ANTI MONEY LAUNDERING MEASURES AND BUSINESS ETHICS - ASSOCIATESHIP

ISQ Examination (Summer-2008)

Q.3 Please identify, define (if applicable) and discuss briefly the following: A) Gold HEDGE (04)
Gold is a monetary metal whose price is determined by inflation, by fluctuations in the dollar and U.S. stocks, by currency-related crises, interest rate volatility and international tensions, and by increases or decreases in the prices of other commodities. The price of gold reacts to supply and demand changes and can be influenced by consumer spending and overall levels of affluence. Gold is different from other precious metals such as platinum, palladium and silver because the demand for these precious metals arises principally from their industrial applications. Gold is produced primarily for accumulation; other commodities are produced primarily for consumption. Golds value does not arise from its usefulness in industrial or consumable applications. It arises from its use and worldwide acceptance as a store of value. Gold is money. In the coming decade, as the dollar suffers one of the great meltdowns in monetary history, gold will reclaim its place at the center of the global financial system. Golds value, relative to most national currencies, will soar.

HEDGE AGAINST INFLATION GOLD - HEDGE AGAINST A DECLINING DOLLAR GOLD AS A SAFE HAVEN GOLD - SUPPLY AND DEMAND GOLD STORE OF VALUE GOLD - PORTFOLIO DIVERSIFIER

B) Smart Card (04)

A smart card, chip card, or integrated circuit card (ICC), is any pocket-sized card with embedded integrated circuits. A smart card ormicroprocessor cards contain volatile memory and microprocessor components. The card is made of plastic, generally polyvinyl chloride, but sometimes acrylonitrile butadiene styrene or polycarbonate. Smart cards may also provide strong security authentication for single sign-on (SSO) within large organizations. The benefits of smart cards are directly related to the volume of information and applications that are programmed for use on a card. A single contact/contactless smart card can be programmed with multiple banking credentials, medical entitlement, drivers license/public transport entitlement, loyalty programs and club memberships to name just a few. Multi-factor and proximity authentication can and has been embedded into smart cards to increase the security of all services on the card. For example, a smart card can be programmed to only allow a contactless transaction if it is also within range of another device like a uniquely paired mobile phone. This can significantly increase the security of the smart card. Governments gain a significant enhancement to the provision of publicly funded services through the increased security offered by smart cards. These savings are passed onto society through a reduction in the necessary funding or enhanced public services. Individuals gain increased security and convenience when using smart cards designed for interoperability between services. For example, consumers only need to replace one card if their wallet is lost or stolen. Additionally, the data storage available on a card could contain medical information that is critical in an emergency should the card holder allow access to this.

C) Correspondent Banking (04)

Definition of 'Correspondent Bank'

A financial institution that provides services on behalf of another, equal or unequal, financial institution. A correspondent bank can conduct business transactions,

accept deposits and gather documents on behalf of the other financial institution. Correspondent banks are more likely to be used to conduct business in foreign countries, and act as a domestic bank's agent abroad.

Explanation 'Correspondent Bank'

Correspondent banks are used by domestic banks in order to service transactions originating in foreign countries, and act as a domestic bank's agent abroad. This is done because the domestic bank may have limited access to foreign financial markets, and cannot service its client accounts without opening up a branch in another country.

D) FATF Style African Grouping (04)

The Financial Action Task Force (FATF) is an inter-governmental body whose purpose is the development and promotion of national and international policies to combat money laundering, the financing of terrorism and proliferation of weapons of mass destruction. The FATF is therefore a 'policy-making body' that works to generate the necessary political will to bring about legislative and regulatory reforms in these areas. AFRICAN MEMBER ORGANIZATIONS ARE:

Middle East and North Africa Financial Action Task Force (MENAFATF)
Determining that the countries in the MENA Region should work together to comply with these standards and those measuresto enhance the fight against ML/TF in the region through the creation of an effective system which countries need to implement according to their particular cultural values, constitutional frameworks and legal systems. The MENAFATF is voluntary and co-operative in nature and is established by agreement between its members. It does not derive from an international treaty. It is independent of any other international body or organization and sets its own work, rules and procedures. Its work, rules, and procedures will be determined by consensus between its members and it will co-operate with other international bodies, notably the FATF to achieve its objectives.

Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG)

The Eastern and Southern Africa Anti Money Laundering Group comprises:

The Ministerial Council (the Council); The Task Force of Senior officials; The Secretariat.

The Ministerial Council will be the key Decision making Body within the ESAAMLG and consist of at least one ministerial representative from each member country. The Council will meet at least once a year. The council shall elect a President and Vice -President from among its member provided always that:

1. 2.

The President and the Vice-President may not represent the same member country. President and Vice-President include among their number one Minister representing financial interests.

Implement any other measure contained in multilateral Agreements and initiatives to which they subscribe for the prevention and control of the laundering of the preceeds of all serious crimes.

Intergovernmental Action Group against Money-Laundering in Africa (GIABA)

The main focus area of GIABA at inception was the protection of West African economies and financial systems against Money Laundering.

In January 2006, the Statutes of GIABA were revised to reflect the growing link between Money Laundering and Terrorist Financing, following terrorist attacks on the United States of America on September 11, 2002. This is why Counter- Financing of Terrorism was incorporated into GIABA's mandate. So in addition to being a reflection of the willingness of the Authority of ECOWAS Heads of State and Government to fight against ML and TF, GIABA is also a Financial Action Task Force-Style Regional Body (FSRB) that fully adheres to the FATF 40 + 9 Recommendations.

E) Suspicious Transaction REGULATION M-5 SUSPICIOUS TRANSACTIONS

The banks/DFIs should pay special attention to all complex, unusually large transactions, and all unusual patterns of transactions, which have no apparent economic or visible lawful purpose. Examples of such suspicious transactions are listed at Annexure-IX. However, these are not intended to be exhaustive and only provide examples of the most basic ways in which money may be laundered. The back ground and purpose of such transactions should, as far as possible, be examined, the findings established in writing, and be available to help the relevant authorities in inspection and investigation. 2. If the bank/DFI suspects, or has reasonable grounds to suspect, that funds are the proceeds of a criminal activity or terrorist financing, it should report promptly, its suspicions, through Compliance Officer of the bank/DFI to Director General, Financial Monitoring Unit, Karachi. The report should contain, at a minimum, the following information: a) Title, type and number of the accounts. b) Amounts involved. c) Detail of the transactions. d) Reasons for suspicion. State Bank has been encouraging banks/DFIs to make use of technology and upgrade their systems and procedures in accordance with the changing profile of various risks. Accordingly, all banks/DFIs are advised to implement systems which could flag out of pattern transactions for reporting suspicious transactions. The existing list of examples of suspicious transactions as Annexure-IX is supplemented with the enclosed list of characteristics of financial transactions that may be a cause for increased scrutiny as Annexure-X. 3. The employees of the banks/DFIs are strictly prohibited to disclose the fact to the customer or any irrelevant quarter that a suspicious transaction or related information is being reported for investigation. 4. In cases of foreign branches of the banks/DFIs and subsidiaries of the banks/DFIs in foreign countries undertaking banking business, the banks/DFIs would ensure compliance with the regulations (relating to Anti Money Laundering and KYC) of State Bank of Pakistan or the relevant regulations of the host country, whichever are more exhaustive.

Q.4 What is reporting? Please discuss with special reference to Prudential Regulations and NAB Ordinance 1999. (10) NAB Ordinance 1999Notwithstanding anything contained in any law for the time being in force, it
shall be the duty of all banks and financial institutions to take prompt and immediate notice of all unusual or large transactions 1[in an account], which have no apparently genuine economic or lawful purpose and upon bonafide professional judgment of the Bank 2[or financial institution] that such transactions could constitute or be related to 3[an offence under this Ordinance], the manager or director of such 4[Bank or] financial institution shall report all such transactions to the Chairman NAB forthwith by the quickest possible mode of communication to be confirmed in writing.

Q.5 Correspondent Banking continues to pose the biggest threat to banking system. Please discuss the proposition with reference to money laundering and its countermeasures under Prudential Regulation No.4 (Correspondent Banking) and FAFT recommendations No.21 and 22. (10)
REGULATION M-4 CORRESPONDENT BANKING The banks/DFIs shall gather sufficient information about their correspondent banks to understand fully the nature of their business. Factors to consider include:

t and ownership

vention and detection measures

(i.e. in case of payable through accounts) ts country

2. The banks/DFIs should establish correspondent relationships with only those foreign banks that have effective customer acceptance and KYC policies and are effectively supervised by the relevant authorities. 3. The banks/DFIs should refuse to enter into or continue a correspondent banking relationship with a bank incorporated in a jurisdiction in which it (the correspondent bank) has no physical presence and which is unaffiliated with a regulated financial group (i.e., shell banks). The banks/DFIs should also guard against establishing relations with correspondent foreign financial institutions that permit their accounts to be used by shell banks. 4. The banks/DFIs should pay particular attention when continuing relationships with correspondent banks located in jurisdictions that have poor KYC standards or have been identified by Financial Action Task Force as being noncooperative in the fight against money laundering. 5. The banks/DFIs should be particularly alert to the risk that correspondent accounts might be used directly by third parties to transact business on their own behalf (e.g., payable-through-accounts). In such circumstances, the banks/DFIs must satisfy themselves that the correspondent bank has verified the identity of and performed on-going due diligence on the customers having direct access to accounts of the correspondent bank/DFI and that it is able to provide relevant customer identification data upon request to the correspondent bank/DFI. 6. Approval should be obtained from senior management, preferably at the level of Executive Vice President or equivalent, before establishing new correspondent banking relationships.

Q.6 SEC-AML unit was sufficient to monitor the financial transactions in the corporate sector including banks and SBP Financial Monitoring Unit is burden on the exchequer? Please argue for or against keeping in view their respective functions. (10)
IVTS type Hawala Hundi Fei ch'ien Hui k'uan Ch'iao hui Phoe kuan Nging sing kek Chop shop Chitibanking India Pakistan China Mandarin Chinese Mandarin Chinese Thailand Tae Chew and Cantonese Chinese (foreigners) Chinese (British) Used by foreigners for one of the Chinese methods Short for "chitty" originated from the Hindi "chitthi", a signifying mark Origin Meaning Trust, reference, exchange; The Arabic root h-w-l means to "change" or "transform" Trust, bill of exchange, derived from Sanskrit root meaning "to collect" Flying money To remit sums of money Overseas remittance

IVTS type Hui or huikuan Stash house

Origin Vietnamese in Australia South America Association For casa de cambrio

Meaning

Q.7 Define informal value transfer system and identify four of them with special reference to their features. (10)
An informal value transfer system (IVTS) is any system, mechanism, or network of people that receives money for the purpose of making the funds or an equivalent value payable to a third party in another geographic location, whether or not in the same form. Informal value transfers generally take place outside of the conventional banking system through non-bank financial institutions or other business entities whose primary business activity may not be the transmission of money. The IVTS transactions occasionally interconnect with formal banking systems, for example, through the use of bank accounts held by the IVTS operator.

Q.8 KYC relied heavily upon CNIC. Please refer to at least three instances where a bank may be dodged by a fake or forged CNIC. (10) Q.9 What is mutual legal assistance and what are its limitations in cross border investigations? (10)
Mutual Legal Assistance is the provision of assistance on a formal legal basis, usually in the gathering and transmission of evidence, by an authority of one country to an authority in another, in response to a request for assistance. "Mutual" simply denotes the fact that assistance is usually given in the expectation that it would be reciprocated in like circumstances, although reciprocity is not always a precondition to the provision of assistance. Obstacles to effective co-operation include the principle of dual criminality, where one State will only execute a request for assistance from another only where the offence under investigation is also an offence in the requested state; the principle of speciality, whereby the information obtained can only be used for the requested purpose; some offshore jurisdictions limit the scope of their co-operation where the offences involved are fiscal in nature; and States sometimes limit their co-operation to certain types of criminal offences; also some countries do not recognize freezing orconfiscation orders made in another country. To ensure the effective tracing, freezing, seizure, confiscation and return of assets full use must be made of the available Treaties and Conventions that enable mutual legal assistance to be rendered. To this end, countries must be encouraged to sign up to international mutual assistance treaties and/or to negotiate multi- or bi-lateral treaties. To freeze assets, to obtain evidence for a prosecution or to have a forfeiture or a confiscation order enforced, a Letter of Request has to be prepared asking for enquiries, actions etc to be carried out, and sent to the Competent Authority of the country who is to execute the enquiries requested to be made.

Q.10 Mr. ABC, a bank officer in XYZ bank, is arrested for reporting on an account which ultimately proved false. The account assigned to Mr. Nobel a real estate tycoon, who is also a member of the parliament, remained frozen for months that incurred substantial losses. The incident was picked up by the electronic media who repeatedly broadcast it over the national and international network. How would you will defend Mr. ABC and XYZ Bank against the prosecution charge of negligence and the claim for damages? (10)