified as a criminal offense. Subsequently, in 1989, the Financial Action Task Force (FATF) Group developed a set of anti-money laundering (AML) measures. FATF has since become a major international organization dedicated to controlling and countering money laundering.
In Russia, anti-money laundering measures are regulated by Federal Law No. 115-FZ On Counteracting Money Laundering and the Financing of Terrorism (7 August 2001, as amended). This law has undergone many changes, especially during the years 2012-2013, designed primarily to tighten control over compliance with the underlying legislative initiative. These amendments include, for example, assigning the regulatory functions of Controller and Chief Risk Manager to the Central Bank of Russia, which organizes anti-money laundering management of the banking system using a risk-based approach. Accordingly, Central Bank of Russia Regulation No. 242-n from 16 December 2003 (as amended) On Organization of Internal Control in Credit Organizations and Banking Groups is a
primary guidance of the Central Bank of Russia to credit institutions for controlling the risk management process on an ongoing basis.
Given the high-speed, digitized nature of banking transactions, the technology for countering money laundering should be no less sophisticated; and the speed of detecting suspicious transactions should be commensurate with that of the underlying bank transactions.
In this regard, the following questions must be answered.
1) How is money laundering defined?
2) What are suspicious transactions? What are their characteristics?
3) What criteria for suspicious transactions should be used to identify them?
4) What specific characteristics should be included in an algorithm for detecting suspicious transactions?
International organizations often use the following legal definition for money laundering: 'concealing or disguising the true nature, source, location, method of
disposition, movement, or genuine ownership rights with respect to monetary funds or other specific property, if it is known that such funds (or other property) were obtained as the result of a criminal offense' (Article 3 of UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, 20 December 1988). This definition was later supplemented by concepts such as conversion and transfer of ownership1. The propensity for close ties between terrorism financing and money laundering was enshrined in the UN Convention for the Suppression of the Financing of Terrorism (9 December 1999). In the Russian legislation, this type of crime is defined as providing a legitimate form of ownership, use or disposition to funds or other property obtained through the commission of a crime2. To compare these definitions, the Russian definition is more generic. Whilst not disadvantageous, further refinements are required in subsequent documents - such as, for example, when defining 'suspicious transactions'.
A more detailed definition of 'suspicious transactions' is provided in Central Bank of Russia Letter No. 172-T of 4 September 2013 The Priority Measures in Exercising Banking Supervision. Suspicious transactions are operations carried out by bank clients having an unusual character, or any indication that a clear economic purpose is absent. Such operations may pursue withdrawing capital from the country, financing 'grey' imports, converting remittances from non-cash to cash (possibly for tax evasion), and financial support for corruption and other illegal activities [1-3, 10, 11].
An important aspect of reducing the risk of money laundering is the detection of suspicious transactions by identifying their characteristic criteria. Relevant criteria were identified by the Central Bank of Russia in implementing its oversight activities for a significant period of time. The result is a continuous struggle between, on the one hand, the Central Bank of Russia and compliance control at commercial banks, and, on the other hand, persons engaged in money laundering.
For instance, the most significant criteria for suspicious banking transactions in 2003 were transfers of funds by individuals without opening an account,
1 Convention against Transnational Organized Crime (Palermo Convention, 15 November 2000).
2 Федеральный закон № 115-ФЗ от 07.08.2001
«О противодействии легализации (отмыванию) доходов, полученных преступным путем, и финансированию терроризма» (Federal Law On Counteracting Money Laundering and the Financing of Terrorism)
and operations with prepaid financial products3. The Central Bank of Russia recommended that compliance control within commercial banks would pay special attention to such transactions, especially if they were undertaken: 1) regularly, 2) by individual (unincorporated) persons, where 3) each individual transfer does not exceed the equivalent of RUB 600, 000.
The Central Bank of Russia's measures toward controlling cash payments forced criminals to seek new methods for money laundering. By 2005, criminal schemes using bank accounts became widespread4. As an example, let's consider the operations potentially available to individuals seeking to buy foreign currency that satisfy all relevant requirements of the Central Bank of Russia:
1) two accounts are opened for an individual - one in a foreign currency and a second for rubles;
2) cash is credited to the ruble bank account, following which the account holder makes a transfer to the foreign currency account, designating it as settlement of a payment (obligation);
3) funds are credited to the foreign currency account and then removed as cash by the individual.
Any of these actions, while technically permissible, might actually constitute a suspicious transaction depending on the context.
By 2007, other money laundering schemes had already been used. They involved non-residents who received Russian tax identification codes specifically designated for foreign legal entities, but were in fact
3 Письмо Банка России от 24.12.2003 № 179-Т
«Об усилении контроля за операциями по переводу денежных средств без открытия счетов и за операциями с использованием предоплаченных финансовых продуктов» (Central Bank of Russia Letter On Strengthening Control Over Operations to Transfer Money Without Opening Accounts and for Transactions Using Prepaid Financial Products).
4 Письмо Банка России от 21.01.2005 № 12-Т «Методические рекомендации по усилению контроля за операциями покупки физическими лицами ценных бумаг за наличный расчет и купли-продажи наличной иностранной валюты» (Central Bank of Russia Letter Guidance on Strengthening Control over the Operations of the Purchase by Individuals of Securities for Cash and the Sale and Purchase of Foreign Currency); письмо Банка России от 26.12.2005
№ 161-Т «Об усилении работы по предотвращению сомнительных операций кредитных организаций» (Central Bank of Russia Letter On Strengthening the Prevention of Suspicious Transactions of Credit Institutions); письмо Банка России от 26.01.2005 № 17-Т «Об усилении контроля за операциями с наличными денежными средствами» (Central Bank of Russia Letter On Increasing Control over Cash Transactions).
not Russian taxpayers. As a result, the Central Bank of Russia designated this particular combination of attributes as criteria indicative of suspicious transactions. To reduce the risk of money laundering, the Central Bank of Russia recommended that banks would perform enhanced due diligence on such clients, i.e. for non-resident legal entities that were also non-Russian taxpayers - before approving their bank accounts5.
By 2008, the escalating confrontation between banks' compliance control function and unscrupulous businessmen had led to the widespread use of money laundering schemes channeled through: commercial lending6; use of promissory notes7; via transit or 'flow-through' companies (SPVs, etc.)8; and distorted (artificially inflated or deflated) transaction prices9. In 2010, suspicious schemes using resident-agents and non-resident principals were quite common10. At each stage, the Central Bank of Russia responded to recent innovations in the financial market, consistently promulgating new criteria for suspicious transactions [5, 6].
Novel opportunities resulting from the establishment of the Customs Union of Russia, Belarus and
5 Письмо Банка России от 30.10.2007 № 170-Т «Об особенностях принятия на банковское обслуживание юридических лиц - нерезидентов, не являющихся российскими налогоплательщиками» (Central Bank of Russia Letter On Specifics of Banking Services for Legal Entities - NonResidents that are not Russian Taxpayers).
6 Письмо Банка России от 13.03.2008 № 24-Т
«О повышении эффективности работы по предотвращению сомнительных операций» (Central Bank of Russia Letter On Enhancing the Effectiveness of Preventing Suspicious Transactions).
7 Письмо Банка России от 04.07.2008 № 80-Т «Об усилении контроля за отдельными операциями физических и юридических лиц с векселями» (Central Bank of Russia Letter On Strengthening of Control over Certain Transactions of Individuals and Legal Entities with Bills).
8 Письмо Банка России от 03.09.2008 № 111-Т «О повышении эффективности работы по предотвращению сомнительных операций клиентов кредитных организаций» (Central Bank of Russia Letter On Enhancing the Effectiveness of Preventing Clients' Suspicious Transactions in Credit Institutions); письмо Банка России от 31.12.2014 № 236-Т «О повышении внимания кредитных организаций к отдельным операциям клиентов» (Central Bank of Russia Letter On Greater Attention of Credit Institutions to Certain Transactions of Customers).
9 Письмо Банка России от 01.11.2008 № 137-Т
«О повышении эффективности работы по предотвращению сомнительных операций» (Central Bank of Russia Letter On Enhancing the Effectiveness of Preventing Suspicious Transactions).
10 Письмо Банка России от 16.09.2010 № 129-Т
«Об усилении контроля за отдельными операциями юридических лиц» (Central Bank of Russia Letter On
Strengthening of Control over Certain Transactions of Legal Entities).
Kazakhstan were aggressively explored in order to create money laundering schemes, which in turn has required the Central Bank of Russia to respond accordingly11.
The Central Bank of Russia is now highly experienced in identifying mechanisms and schemes for money laundering. And the overall increase in the number and complexity of suspicious transactions indicia has generated a need to systematize them. The Central Bank of Russia made the first attempt at such systematization in 200512. The most complete and structured list of suspicious transactions criteria can be found at the Central Bank of Russia Regulation of 2 March 2012 No. 375-П On the Requirements for Internal Control Rules of the Credit Institution to Counteract the Legalization (Laundering) of Criminal Income and the Financing of Terrorism, where 82 specific money laundering scenarios are in turn divided into eleven groupings organized by a specific type of financial transaction.
11 Письмо Банка России от 11.06.2010 № 83-Т
«Об особенностях работы уполномоченных банков с товарно-транспортными накладными, оформленными грузоотправителями на территории Республики Беларусь» (Central Bank of Russia Letter On Specifics of Handling Shippers' Consignment Notes by the Authorized Banks in the Republic of Belarus); письмо Банка России от 16.11.2012 № 157-Т «Об осуществлении уполномоченными банками валютного контроля за проведением резидентами валютных операций, связанных с оплатой товара, перемещаемого по территории Таможенного союза» (Central Bank of Russia Letter On Authorized Banks' Currency Control over Residents' Foreign Exchange Transactions Associated with the Payment of the Goods Transported Through the Customs Union); письмо Банка России от 07.12.2012 № 167-Т «О повышении внимания кредитных организаций к отдельным операциям клиентов» (Central Bank of Russia Letter On Greater Attention of Credit Institutions to Certain Transactions of Customers); письмо Банка России от 07.08.2013 № 150-Т «О повышении внимания кредитных организаций к отдельным операциям клиентов» (Central Bank of Russia Letter On Greater Attention of Credit Institutions to Certain Transactions of Customers); письмо Банка России от 19.06.2013 № 110-Т «О повышении внимания кредитных организаций к отдельным операциям клиентов» (Central Bank of Russia Letter On Greater Attention of Credit Institutions to Certain Transactions of Customers); письмо Банка России от
10.06.2013 № 104-Т «О повышении внимания кредитных организаций к отдельным операциям клиентов» (Central Bank of Russia Letter On Greater Attention of Credit Institutions to Certain Transactions of Customers); письмо Банка России от
03.10.2014 № 168-Т «О повышении внимания кредитных организаций к отдельным операциям клиентов» (Central Bank of Russia Letter On Greater Attention of Credit Institutions to Certain Transactions of Customers).
12 Положение Банка России от 02.03.2012 № 375-П
«О требованиях к правилам внутреннего контроля кредитной организации в целях противодействия легализации (отмыванию) доходов, полученных преступным путем, и финансированию терроризма» (Central Bank of Russia Regulation On Requirements to Internal Control Rules of the Credit Institution to Counteract the Legalization (Laundering) of Criminal Income and the Financing of Terrorism).
Reviewing the typology of the Central Bank of Russia for suspicious transactions, we have categorized them as follows [7-9, 12, 15-20]. Please note that they are complementary and not mutually exclusive:
• multi-parameter - each money laundering indicator is comprised of several constituent parameters;
• complex - the interrelationship among several parameters must be considered in order to reach an informed conclusion as to the presence of money laundering;
• dynamic - here, the dynamics of interaction among parameters is the key distinguishing element;
• multivariate - an analysis of an indicator's characteristics requires considering various combinations of parameters.
We support our conclusion by choosing an example of a criterion indicating potential money laundering while conducting operations designated as ID 140213. This criterion is formulated as follows: 'Depositing large amounts, i.e. more than three million rubles or the foreign currency equivalent - for short periods (less than three business days) to the account of a client-legal entity, in cases where there was little of any account activity for the past three months when compared with this account's usual level of activity, following which the account holder withdraws these funds in cash or sends them to another bank by wire transfer'14.
Formulated parameters that, when taken together, (multivariable) are indicative of a suspicious transaction, are presented in Table 1, which indicates that, for a reliable determination of suspicious transaction indicia, their entirety (complexity) as well as dynamics of their development over time (dynamic) must be analyzed.
In order to construct an algorithm for detecting suspicious transactions, it is important to adhere to a
13 Положение Банка России от 02.03.2012 № 375-П
«О требованиях к правилам внутреннего контроля кредитной организации в целях противодействия легализации (отмыванию) доходов, полученных преступным путем, и финансированию терроризма» (Bank of Russia Regulation On Requirements to Internal Control Rules of the Credit Institution to Counteract the Legalization (Laundering) of Criminal Income and the Financing of Terrorism).
14 Положение Банка России от 02.03.2012 № 375-П
«О требованиях к правилам внутреннего контроля кредитной организации в целях противодействия легализации (отмыванию) доходов, полученных преступным путем, и финансированию терроризма» (Bank of Russia Regulation On Requirements to Internal Control Rules of the Credit Institution to Counteract the Legalization (Laundering) of Criminal Income and the Financing of Terrorism).
correct sequencing (hierarchy) of operations [13, 14]. This will reduce costs and enhance both the performance and reliability of the identification of suspicious transactions. Quite obviously, irrevocable operations, i.e. the results of which cannot be canceled, or the reversal of which is extremely difficult, must come first. In this example, cash withdrawals and transfers of funds to other banks are irrevocable operations.
If an irrevocable operation has any feature(s) of a suspicious transaction, then the next step is an analysis of the most relevant indicators. In this example, the speed of transactions is the most significant factor (i.e. deposit and onward transfer within a period of less than three banking days). Features relevant to a legal entity are examined last. A flow chart for analyzing the algorithm of suspicious transaction features codified at ID 1402 (indicators of potential money laundering when executing operations with monetary funds) is presented at Figure 1.
Note that criteria such as 'cash withdrawal', 'withdrawals within three banking days after deposit (to account)', 'absence of transactions on the bank account to which funds are transferred', etc., are common to multiple suspicious transaction scenarios. We therefore propose to supplement the principle of algorithmic hierarchy with a taxonomical approach.
Let us briefly consider the essentials of the proposed taxonomical approach. The features of suspicious transactions are complex composite structures that can be represented by a set of simple, easily juxtaposable indicators, the respective properties of which are then analyzed. The implementation of the taxonomical approach includes the following stages:
1) identifying all suspicious transactions to be analyzed15;
2) reconfiguring the component characteristics for all suspicious transactions chosen in Step 1 as sets of (grouped) simple (single-feature) indicators;
3) defining the elementary properties (taxonomic elements) of these simple indicators;
4) formulating a new classification matrix (matrices) by ordering the taxonomic elements thus identified
15 Положение Банка России от 02.03.2012 № 375-П «О требованиях к правилам внутреннего контроля кредитной организации в целях противодействия легализации (отмыванию) доходов, полученных преступным путем, и финансированию терроризма» (Central Bank of Russia Regulation On Requirements to Internal Control Rules of the Credit Institution to Counteract the Legalization (Laundering) of Criminal Income and the Financing of Terrorism).
in a sequential pattern that gradually reduces the number of repetitive (redundant) references ('visits') to the relevant indicators while completing the process of detecting suspicious transactions.
Adapting our proposed taxonomic approach to formulating a typology of parameters characterizing
(in the aggregate) suspicious transactions, in combination with the principle of hierarchical analysis, will create an effective and efficient algorithm for identifying suspicious money laundering transactions.
Table 1
ID 1402 - Typology of Characteristics (Features) for Suspicious Transactions
Parameter Type Feature
Transaction Deposit to account For less than 3 banking days
Withdrawal For less than 3 banking days after being deposited
Wire transfer
Object RUB or Foreign currency More than RUB 5 million or an equivalent amount in foreign currency
Cash Amount accrued
Non-cash transaction
Subject Corporate account of the legal entity. Transactions for the past 3 months Performed minimally or not performed at all
Legal entity Insignificant
Account at another bank
Figure 1
ID 1402 - Algorithm for Analysis of Suspicious Transaction Indicia
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