FIN573: The Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful

Part A Compulsory Question Question 1

The Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (AMLA) which was enforced on 15 January 2002 had a profound effect on the battle against money laundering (ML) as ML is now classified as a crime where previously it was not.

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Following its enforcement, numerous investigations were conducted by Law Enforcement Agencies (LEAs) including Bank Negara Malaysia (BNM) and tble Royal Malaysian Police with assets worth more than RM1.2 billion were seized and close to RM0.5 billion frozen between years 2019 and 2020. The Financial Intelligence and Enforcement Department (FIED) of BNM acts as the core facilitator for the implementation, enforcement and coordination of the ML activities locally and globally, as well as countries within the Asian region.

With the global reach and exponential growth of ML/TF in recent years, the trend of using shell companies to hide the true identity of the legal person behind such activities is becoming more prevalent. This had resulted in the ambit of CDD under AMLA being expanded to cover Government-Linked Companies (GLCs) and State-Owned Companies (SOCs), besides the private companies.

However, greater use of e-commerce platforms by banks for virtual account opening and online banking for payments via electronic funds transfers has made customers’ verification process more complex. This has resulted in AMLA allowing for the use of risk­ based Expanded Verification Method

You, being the Chief Compliance Officer of Bank X, are concerned with the recent increase in ML activities relating to the use of shell companies and the opening of bogus accounts to launder money.

This was following an update received from your Designated Compliance Officer (DCO) based in the Johore Bahru (JB) branch where a prominent local businessman and his two sons were being sought by the police for links to an elaborate web of scams facilitated by the setting up of shell companies using drug addicts as directors to launder money and investing their ill-gotten gains in a mall in JB, purchasing 100 units of high-end condominiums in Penang, as well as other properties in Kuala Lumpur (KL) and Thailand.

The same family was also involved in a Macau scam that raked in millions which were used to invest in fixed assets and cryptocurrencies in excess of RM336 million. At least 12 suspects related to this case had been arrested, including several company directors based in Penang and KL. Bank X also has branches in all these cities.

Although the accounts were not maintained with any of Bank X’s branches, you were specifically concerned with the internal AMLA procedures relating to the level of scrutiny and due diligence applied in the account opening process as well as the procedures to properly ascertain the legal person or beneficial owners behind these accounts; as well as the level of staff understanding on how to respond when served with a Seizure Order under Section 50, and Freezing Order under Section 44(1) of AMLA.

This was especially important as the AMLA also contains provisions on the actions that must be taken by Fis in implementing compliance programs that are able to detect and prevent money laundering and the penalty for non-compliance.

In your monthly Compliance update to the Board of Directors, the Board members had pointed out to you the similarities of what had recently happened in JB as reported by your DCO, to the ongoing court case relating to a GLC and the severe financial impact sustained by a local bank which had to pay billions of Ringgit in global settlement to the government due to AMLA breaches. The Board had also asked you to obtain further details on the modus operandi of this fraud and update the Board in its next meeting.

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a. In order to be able to provide an update to your Board, you would like to request the affected financial institution to share details on the fraud as this is allowed for under the

i.Discuss the safeguards that you have to ensure is in place prior to receiving the information

ii. Elaborate on the KEY information that you should provide when seeking such approval from the regulator

b. Explain the benefits to the banking industry as a whole, arising from the criminalisation of money laundering offences arising from the enforcement of

c. From the case study, the application o(Freezing Order and Seizure Order under AMLA have proven to be very effective in recovering the ill-gotten gains However, there are practical challenges faced by financial institutions in complying with these

i. Discuss some of the challenges faced by financial institutions in complying with these Orders.

ii. As the CCO of Bank X, explain the actions you will take if you receive a High Court Order to pay all the monies in an account to a third party identified by the court while the1·e is an existing Freezing Order under Section 44(1) on the account.

d. As the fight against money laundering is global in nature, discuss the initiatives available! Malaysia in combating ML/TF at the international

Pan: B – Compulsory Question 2

You are the AML compliance officer of Age Bank in Malaysia A freezing order pursuant to S44(1) of Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (AfVlLA) had been served on a corporate customer, Kaya Saya Sdn. Bhd. (KS) by the Police Diraja Malaysia on 2 February 2021. You have immediately communicated the freeze order to the affected branches for action.

Arising from this triggering event, you performed an Enhanced Due Diligence (ECDD) on all entities related to KS which have a banking relationship with Age Bank.

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Below is the profile of KS:

  • Incorporated in the year 1993, KS is principally engaged in the exporting of various chemicals and The factory is in Muar, Johar. The sales breakdown between chemicals and batteries are 70% and 30% respectively.
  • The group has successfully established a stable operating track record since incorporation. 90% of its products are catered for the export market, whereby the transactions are denominated in
  • Currently, their export markets include North America, Saudi Arab, Russia, Ukraine, Iran and
  • Its clientele base comprised of medical suppliers, healthcare services and distribution companies, vehicle
  • The shareholders are Mr Andrew Ng and Mr Afizi (business partner relationship) who hold 16% and 84% of the shareholding
  • The sole decision-maker is Mr Afizi who has been in this industry for the past 20
  • Sales based on financial year (FY) 2020 was RM245 million, comprising of export (85%) and local (15%).
  • Net profit based on FY 2020 was RM10,000.
  • Purchases based on FY 2020 amounted to RM60 The purchases of raw materials comprised 10% of imports and the remaining 90% comprised local purchases of chemical and packaging materials.
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Currently, the exposures to KS Group entities are as below:

Name

Facilities

Balance/Outstanding Balance as at

2 February 2021

Kaya Saya Sdn. Bhd.

Ringgit current account RM1,520,300.25
USD foreiqn currency account USD98,098.00
10-year term loan RM5,768,990.00
Trade financing line RM769 ,990.00
Kaya Nima Sdn. Bhd.

(100% owned subsidiary of KS)

Ringgit current account RM54,908.00
Revolving loan RM2,345,900.00

  • Based on the on-boarding and ongoing customer due diligence process of the Age Bank, the following had already been conducted on KS and its subsidiary:
  • Verified identification documents of KS, its shareholders, directors and authorised signatories;
  • Sighted Board resolution;
  • Screened names of KS, its shareholders, directors and authorised signatories;
  • Sighted other supporting documents i.e. bank statements issued by other banks in Malaysia;
  • On daily basis, the transaction patterns of the customer will be screened via a surveillance system to ensure transaction patterns match the profile of the customer. So far, no suspicious transactions were noted.
  • KS group entities are rated as low risk on the basis that the companies are all incorporated locally, no adverse news reported on these companies, no involvement of Politically Exposed Persons (PEPs) and the nature of business is

For ECDD, you had requested your team to perform additional reviews as below:

  • Internal research on KS and related parties;
  • Review past 5 years’ annual financial reports of KS and its subsidiary; and
  • Interview Mr Andrew and Mr

The outcomes of the ECDD discovered that:

  • there are informal reports on the internet that KS group entities have been actively dealing with entities related to North Korea and Iran; and
  • the annual revenue and pricing of KS Group appeared to be very much lower than companies involved in similar activities.

The findings had alerted you that KS Group may be involved in proliferation financing activities.

a. Based on the definition of proliferation financing, elaborate the attributes of KS Group entities that match the potential proliferation financing

b. Discuss four (4) main areas for improvements in the AML program of Age Bank and what are your proposed controls to close the gaps.

c. Highlight two (2) laws/regulations/guidelines related to combating proliferation financing for which Age Bank in Malaysia is required to comply with and elaborate on the role of the Competent Authority that manages s the financial intelligence received on proliferation financing related

d. Quote one (1) case each relating to terrorist financing and proliferation Discuss briefly the lessons learned from the cases quoted. (5 marks)

Part C – Choose ONE of the following questions

Question 3

“In the year 2012, the Financial Action Task Force (FATF) updated its Recommendations to strengthen global safeguards and to further protect the integrity of the financial system by providing governments with stronger tools to take action against financial crime.”

One of the most important changes was the increased emphasis on the RBA to AML/CFT, especially in relation to preventive measures and supervision. While the 2003 Recommendations provided for the application of an RBA in some areas, the 2012 Recommendations consider the RBA to be an ‘essential foundation’ of a country’s AML/CFT framework. This is an over-arching requirement applicable to all relevant FATF Recommendations.

According to the introduction to the 40 Recommend collations. the RSA :

‘allows countries, within the framework of the FATF requirements, to adopt a more flexible set of measures in order to target their resources more effectively and apply preventive measures that are commensurate to the nature of risks, in order to focus their efforts in the most effective way’. (FATF- Guidance for a Risk-Based Approach- The Banking Sector-2014)

Senior Management plays an important role in the successful implementation of RBA in any organisation.

Based on the above Guidance published by FATF, you are required to attend to the following :

a. What is your understanding of RBA in AML/CFT?

b. Discuss the role of Senior Management in ensuring the successful implementation of the RBA in your bank.

c. Explain the potential benefits and challenges faced by Reporting Institutions when applying the RBA to their AML/CFT programme

Question 4

“Terrorist organisations vary widely, ranging from large, state-like organisations to small, decentralised and self-directing networks. Terrorist financing requirements reflect this diversity, varying greatly between organisations. Financing is required not just to fund specific terrorist operations, but to meet the broader organisational cost of developing and maintaining a terrorist organisation and to create an enabling environment necessary to sustain their activities.

Terrorists have shown adaptability and opportunism in meeting their funding requirements. Terrorists. organisations raise funding from legitimate sources, including the abuse of charitable entities or legitimate businesses or self-financing by the terrorists themselves. Terrorists also derive funding from a variety of criminal activities ranging in scale and sophistication from low-level crime to organised fraud or narcotics smuggling, or from state sponsors and activities in failed states and other safe-havens.

Terrorists use a wide variety of methods to move money within and between organisations, including the financial sector, the physical movement of cash by couriers, and the movement of goods through the trading system. Charities and alternative remittance systems have also been used to disguise the terrorist movement of funds. The adaptability and opportunism shown by terrorist organisations suggest that all the methods that exist to move money around the globe are to some extent at risk.” (FATF Terrorist Financing Report)

a. Based on the statement from the above FATF report, examine the typologies and techniques known to be used by terrorists and terrorist organisations to source the financing of their activities.

b. Discuss the challenges faced by Law Enforcement Agencies (LEAs) and Reporting Institutions (Rls) in combating TF.

3. Review the measures that need to be in place to combat TF.

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