Customer due diligence (CDD) mandate and the propensity of its application as a global AML paradigm

Author:Norman Mugarura
Position:Global Action Research and Development Initiative Limited, Barking, UK

Purpose – It has become customary for states or regulatory domains to come together and evolve normative regimes to deal with overlapping exigencies such as money laundering. Over the past two decades, there has been a proliferation of global AML laws designed to foster international cooperation against money laundering and its predicate crimes. In this same vein, some states have adopted domestic AML laws designed with an ethos of... (see full summary)

I The evolution of a global AML paradigm

The global AML paradigm has been fostered through the proliferating AML regimes either at a state or at an international level. For instance, the Bank Secrecy Act (BSA) in (1970) in the USA was geared towards addressing bank secrecy laws operated not only in the USA but also in offshore financial centers ( Shams, 2006 ). Bank secrecy laws were being exploited by money launderers and tax evaders to move illicit proceeds of crime beyond the reach of domestic authorities. The UN Vienna Convention (1988) on Drug Trafficking and Other Psychotropic Substances (1988) was adopted as a robust response to address the problem of drug trafficking internationally ( Shams, 2006, n 2 ). The antecedents of the United Nations Carlson (2004) s were a series of General Assembly resolutions1 where the concern over drug abuse was expressly discussed by delegates from many national governments. The drug abuse and trafficking was viewed as an increasing concern internationally. This led to the adoption of UN General Assembly Resolution 39/141 of December 1984 entitled “Draft Convention against Trafficking in Narcotic Drugs and Psychotropic Substances”2. The Securitization of Drug abuse and Trafficking through their conceptualization as a threat and prioritisation of the adoption of counter-measures resulted in the call for a specialised conference ( Anderson, 1989 ) to deal with the fight against drug trafficking. Adopting a similar securitisation discourse, the then Secretary General of United Nations3 stated that existing resources were inadequate to deal with the drug plague, which was contaminating, corrupting and weakening the very fabric of society4. In December 2000, the United Nations Convention against Transnational Organised Crimes and its attended three protocols were adopted in Palermo. Palermo Convention not only addresses the definitional limits of ML by Vienna Convention (1988) but it also creates four additional specifically on internalisation of crimes: participation in organised criminal groups, money laundering, corruption and obstruction of justice. Palermo Convention also streamlines modalities for extradition of wanted criminals: through mutual legal assistance, law enforcement and cooperation in the area of information exchange5. After UN Convention on Organised Transnational Crimes in Palermo (Italy) in 2000, the scope of what constituted ML was expanded to capture financial crimes such as bank fraud6, credit card fraud, investment fraud, advance fee fraud, bankruptcy, fraud, embezzlement which were the most mentioned sources of proceeds of crime ( FATF, 2005 ). The EU Council of Ministers approved the revisions of the EU's AML to reflect necessary changes in Europe7. The Directive broadens the definition of targeted criminal activities from drug offences (as per the original Directive) to include proceeds from other crimes8. Many countries have now taken positive action to extend the scope of their ML offences based the expanded scope of ML activities under Palermo Convention (2000).

II The use of legislative measures in the USA to fight ML globally

The early AML initiatives started with enactment of BSA 1970 which created a framework of rules for banks and regulatory authorities on varied issues in relation to money laundering in the USA. Most significantly, the BSA introduced severe obligations on financial institutions to know who their customers are at the point of initiating customer relationship but also creates enforcement regimes. Banks were required to generate and keep records (also known as the Currency and Foreign Transactions Reporting Act or CTR) on their customers ( Sunha, 2013 ). Hence, financial institutions in the USA would work closely with US government agencies to detect and prevent money laundering. Financial institutions were required to keep records of cash purchases of negotiable instruments, and file reports of cash purchases of these negotiable instruments of more than $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities9. The primary purpose of BSA was to safeguard financial institutions from being exploited by criminals as avenues to perpetuate financial crimes such as money laundering and tax evasion. BSA required financial institutions to generate CTR of cash in excess of $10,000 during the same business day. The amount over $10,000 can be either in one transaction or a combination of cash transactions. They must also indicate cash purchases of monetary instruments, such as money orders, cashier's checks and traveler's checks, in value totaling $3,000-$10,000, inclusive. This form is required to be kept on record at the financial institution, and produced at the request of examiners or audit to verify compliance. Financial institutions are required to keep Suspicious Activity Report (SAR) on any cash transaction where the customer seems to be trying to avoid BSA reporting requirements by not filing CTR or MIL, for example. A SAR must also be filed if the customer's actions suggest that he is laundering money or otherwise violating federal criminal laws and committing wire transfer fraud, check fraud or mysterious disappearances.

Money Laundering Control Act (MLCA) (1986) was adopted to streamline and strengthen the application of BSA especially in areas of enforceability of engendered reporting regimes. For instance, criminals were able to circumvent reporting rigors by restructuring transactions to fall below reporting thresholds (a practice that became popularly known as smurfing) ( Sunha, 2013, n 17 ). The MLCA created the following ML offences for deliberately avoiding reporting requirements under the BSA ( Summe, 2007 ). It also created an offence of knowingly, aiding a criminal to launder money; knowingly engaging in a financial transaction in excess of US$10,000 with proceeds from criminal activity. It stipulates that any person who engages in activities either knowingly or had reason to believe that involved proceeds of crime would be prosecuted ( Summe, 2007, n 17 ). The MLCA was designed with an extra-territorial reach to impose severe penalties on none US financial institutions deemed complicit in its violation. Section 1956(f) of MLCA empowers US Federal Authorities to impose severe sanctions on other countries in violation of its provisions ( Summe, 2007, n 17 ). However, the extra-territoriality ethos of the foregoing legislation precipitated simmering tensions between the USA and other countries. The USA would then influence the adoption of UN Convention on Illicit Narcotic Drug Trafficking and Psychotropic Substances in Vienna (1988), and the FATF (1989) in Paris ( Mugarura, 2012 ). The USA recognized that owing to the international character of money laundering crimes, it could not be defeated through robust domestic Legislation alone ( Mugarura, 2012, n 20 ). As a hegemonic power, the USA has always brought its influence to bear on evolution of International Law10. I suppose this is little surprising given that “when USA sneezes, every other country catches a cold?” In the revised FATF 40 plus 9 recommendations (2003), financial institutions are required to maintain, for at least five years necessary records on transactions, both domestic and international so that they are able to comply swiftly with information requests from the competent authorities. Such records should be sufficient to permit reconstruction of individual transactions. Records generated in the course of customer identification (e.g. copies or records of official identification documents like passport, identity cards, driving licence or similar documents), accounts files and business correspondence have to be maintained for at least five years after the account is closed.

The USA Patriot (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism) (2001) was enacted in response to terrorist attacks in the USA on 9/11/2001. In relation to money laundering, the relevant section is “Title III” of the Act. This section is designed specifically to addresses international money laundering and financing of terrorism using US or foreign financial institutions. The Act introduced drastic changes in US AML framework to undercut funding of organized terrorism through financial institutions and other organizations ( Preston, 2002 ). Prior to the enactment of the foregoing Act, the BSA disclosure requirements were limited only to a list of registered financial institutions11. It introduced enhanced CDD programmes to be carried on all banks customers especially those who are perceived to pose a significant risk US national security. The exorbitant powers wielded by law enforcement agencies in enforcement of AML provisions under the Patriot Act have been perceived as a retreat from fundamental freedoms and rights of US nationals enshrined in the USA constitution ( Fisher et al., 2005 ). The Act provide enormous powers to (by virtue of Section 311) the US Secretary of State to the Treasury to disallow financial institutions perceived to pose serious risks to the US national security. The seemingly obnoxious provision is the extension to US AML regimes to foreign jurisdictions. Foreign financial institutions are required to...

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