SHORT NOTES 2 KYC AML

 SHORT NOTES  2 KYC AML

5. Terrorism Financing are 3 types



A.    State financing: Separate entities are created with organizational and financial support of the state

B.    Legimate modes : Donations by business,individuals and charity funds

C.    Private funding:by criminal activities by bank robberies, drug trafficking, kidnaps,exortion..



6. Money laundering can take several forms, although most methods can be categorized into one of a few types. These include "bank methods, smurfing [also known as structuring], currency exchanges, and double-invoicing".

 Structuring: Often known as smurfing, this is a method of placement whereby cash is broken into smaller deposits of money, used to defeat suspicion of money laundering and to avoid anti-money laundering reporting requirements. A sub-component of this is to use smaller amounts of cash to purchase bearer instruments, such as money orders, and then ultimately deposit those, again in small amounts.

·         Bulk cash smuggling: This involves physically smuggling cash to another jurisdiction and depositing it in a financial institution, such as an offshore bank, with greater bank secrecy or less rigorous money laundering enforcement

·         Cash-intensive businesses: In this method, a business typically expected to receive a large proportion of its revenue as cash uses its accounts to deposit criminally derived cash. Such enterprises often operate openly and in doing so generate cash revenue from incidental legitimate business in addition to the illicit cash – in such cases the business will usually claim all cash received as legitimate earnings. Service businesses are best suited to this method, as such enterprises have little or no variable costs and/or a large ratio between revenue and variable costs, which makes it difficult to detect discrepancies between revenues and costs. Examples are parking structures, strip clubs, tanning salons, car washes, arcades, bars, restaurants, and casinos.

·         Trade-based laundering: This involves under- or over-valuing invoices to disguise the movement of money. For example, the art market has been accused of being an ideal vehicle for money laundering due to several unique aspects of art such as the subjective value of artworks as well as the secrecy of auction houses about the identity of the buyer and seller.

·         Shell companies and trusts: Trusts and shell companies disguise the true owners of money. Trusts and corporate vehicles, depending on the jurisdiction, need not disclose their true owner. Sometimes referred to by the slang term rathole, though that term usually refers to a person acting as the fictitious owner rather than the business entity.

·         Round-tripping: Here, money is deposited in a controlled foreign corporation offshore, preferably in a tax haven where minimal records are kept, and then shipped back as a foreign direct investment, exempt from taxation. A variant on this is to transfer money to a law firm or similar organization as funds on account of fees, then to cancel the retainer and, when the money is remitted, represent the sums received from the lawyers as a legacy under a will or proceeds of litigation.

·         Bank capture: In this case, money launderers or criminals buy a controlling interest in a bank, preferably in a jurisdiction with weak money laundering controls, and then move money through the bank without scrutiny.

·         Casinos: In this method, an individual walks into a casino and buys chips with illicit cash. The individual will then play for a relatively short time. When the person cashes in the chips, they will expect to take payment in a check, or at least get a receipt so they can claim the proceeds as gambling winnings.

·         Other gambling: Money is spent on gambling, preferably on high odds games. One way to minimize risk with this method is to bet on every possible outcome of some event that has many possible outcomes, so no outcome(s) have short odds, and the bettor will lose only the vigorish and will have one or more winning bets that can be shown as the source of money. The losing bets will remain hidden.

·         Real estate: Someone purchases real estate with illegal proceeds and then sells the property. To outsiders, the proceeds from the sale look like legitimate income. Alternatively, the price of the property is manipulated: the seller agrees to a contract that underrepresents the value of the property, and receives criminal proceeds to make up the difference.

·         Black salaries: A company may have unregistered employees without written contracts and pay them cash salaries. Dirty money might be used to pay them.

·         Tax amnesties: For example, those that legalize unreported assets and cash in tax havens.

·         Life insurance business: Assignment of policies to unidentified third parties and for which no plausible reasons can be ascertained.

·         By using national banking services smurfing, Muiltiple tier of accounts,funnel accounts,Contra transactions,DD,cash depost and transfer fund connected accounts, front companies, legimate accounts, dormant accounts(Mostly used by terrorists) and wire transfer

·         Using remittance ,prepaid cards, money changers,credit and debit cards

By using The credit card industry includes: case study


 Credit card associations, such as American Express,MasterCard and Visa, which license member banks toissue bankcards, authorize merchants to accept thosecards, or bothIssuing banks, which solicit potential customers and issue the credit cards.Acquiring banks, which process transactions for merchants who accept credit cards.
 Third-party processors, which contract with issuing or acquiring banks to provide transaction processing andother credit card–related services for the banks.Credit card accounts are not likely to be used in the initialplacement stage of money laundering because the industrygenerally restricts cash payments. They are more likely to be usedin the layering or integration stages.
Example
Money launderer Josh prepays his credit card using illicit funds that he has already introduced into thebanking system, creating a credit balance on his account. Josh then requests a credit refund, whichenables him to further obscure the origin of the funds, which constitutes layering. Josh then uses the illicitmoney he placed in his bank account and the creditcard refund to pay for a new kitchen that he bought.Through these steps he has integrated his illicit fundsinto the financial system.

·         A money launderer could put ill-gotten funds in accounts at banksoffshore and then access these funds using credit and debitcards associated with the offshore account. Alternatively, he couldsmuggle the cash out of one country into an offshore jurisdictionwith lax regulatory oversight, place the cash in offshore banks and— again — access the illicit funds using credit or debit cards.In a 2002 Report called “Extent of Money Laundering throughCredit Cards Is Unknown,” the U.S. Government AccountabilityOffice, the Congressional watchdog of the United States, offered hypothetical money laundering scenarios using credit cards. One
example was: “[Money launderers establish a legitimate businessin the U.S. as a ‘front’ for their illicit activity. They establish a bank account with a U.S.-based bank and obtain credit cards and ATM cards under the name of the ‘front business.’ Funds from theirillicit activities are deposited into the bank account in the United States. While in another country, where their U.S.-based bank hasaffiliates, they make withdrawals from their U.S. bank account,
using credit cards and ATM cards. Money is deposited by one of their cohorts in the U.S. and is transferred to pay off the credit cardloan or even prepay the credit card. The bank’s online services make it possible to transfer funds between checking and creditcard accounts.”



6.ML Global measures can be achieved by



A.    Engagement of international organizations

B.    UNO initiatives like Vienna convention in 1988, Political declaration in 1998  , The Palermo convention in 2003

C.    International monetary fund

D.    Financial intelligence units (In india 15th nov 2004 , Director EIU economic intelligence council, Headed by finance Minister)

E.    Egmont group of FIUs..1995 (151  FIUs)