The Red Flags of Money Laundering and Malaysian Cases on Money Laundering

Master in Forensic Accounting and Financial Criminology AFC 738 – Money Laundering and Specialized Fraud

The Red Flags of Money Laundering and Malaysian Cases on Money Laundering

Name: 1) Ameer Shafiq Kamalullail

The red flags of Money Laundering and Malaysian cases on Money Laundering.

It is important to understand what money laundering is, both in general terms and it is defined in the law. The term “money laundering” is in fact misleading and precise, for a number of reasons. Firstly, often it is not money that is involved. It can be any kind of property that directly or indirectly represents the proceeds of crime. If property, whether cash, land, shares, a painting or any other kind of property are derived from the proceeds of someone’s criminal activity, then it comes within the scope of what is meant by money laundering. This is so even part of the property concerned derives from crime. Secondly, the term “money laundering” suggests that criminal property starts out in one form then goes through some sort of laundering process and comes out in a different form. In other words, the term implies that it involves some form of relatively complex transformation process. This encourages the view that the clients who pose a money laundering threat know how to launder money and set out consciously to cleanse it in some way. This view is encouraged by the traditional staged interpretation of money laundering. In fact, property can be laundered very simply without the need for a complex laundering process to be followed. Money laundering simply means doing something in relation to the proceeds of crime that helps someone to benefit from the crime. It need be a clever or complex arrangement. It can be as simple as spending stolen cash in a shop or depositing it in a bank account. Money laundering occurs whenever there is an arrangement which involves the proceeds of another person’s crime. In Malaysia and many other jurisdictions a money laundering offence can arise wherever a person knows or has reason to believe that the property concerned represents his or her own or another’s benefit from criminal conduct, and acquires, possesses or uses it. Consequently a burglar becomes a money launderer as soon as he or she completes the act (burglary) and acquires his or her stolen property. Regardless of whether the burglar sells the stolen property or merely uses it personally, in the eyes of the law the property has still been laundered. It was also mentioned by the Bank Negara Malaysia Deputy Governor Datuk Zamani Abdul Ghani (2010) that, there were ninety four money laundering cases in various stages of prosecution with more than 3,000 charges involving proceeds amounting of RM 1.2 billion. It is important to understand that to be guilty of money laundering you do not have to be in on the crime generated the property. In many jurisdictions you will be guilty if you know or suspect that property represents the proceeds of crime, and yet you get involved in dealing with the property. You do not necessarily have to know who committed the crime, nor precisely what the crime was, nor do you have to have made any specific agreement to help the criminal or his or her associates benefit from the property. The crucial test is whether or not you knew or had reason to believe that the property represented the proceeds of crime. The objective of money laundering is to be able to benefit from the crime and not get caught. This will require disguising the source of the property and altering it into something else. It is important to the criminal not to leave a trail leading back to the crime, or to the property derived from it. As an example, a simple scenario in which a drug trafficker is caught red-handed by law enforcement in possession of RM 250,000 in cash. Even in the absence of any narcotics in his or her possession,

this would be very valuable evidence to law enforcement of this person’s involvement in drug trafficking. Would the situation be any different if the same drug trafficker had managed to successfully deposit the cash into a variety of different bank accounts and the transfer the money into the account of an existing offshore company, wholly owned by an offshore trust, representing it as having resulted from legitimate activity supported by false but credible information? The situation would be very different, and the drug trafficker’s chances of succeeding both in avoiding prosecution and benefiting from the crimes would be greatly enhanced. The underlying crime could, for the purposes of the money laundering laws in most jurisdictions, be any crime that can give rise to the unlawful obtaining of property. This includes fraud, theft, counterfeiting, drug dealing, corruption or bribery, breach of sanctions, people trafficking and tax evasion. In Malaysia, all serious crimes are predicate offences for this purpose (Anti Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001). For predicate offences, Malaysia takes a “list based” approach to the range of predicate offences covered by the money laundering offence. Section 2 (1) of the AMLATPUA applies the provisions of the Act to ‘any serious offence, foreign serious offence or unlawful activity whether committed before or after the commencement date’. The serious offences listed in the Second Schedule to the AMLATPUA contains a number of the designated categories of offences, including offences of corruption, fraud, smuggling, currency counterfeiting, people trafficking and narcotics trafficking. The offence of money laundering includes appropriate ancillary offences. Subsection 4 (1) of the AMLATPUA extends the offence of money laundering to the acts of persons who engage in, or attempt to engage in, or abet the commission of money laundering. The definition of ‘abetment’ under section 107 of the Penal Code includes the conduct of a person who engages with one or more other persons in any conspiracy for the doing of a thing. Sections 120A of the Penal Code defines ‘conspiracy’ as the agreement of two or more persons to do, or cause to be done, an illegal act or an act by illegal means. In Malaysia, cases related to money laundering are arising based on the range of predicate offences covered by the money laundering offence.

AMLA CASES Cheating & Falsification Offence : S.4(1)(a) AMLATFA 2001 Accused : Dr. Hamimah Bt. Idruss Fact of the case : Accused, a medical doctor falsified financial documents and Promissory Notes which resulting a sum of RM 42 million been transferred into her own account. Prosecution against accused was initiated for eight counts of money laundering offences. Assets and property worth RM 34.9 million was seized. Accused was found guilty and sentenced to 8 years of imprisonment for eight count of offences prosecuted. Besides, accused was ordered to pay a sum of RM 5.3 million under a percuriary order.

http://www.thestar.com.my/News/Nation/2012/03/21/Dr-Hamimah-gets-38-years-jailRM639mil-fine-for-money-laundering/ Investment Fraud Offence : S.4(1)(a) AMLATFA 2001 Accused : Dr. Sadeq Faris – CEO Invetq Jaya Fact of the case : Malaysia Ministry of Finance (MOF) invested into a business at Multimedia Super Corridor (MSC) to purchase eight high-tech patients from a company, Reveo Inc. in USA. The investigation revealed the eight technologies that claimed to be a high-tech products are not-viable. Payment been paid by MOF to Reveo (USA) Ltd., Frazer Nash, and Reveo Bangalore. Actions : Seizure of cash amounting to RM 56 million and other assets amounting to RM 2 million. Fortfeiture of property initiated and seized assets return to Malaysia government. http://www.thesundaily.my/node/179545 Offence : Still on trial under BAFIA & AMLATFA Suspects : Tengku Muhaini Sultan Ahmad Shah, Philip Lim Jit Meng, Ahmad Khairuddin Ilias and Tan Lian Keng – (Genneva Malaysia Sdn. Bhd.) Facts of the case : Genneve is undergo trial under several case such as committed fraud and misrepresented the gold scheme as complying with syariah law. BNM had frozen Genneva Malaysia’s cheques, accounts and other assets worth RM99.8 million in cash, as well as seizing 126kg in gold bullion, based on suspicions that the company had broken several banking and financial laws, such as money-laundering, taking deposits without giving gold in return, appointing agents without license, evading taxes, failing to file statutory documents, giving false descriptions on its business, and misrepresenting itself as an investment firm. Cross Border Crimes Offence : S.4(1)(a) AMLATFA 2001 Accused : Sheikh Mohd Aszal (Pakistani) Facts of the case : Accused falsified loan documents and cheated Bank of Punjab, Pakistani for a total sum of 15 billion Rupee. Then, he transferred such money to Malaysia for investment. As the investigation completed, a total sum of RM 15 million and several luxurious vehicles owned by accused were seized. Forfeiture of property under section 56 AMLATFA 2001 was initiated against seized assests and properties owned by accused. Assets and properties worth of RM 15 million was forfeited by court. http://tribune.com.pk/story/353620/nab-rejects-sheikh-afzals-rs3b-plea-bargain-deal-in-bank-ofpunjab-scam/

Illegal Deposit Taking Offence : S.55(1) AMLATFA 2001 Accused : Shamsudin Mahadi and Shafila Shamsudin Mahadi (Directors of Dencomm Sales & Services Sdn Bhd) Facts of the case : Shamsuddin and Shafila, who are managing directors of Dencomm Sales and Services, were charged with committing the offences between February 2002 and April 2010 at A16 and A17, Kedai Pusat Bandar Penawar.He was found guilty on 27 counts of illegal deposit taking and money laundering and being convicted for all charges under BAFIA and AMLATFA. The sentences are as follows:Company - Fine RM2 million Samsudin Mahadi - Imprisonment for 5 years and fine RM3.45 million Shafila Samsudin - Imprisonment for 2 years and fine RM1 million http://www.thestar.com.my/News/Nation/2013/10/01/RM645mil-fine-and-jail-time-for-fatherand-daughter/ Offence : S.4(1)(a) AMLATFA 2001 & S.25(1) BAFIA Accused : Rusdie Ganing and Hariyah Yaacob (Directors of Mercantile Point Sdn Bhd) Facts of the case : The duo had illegally pocketed nearly RM117 million of investors' money through their company Mercantile Point Sdn Bhd. The duo had also been slapped with 11 charges under the Anti-Money Laundering and Anti-Terrorism Financing Act (AMLAFTA) 2001, for illegally spending, transferring and possessing RM32.5 million of investors' deposits throughout 2007 and 2008. Actions : Rusdie was jailed 18 months on each charge and fined RM1.9 million in default 18 months while Hariyah, a single mother, was jailed 18 months on each charge and fined RM3.7 million in default 18 months jail. http://bernama.com/bernama/state_news/news.php?cat=ct&id=608843 Money launderers in general would concerns crime groups and the proceeds of their drug trafficking and racketeering activities but it is important to recognize that money laundering appears in less obvious situations, such as private client tax evader or the corrupt public official. It is important to recognize that while the person you may think of as the money launderer is the person who committed or arranged the original crime, in fact anyone who assists them in the process of enabling them to use the property and conceal its origins has played a part in the money laundering process and in the eyes of the law may well be guilty of a money laundering offence. Money laundering may take a variety of forms, from highly complex processes through to the most straightforward of arrangements. It can be achieved using an almost infinite number of methods involving, where necessary, financial services and products. The general money laundering has been

analysed as having three stages which are placement, layering and integration, and from this general three stages the red flags on money laundering can be identified. In the initial stages of money laundering which is placement, persons involved in organises crime often acquire large amounts of money in the form of cash that is often in small denomination bank notes. When criminals are in physical possession of cash that can directly link them to predicate criminal conduct, they are at their most vulnerable. Such criminals need to place the cash into the financial system, usually through the use of bank accounts, in order to commence the laundering process. The most obvious way to place the proceeds of crime into the banking system is simply to deposit cash into a bank account. In Malaysia (based from the guideline from BNM), for example, all cash transactions over RM 50,000 in a day are subject to a mandatory reporting obligation by financial service providers. As a result, more innovative and less obvious methods of placing cash into the financial system have been developed. Cash is outside the financial system in the sense that it is a universally accepted form of value owned or controlled by the person who possesses it. Cash is a form of value which can be readily passed between people without a record being made of the transaction. Cash is utterly transferrable and can only be detected through its physical presence. The possession of the proceeds of crime in the form of cash in large quantities is risky because it provides a link to the predicate offence/crime, it is hard to explain away when detected by law enforcement or other government agencies, requires safe storage, is susceptible to theft, is exposed to deterioration and may raise questions when used in large sums to pay for other assets such as cars, houses, boats, shares and many more. When cash is placed with a business within the financial system then it is transformed from its physical form to data. Financial systems for example are banks, authorised deposit-taking institution, credit union, building society or wealth management business. The data record then represents the value to which the payer is entitled as a result of the placement of the cash. If the depositor is depositing the proceeds of crime into a financial system then the first stage of money laundering has been achieved. The proceeds of crime have been converted from cash, which was connected with the predicate crime committed by the criminal, to data inside the financial system. The red flags in money laundering in this stage can be determined from disguised deposits, use of monetary instruments, intermingling, asset purchases and personal investment products and small general insurance policies. In disguised deposits, launderer often divides large amounts of cash into a number of small transaction amounts, for instance by making several deposits into a single or multiple accounts on successive days, making deposits into a number of accounts at different branches of the same bank, using different banks and then consolidating the accounts, deposits cash into the accounts of third parties (such as lawyers, real estate agents, broker and security firms), and depositing cash with the assistance of corrupt bank staff who themselves manipulate the deposits to make them appear as if they are below the reporting threshold. In the perspective of the use of monetary instruments, launderers purchase monetary instruments, such as money orders, postal orders and traveller’s cheques. In this way they convert cash into financial instruments for relatively small amounts and then deposit them elsewhere.

For intermingling, money launderers often attempt to conceal the origin of criminally derived cash by mixing it with legitimately generated cash. They do so by using the services of lawful business enterprises that they own or control. Cash takings of lawful business may be augmented by the proceeds of crime before being deposited into financial system, disguised as the turnover or income of the lawful business. Business, which by their very nature generate large quantities of cash such as retail outlets, restaurants and bureaux de change which are popular businesses for this type of activity. These types of business are able to absorb additional amounts of cash without arousing the suspicions of bankers or auditors. The alternative way for launderer is to establish what is known as “shell company”. This is a company that is incorporated in paper, but that does not genuinely trade. The launderer opens an account in the name of the shell company and deposits criminally derived cash into it, representing the money as the profits of the shell company. For asset purchases, money launderers may also use the cash proceeds of their criminal activities to buy assets, rather than placing the cash directly into the banking system. Virtually any assets will suffice for this purpose, although real estate, gold and precious metals, art, motor cars and antiques are popular items because they hold substantial value and are readily tradable. These assets may then be sold and converted into bank transfers for the value, thereby bringing the proceeds of crime into the financial system. However, there are risks arise with this approach which are cash reporting obligation that might directly apply, records that the seller may keep of the assets it sell and questions that may be asked by the seller’s bank regarding the large cash deposit that it makes following the sale. Money launderer will usually search for sellers of such assets who want cash for their own reasons for example tax evasion. Such sellers are involved in committing second predicate offence which is tax evasion and begin their own process of money laundering with the cash involved in the tax evasion. In personal investment products and small general insurance policies, money launderer may seek to purchase personal investment products, such as units in managed investments schemes, with cash. For the smaller money launderer this may merely be a saving scheme, while for the more sophisticated it may be the prelude to cancellation within the cooling-off period and the receipt of a redemption cheque which will be used in the layering process. Similarly, general insurance paid for by cash may also be the prelude to cancellation within the cooling-off period and a request for a refund cheque. The second stage of money laundering is layering. Once cash has been successfully placed in the financial system, launderers can engage in an infinite number of complex transactions and transfer designed to disguise he audit paper trail and thus the source of the property. One of the primary objectives of the layering stage of the laundering process is to confuse any criminal investigation and place as much distance as possible between the source of the ill-gotten gains and their present status and appearance. Integration is the final stage of the process, whereby criminally derived property that has been placed and layered is returned to the legitimate economy. At this stage the funds appear to have legitimate origin. Examples of reintegration methods that would also be red flag are loan agreements, sham transactions, inheritance, redemption of life policy or similar investment and purchases of real estate. For loan agreements, funds may be transferred from offshore to onshore accounts controlled by the launderer and made to appear as if they are a loan made by the offshore company. While in sham transactions, payments made from offshore to onshore accounts controlled by the launderer are made to appear to be proceeds of a genuine transaction. The offshore company may appear in its correspondence to be distributing the proceeds of, for instance, a real estate deal, or royalty payments

for the exploitation of intellectual property. However the reality is that there is no substance behind the claimed transactions. Alternatively, the offshore company may appear to be purchasing goods or services from the launderer, shown on sham invoices at inflated prices. Therefore, it is the reasons in the money laundering regulations the importance and the necessity for financial services provider to find out, and demand proof, of their customers’ claimed business activities and the origin of their funds. While for inheritance, funds held in one jurisdiction on behalf of the launderer may be transferred to another jurisdiction and be purportedly to represent a gift or inheritance. For redemption of life policy or similar investment, the launderer in placing funds with an insurance company and sometime later en-cashing the property so that a cheque from the insurance company has the appearance of emanating from a legitimate source. Single premium investment bonds are sometimes used where in this case the criminal pays the early surrender penalty and withdraws the investment and receives an insurance company cheque. Lastly for the purchase of real estate, where it is a popular method and vehicle for laundering criminal funds. Criminal will buy property for their own use, as an example, residential homes or second properties, a business or warehouse premises and as investment vehicles to provide additional income. Real estate may also provide a way of avoiding confiscation, for example, if a money launderer rents a property from a company registered offshore, which in turn is owned by the launderer, it may not be possible to link the launderer or his criminal funds with the company and the property. Financial sector firms lending against property that has been acquired partly with criminal funds, or where the repayments are being made out of the proceeds of crime, increase their vulnerabilities. To be specific for red flags on money laundering in the banking sector, it can be focus more in 3 categories which are individual customer behaviour, business customer behaviour and both individual and business entities. Individual Customer Behaviour

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Customer is wary of providing identification or provides identification that cannot be easily verified and shies away from offering personal information on applications. Customer tends to make transactions just below the reporting threshold or cancel the transaction when told by a bank employee that a report will be filed based on that transaction if it is conducted. The funds transacted are not consistent with the customer’s occupation or employment status. For example, a customer working in a low-to-moderate income job or a student suddenly begins depositing thousands in cash, and the account has never been used in that way before. Topping credit card by substantial cash and then used for incurring expenses. Cumulative payment during the year was beyond known sources of income. Settlement large value housing loans by cash payments. Deposits at various branches and times for no logical reasons.

Business Customers Behaviour

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Individual and Business Entities

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The business suddenly has lots of cash deposits but ordinarily does not do much cash business. The business presents financial statements hat look much different than other statements from businesses in the same industry. Financial activity and certain characteristics are inconsistent with the stated purpose of the business. Transactions, purchases and deposits that are not consistent with the business activities of the customer, especially wire transfer, cash, and monetary instruments. The transaction does not fit the realm of past business. The bank must understand if there is a legitimate explanation. For example, the customer has received an inheritance, change jobs, is preparing to purchase a new home. The method of payment appears inconsistent with the risk characteristics of the transaction. The transaction involves the use of repeatedly amended or frequently extended letters of credit. Use of multiple accounts to collect and funnel funds t a small number of foreign beneficiaries. Use of multiple accounts at a single bank for no apparent legitimate purpose. Sudden unexplained change in behaviour, account activities or balance. Deposits followed within a short period of time by wire transfers. Inherently risk industries or geographical areas. Unusual fund transfers to foreign countries. Insufficient, false,, or suspicious information provided by the customer. The size or type of transaction is inconsistent with those made by the same customer in the past. Structuring of transactions to evade record keeping. Unusually large number of beneficiaries receiving funds from one originator or multiple originators sending to the same beneficiary. The transactions involve the use of shell companies. Different entities and individuals operating from the same address.