In the first article on this subject published on September 9, 2017 the relevance and changed perspective of anti-money laundering (AML) in today’s world was briefly discussed. That article restricted its scope to the need for synchronization, if required, of the matter of tax evasion and AML which is an urgent issue in principle relating to income tax. In this article, the subject matter is the basic and classical understanding of the concept of money laundering and operation of anti-money laundering (AML) processes. As stated earlier, money laundering is placement, layering and integration of proceeds of crime into regular business and financial system. These acts can have various methods and dimensions. Regulators of AML processes, in principle, are handicapped in the sense that there are billions of commercial and financial transactions that take place in a regular economic/commercial system. Some of them are regulated, in the sense that they are undertaken through banking channels being indirectly monitored and supervised by the central banking regulations of the respective jurisdictions. Others are outside the system; mostly being ‘cash economy’.
Amongst the profoundly large number of transactions that are undertaken in a banking system it is virtually impossible to identify and locate those transactions for which enquiries may be undertaken under the AML regulations. Money laundering, in essence, means attempts to integrate both the systems to project the proceeds of crime as untainted money. This task therefore necessitates a vigilance over ‘regulated transactions’ to forestall such integration. Anti-money laundering operations inherently deal with that process.
Unlike the general perception, as will be observed in the following paragraphs, money laundering has always been conceived as an act involving ‘foreign jurisdictions’ and abuse of foreign exchange regulations. This is a limited aspect of money laundering operations. This perception primarily emanates for the reason that proceeds of crime in many cases, which originate in cash economies of the undeveloped countries, are attempted to be integrated into financial systems of the developed world. That requires and involves movement of funds from one jurisdiction to another. Accordingly, abuse of foreign exchange regulation is perceived as an integral part of an AML process. That perception is not wholly correct.
To summarize this aspect it is stated that anti-money laundering processes can be undertaken without involving foreign jurisdictions; however, under the present integrated world, in most of the cases, that processes also involve inter-jurisdiction transactions. As stated in Part 1 of this article, we have stated that the AML Act, 2010 covers both the situations being (i) origination of proceed of crime in one jurisdiction and projection of same as untainted money in the same jurisdiction; and (ii) origination of projections in different jurisdictions. An act of money laundering, under the AML Act, 2010 can be undertaken with or without movement of funds out of Pakistan.
Money laundering regulations ‘per se’ do not restrict their scope to regulated banking and documented transactions, however, as stated earlier the purpose of money laundering is to ‘assimilate’ the property being the proceed of crime into regular system therefore it is assumed [and rightly so] that a money launderer will ultimately use the documented system for such ‘assimilation’. Accordingly, in almost all the AML regulations, the ‘Ultimate Destination Approach’ is used. Under that approach transactions in banking system are traced back to identify the ‘precedent acts’ which may be a part of a money laundering scheme. Accordingly, all the anti-money laundering regulations are designed to curtail such abuse. Thus, the first step in that process is to identify the transactions that can be ‘suspicious’. In Pakistan, this ultimate aspect is laid down in regulations in the following manner:
Under Section 7 of the Anti-Money Laundering Act, 2010 ‘suspicious transaction’ has been defined as a transaction that:
(i) involves funds derived from illegal activities or is intended or conducted in order to hide or disguise proceed of crime;
(ii) is designed to evade any requirement of this section;
(iii) that has no apparent lawful purpose after examining the available facts, including the background and possible purpose of the transaction; or
(iv) involves financing of terrorism, including funds collected, provided, used or meant for, or otherwise linked or related to, terrorist acts or organizations and individuals concerned with terrorism.
This is a very wide definition. In fact, financing of terrorism is a feature in addition to general concept of money laundering. This matter has been added after 9/11. As stated earlier, the first part of the exercise is to identify the proceeds of crime as defined in the AML Act 2010. Sub-section (iii) and (iv) are essentially the matter beyond the ‘proceeds of crime’ as referred to in sub-section (i). In this case any transaction where there is no apparent reason and purpose of transaction can be treated as suspicious transaction. This wide extent of the subject may lead to subjectivity in decision making as a regular banking transaction, may not provide adequate answer to the question being raised in the section. This is a very serious issue for the persons engaged or dealing with transactions as the available information and background details of the customers [parties] available with that person cannot necessarily provide assertions ultimate necessary to this effect. There is a need for to proper synchronization on this subject that has been discussed in the following paragraphs. It is important to note that India’s Prevention of Money Laundering Act, 2002 does not include any term by the name of ‘Suspicious Transaction Report’. In the following discussion we will like to discuss the concept in common parlance to provide general understanding to the readers:
This aspect of suspicious transaction has been discussed in Anti-Money Laundering Regulations 2015 in Appendix 11. That description provides a practical meaning to understand comprehensively the first part of AML exercise being identification of suspicious transactions. Under these regulations suspicious transaction may be :
(i) A transaction which do not make economic sense;
(ii) A transaction that is inconsistent with the customers’ business;
(iii) A transaction involving large about of cash;
(iv) A transaction involving structuring to avoid reporting and identification requirements;
(v) A transaction involving various accounts;
(vi) A transaction involving transfers to and from abroad;
(vii) Investment related transactions;
(viii) Transactions involving unidentified parties;
(ix) Transactions involving embassy and foreign consulate accounts.
The guiding factors identified in the aforesaid regulations provide a road map to reach a conclusion. These guidelines would have to be applied in relation to Section 7 of the Act described earlier. An isolated reading will be misplaced.
The AML Regulations 2012 includes as a part of legislation reference to the Financial Action Task Force (FATF). The FATF is an inter-governmental body whose purpose is the development and promotion of policies, both at national and international levels, to combat money laundering and terrorist financing. According to their guidelines the suspicious transactions are those where:
— Activity is inconsistent with the customer’s business;
— There is large number of incoming and outgoing of funds; and
— Transactions are inherently unusual in character.
In a nutshell, under both these regulations, STR would represent unusual and extraordinary transactions without legal economic substance. In the following articles we will further dilate on the subject of identification with reference to national and international standards and practices. The reporting requirements and jurisdiction in relation to AML Regulations 2012 are:
“3. Jurisdiction for reporting of suspicious transactions and currency transactions.- (1) FMU is the only designated agency in Pakistan to which suspicious transaction reports (STRs) and currency transaction reports (CTRs) shall be made.
(2) The FMU shall, after analyzing the transactions, refer any report of a suspicious or currency transaction including analysis to any appropriate investigating or prosecuting agency for use in the conduct of inquiry, investigation, prosecution, intelligence or counterintelligence activities, including in respect of potential cases of money laundering or terrorist financing. Provided that the report disseminated by FMU under this clause shall be treated confidential.
(3) Nothing in clause (1) shall be construed as precluding supervisory agency for a financial institution from requiring the financial institution to submit any information or report in the normal course of business under other applicable laws.
4. Reporting of suspicious transactions. -. (1) In addition to financial institutions, Director General may, under the Act, require any NFBP to report suspicious transaction to FMU” in the manner as he may, from time to time, prescribe.
(2) Every financial institution and such NFBP (non-financial business and profession) as required under clause (1) shall file with FMU on the prescribed format as annexed (appendix-l), STR effected or attempted by, at or through that financial institution or NFBP if the financial institution or NFBP knows, suspects, or has reason to suspect that the transaction (or a /pattern of transactions of which the transaction is a part) involves funds derived from illegal activities or is, intended or effected in order to hide or disguise proceeds of crimes or is designed to evade any’ requirements of section 7 of the Act or has no apparent lawful purpose after examining the available facts, including the background and possible purpose of the transaction or concerns financing of terrorism. A guide containing examples of possible suspicious transactions and characteristics of financial transaction that may be a cause for increased scrutiny is given in Appendices – III to VIII.
(3) The STR ]STRs] shall be Tiled [filed] by financial institutions and designated NFBPs immediately but not later than seven working days after forming that suspicion in respect of a particular transaction, irrespective of the fact that the transaction was followed through or not.”Syed Shabbar Zadi, "AML regulations and fiscal laws – II," Business Recorder. 2017-09-15.
Keywords: Social science , Money laundering , Financial system , customer business , Financial institution , Pakistan , FATF , AML