Part 1 of 3

Anti Money Laundering

& Combating the
Financing of Terrorism

AML/ CFT Presentation for Meezan Bank Staff

Overview of Money Laundering & Terrorism
Financing Risks to Pakistan
 Pakistan has been afflicted by Money Laundering and its associated crimes such
as drug trafficking, cash smuggling, corruption, Hundi/ Hawala, misuse of Real
Estate Business, tax evasion and terrorist financing since last three decades.

 Instances such as imposition of significant penalty on a Pakistani bank by US

regulator; hearings of high profile/ Politically Exposed Persons cases for the
charges of buying offshore property with laundered money by Supreme Court of
Pakistan and recent investigations of anonymous accounts by Joint Investigation
Team (JIT) have brought money laundering concerns into mainstream media.

 In 2018, Financial Action Task Force (FATF) formally placed Pakistan on the grey
list. FATF requires Government of Pakistan to demonstrate that remedial actions
are taken and penalties are imposed in cases of AML/CFT violations, and that
these actions have an effect on AML/CFT compliance by financial institutions.

 After promulgation of AML Act 2010 and AML/ CFT Regulations by State Bank of
Pakistan (SBP), the focus on implementing preventive controls, monitoring,
detection and reporting of suspicious transactions and screening of customers
against proscribed watchlists, has increased manifolds during last couple of years
in Pakistani Banks.
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What Is MONEY LAUNDERING?
Money laundering is the method where “dirty money” (“proceeds of
crime” ) is received from criminal activities, processed through
legitimate businesses and is converted into “clean money”.
Anti-money laundering means taking steps to adequately identify funds
obtained by illicit or criminal activity and take measures to prevent
Money Laundering.

Sources of Money Laundering

 Drug trafficking  Insider trading
 Smuggling  Gun running
 Financial frauds  Under/Over invoicing
 Gambling  Tax evasion
 Corruption  Counterfeiting
 Arms, antique, gold smuggling  Embezzlement
 Illegal sale of wild life products  Unlawful Emigration
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What Is TERRORIST FINANCING?
Terrorist Financing is the process whereby funds (often in smaller
amounts) are provided for the purpose of committing terrorist activities or
for the use or benefit of a terrorist group.

Anti-terrorist financing means:

Interrupting the flow of funds (and materials) to known and suspected

terrorist individuals and entities.
Not doing business with persons or entities from countries sanctioned by
OFAC, EU, the United Nations (UN) or cited by the Financial Action Task
Force (FATF), or other applicable body.

In terrorist financing, the money frequently starts out clean i.e. as a

‘charitable donation’ before moving to terrorist accounts. Terrorist
financing is also referred as ‘Reverse Money Laundering’.

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Trade-based Money Laundering (TBML)
Trade-based money laundering is the process of disguising the
proceeds of crime through the use of what appear to be legitimate
trade transactions, often by misrepresenting the price, quantity or
quality of imported or exported goods.

Traditional ways of Trade based Money Laundering:

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Over and Under-invoicing of Goods and Services
By under-invoicing the good or service at a price below the “fair market” price, the exporter
is able to transfer value to the importer, as the payment for the good or service will be
lower than the value that the importer receives when it is sold on the open market.

Alternatively, by over-invoicing the good or service at a price above the fair market price,
the exporter is able to receive value from the importer, as the payment for the good or
service is higher than the value that the importer will receive when it is sold on the open
market.

Multiple Invoicing of Goods and Services

By invoicing the same good or service more than once, a money launderer or terrorist
financier is able to justify multiple payments for the same shipment of goods or delivery of
services. Employing a number of different financial institutions to make these additional
payments can further increase the level of complexity surrounding such transactions.

In addition, even if a case of multiple payments relating to the same shipment of goods or
delivery of services is detected, there are a number of legitimate explanations for such
situations including the amendment of payment terms, corrections to previous payment
instructions or the payment of late fees. Unlike over- and under-invoicing it should be
noted that there is no need for the exporter or importer to misrepresent the price of the
good or service on the commercial invoice. 6
Over- and Under-Shipments of Goods and Services
In addition to manipulating export and import prices, a money launderer can
overstate or understate the quantity of goods being shipped or services being
provided. In extreme cases, an exporter may not ship any goods at all, but simply
collude with an importer to ensure that all shipping and customs documents
associated with this so called “phantom shipment” are routinely processed. Banks
and other financial institutions may unknowingly be involved in the provision of
trade financing for these phantom shipments.

Falsely Described Goods and Services

In addition to manipulating export and import prices, a money launderer can
misrepresent the quality or type of a good or service. For example, an exporter may
ship a relatively inexpensive good and falsely invoice it as a more expensive item
or an entirely different item. This creates a discrepancy between what appears on
the shipping and customs documents and what is actually shipped.

The use of false descriptions can also be used in the trade services, such as
financial advice, consulting services and market research. In practice, the fair
market value of these services can present additional valuation difficulties.

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Why AML/ CFT is Critical for Banks/ DFIs
The banking sector continues to have a relatively high potential risk
because money launderers and terrorist financiers tend to seek out
vulnerable banks which have weak KYC/ CDD controls to achieve their
criminal objectives. Banks must act cautiously because:

 Regulators heavily fines banks due to AML/ CFT lapses.

 US, European banks would not correspond with such banks.
 Financial Intelligence Units considers banks as primary money launder
targets.

The cost of fine is insignificant, compared to the loss of business and

internal costs such as:

- Restructuring, designing new procedures, new systems, training etc.

- Hiring of staff to perform customers due diligence
- Loss of Reputation
- Loss of Shareholder value
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Penalties Imposed On Banks

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Tools to Combat Money Laundering &
Terrorist Financing
 Anti Money Laundering ACT 2010
 Risk Based Approach
 SBP AML/ CFT Regulations
 Accuity Compliance Link for Screening of Customers &
Transactions against proscribed watchlists
 Oracle Financial Crime Compliance Management for
transaction monitoring

Please refer following websites for laws, regulations & guidance:

- State Bank of Pakistan http://www.sbp.org.pk
- Financial Monitoring Unit http://www.fmu.gov.pk
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SBP Risk Based Approach (RBA)
SBP requires Banks to conduct their internal money laundering and
financing of terrorism risk assessments to identify, assess, manage and
mitigate related risks on on-going basis.
SBP further advised banks to develop a risk register whereby risks
emanating from various business aspects can be accounted for. These may
include the following:
Customers: Identifying risk determinants while establishing relationships
with customer;
Products: Envisaging risk attributes resulting from customer’s need for
financial services and appropriate controls;
Delivery Channels: Identifying risks associated with delivery channels
which may vary from customer to customer depending on their needs; and
Geographic/Jurisdictional: Risks resulting from customer geographic
presence and jurisdiction in which the customer is operating.
In addition to the above, other risk factors such as expected account activity,
nature of business, residency status and beneficial ownership structure are
also considered for customers' risk evaluation. 11
SBP Risk Based Approach (RBA)
Account Holder

Customer Products Channels Location

Segment

Risk Score Risk

Registe Determination Registe
r r
High

Risk
Medium
Decision

Low

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