A General Overview of Anti-Money Laundering and Countering the Funding of Terrorism

Introduction

The author would like to begin with a brief historical view of countering money laundering - now more commonly known as Anti-Money-Laundering and Countering the Funding of Terrorism (AML/CFT).  The author will use this term for the remainder of this work.

We are, or should be(!), well aware of the traditional purpose and methods of money laundering, whereby criminal syndicates, in general, would use their illegally-acquired funds to either invest in legitimate businesses, and thereby either earn income form these businesses, or sell the shares, thereby providing a ‘cut off’, making funds look that they have been legally acquired to a non-expert observer.  Two other traditional methods were to buy ‘chips’ in a casino lose some, then ‘cash in’ the remainder, or to utilise the, shall we say, ‘less transparent’ arms of the banking community, who would provide an equivalent service, for a (considerable!) price.

AML/CFT, in its modern form, seems to have started emerging as a separate specialisation about 2003. This was because of the dramatic increase in the use of electronic funds transfer and the spread of advanced IT expertise to the criminal syndicates, both of which greatly simplified the conversation of illegally-acquired funds into electronic form, the transfer of such electronic funds between the various arms of the banking system and the frustration of means to pursue the ‘laundering’ of illegally-acquired electronic funds.

The author’s professional background in AML/CFT (including awareness of it‘s translation into a separate specialisation), such as it  is, is within the electronic gaming (eGaming) industry, which provides  as good a background as any to how electronic money laundering affects an industry that uses corporate finance from a number of national and international sources, and the AML/CFT policies the various eGaming regulators require eGaming operators that they have licensed  to compile and execute in order to frustrate organised crime syndicates as part of these operators’ licences.  

The countering of terrorist funding has been combined with the countering of what may be called ‘criminal’ money laundering, as the same techniques are used be terrorists to fund the or activities as criminals, and accessing the same sources of illicit funds, particularly as the more traditional sources of illicit funds have disappeared as a result of the ending of the Cold War and the ‘rumbling’ of the support given to the Provisional IRA and it’s offshoots by other Western powers.  Indeed, terrorist funding may be thought of as ‘political’ money laundering.

The primary of the any government’s AML/CFT guidelines must be to, if possible, prevent, and, if necessary, to deal with, any act of either ‘criminal’ or ‘political’ money laundering.

The core of the international AML/CFT effort is persuading each national financial services jurisdiction into developing a ‘toolkit’, in terms of policies and procedures, to be used to prevent, and, if prevention fails, cure cases of money laundering and terrorist funding within that jurisdiction, including any international ramifications.

Why Implement an AML/CFT Policy?

The basic purpose of AML/CFT is to ensure the integrity of all financial services marketplaces, which depend heavily on the perception that they function within both a national and international framework of high (and effectively enforced!) legal, professional and ethical standards. A reputation for integrity is the one of the most valuable assets of a financial institution - and one lost with a moment’s thoughtlessness! - and once lost, not easily regained, as the international banking fraternity is finding out as this is written.

If funds from criminal activity can be easily processed through a particular institution by whatever means present themselves,  the institution will be drawn (given the size and reach of modern organised crime networks) into active complicity with criminals and become part of the criminal network itself. Evidence of such complicity will destroy the integrity of the institution in question in the eyes of all external stakeholders.

Money laundering will also have a cumulative international effect if left unchecked. This will cause, according to they International Monetary Fund, otherwise inexplicable changes in money demand, extra risks to bank soundness, contamination effects on legal financial transactions, and increased volatility of international capital flows and exchange rates due to unanticipated cross-border asset transfers - and these are just the ones the public at large has heard about and can understand!  AML/CFT needs to stop all these.

It is an unfortunate fact of life that many international criminals have skills equal to, and morals very nearly equal to, so-called legitimate businessmen.  This gives launderers opportunities to continuously look for new routes for laundering their funds. Economies with growing or developing financial centres, but inadequate controls are particularly vulnerable as countries with established financial centres are supposed (!) to have implemented comprehensive AML/CFT policies.

AML/CFT deficiencies also have an international impact.  Differences between national AML/CFT systems (which the FATF and Egmont networks are trying to iron out) will be exploited by launderers, who tend to move their networks to countries and financial systems with weak or ineffective AML/CFT networks.  Commentators (usually financial PRs, journalists and other general talking heads) who should know better (!!) might argue that developing economies cannot afford to be too selective about the sources of capital they attract. When one reads such statements in the press, the phrase “Round Objects” comes to mind…

Postponing action is acutely dangerous. The more it is deferred, the more entrenched organised crime will become.  As with the damaged (both perceived and real) integrity of an individual financial institution, there is a damping effect on foreign direct investment when a country’s commercial and financial sectors are perceived to be subject to the control and influence of organised crime.  There may also be behind-the-scenes pressure to change the political arrangements of the countries in question.  It is therefore doubly important for the governments of such countries to get their AML/CFT act together.

The social and political costs of money laundering on the institutions of a country, if left unchecked or dealt with ineffectively, are both cumulative and serious. Organised crime will increasingly infiltrate financial institutions, acquire control of large sectors of the economy through investment, or offer bribes to public officials and indeed governments.  This will corrupt the economic and political influence of a country.  If even a fraction of what one read in the daily press is even partly true, much of the EU has little to shout about in this area, which will affect international AML/CFT cooperation.

Criminal organisations will cumulatively weaken the social fabric, collective ethical standards, and ultimately the democratic institutions of society - always assuming that the country was, in practice, a democracy in the first place!  In countries transitioning to democratic systems, this criminal influence will, perhaps irrecoverably,  undermine the transition.  Fundamentally speaking , money laundering (more perhaps the ‘political’ variety) is inextricably linked to the underlying criminal activity that generated it.  Money laundering in enables criminal activity and terrorism to continue.

Money laundering is a cumulative threat to the good functioning of a financial system.
However, it should also be the Achilles heel of criminal and terrorist activity. In law enforcement investigations into organised criminal activity, it is often the connections made through financial transaction records (as expressed in Suspicious Transaction Reports, or STRs) that allow hidden assets to be located and that establish the identity of the criminals and/or terrorists and the criminal/terrorist organisation responsible.  However, the problem here is the ‘one off’ crime which may have an ‘inside’ element.  One historical British example is the 1963 Great Train Robbery.  This appears to have been put together by senior Post Office personnel (the ‘straight’ members of the gang, including the individual who injured the locomotive driver, were never caught) and the primitive AML/CFT network of the day should have dealt with this - but the possibility of a one-off ‘inside job’ was never even considered.

When criminal funds are derived from ‘white collar‘ crimes, such as extortion, embezzlement or fraud, as well as straightforward robbery, a money laundering and/or terrorist funding investigation is frequently the only  way to locate the stolen funds and restore them to the victims.  Most importantly, however, targeting the money laundering aspect of  criminal and/or terrorist activity and depriving the criminal and/or terrorist  of his (or her?) ill-gotten gains means hitting him where he/she hurts - in the pocket!.  Without a tangible profit or the opportunity to make one, the criminal/terrorist activity grinds to a halt - in a country or territory with an effective AML/CFT set-up!

An Overview Of A Specific AML/CFT Jurisdiction - the Channel Islands

The electronic gaming (eGaming) industry forms as good a case study as to how electronic money laundering affects an industry that uses corporate finance from a number of national and international sources, and the AML/CFT policies the various eGaming regulators require eGaming operators that they have licensed  to compile and execute as part of these operators’ licences.  There are a considerable number of eGaming operators licensed in the Channel Islands, the eGaming regulator for which is the Alderney Gambling Control Commission, or AGCC for short.

Some of the forms of electronic money laundering that an eGaming operator may encounter include : using a credit of debit card (which may itself be fraudulent) to set up a customer account with such an operator, then deposit funds which would be used to, for example, purchase virtual ‘chips’ in an online roulette game or casino, losing as much as half the ‘investment’ to throw the authorities of the scent, then  withdrawing the remaining funds into a what appears to be a legitimate bank account.  Similar methods that may be used by ‘gamers’ (who may themselves may be false identities) for other forms of electronic for, for example. ‘slot games’ (the online electronic equivalent of a amusement arcade slot machine) played on a PC.

Regarding eGaming regulation in general, and the AML/CFT measures that accompany it, only the United Kingdom Gambling Commission, follows a ‘risk based’ approach.  The other eGaming regulators that the author has studied, such as the Isle of Man regulator, the Malta regulator and the Netherlands Antilles regulator, all follow the AGCC in the full audit route.  The author has chosen the AGCC to illustrate eGaming AML/CFT because he dealt with them professionally while working a technical author for the Gala Coral Group, and therefore possesses detailed knowledge of the implicit requirements of the AGCC as well as the explicit ones.

The countering of terrorist funding has been combined with the countering of what may be called ‘criminal’ money laundering, as the same techniques are used be terrorists to fund the or activities as criminals, and accessing the same sources of illicit funds, particularly as the more traditional sources of illicit funds have disappeared as a result of the ending of the Cold War and the ‘rumbling’ of the support given to the Provisional IRA and it’s offshoots by other Western powers.  Indeed, terrorist funding may be thought of as ‘political’ money laundering.

The primary of the AGCC’s AML/CFT guidelines is to, if possible, prevent, and, if necessary, to deal with, any act of either ‘criminal’ or ‘political’ money laundering.

This objective is to be achieved by mandating all eGaming operators licensed within the Channel Islands jurisdiction to implement a full programme of AML/CFT policies, procedures and management controls.  This includes due diligence processes to be carried out on all new end existing eGaming customers using the operator’s eGaming services (as well as the operator‘s business associates), having a specialised AML/CFT team within the operator (referred to as the Payment & Fraud team by the author below) and the training of that team.  Background and continuing probity checks, to ensure freedom from business risk are also to be carried out on all of the operator’s staff.

It should also be mentioned at this point that, for example, gaming software providers, who are not operators themselves, also fall under the purview of the AGCC, although the regulatory processes they have to undergo as part of their licences are somewhat different.

This article has been structured to illustrate a series of AML/CFT ‘tools’ that any Channel Islands licensed eGaming operator will be expected to develop and apply to implement an AML/CFT capability to the AGCC’s satisfaction.

How the Channel Islands AML/CFT System works

The AGCC’s requirements for an eGaming operator to be licensed in the Channel Islands stem form the Alderney eGambling Regulations 2009, which came into force on the 1st of January 2010.  Incidentally, these replaced the amended 2006 Regulations, to which the author worked while employed by the Gala Coral Group.

Compliance with the AGCC’s AML/CFT requirements, which must be met as part of the eGaming operator’s overall licence, are set out in a Guidelines document freely available form the Commission’s website as a PDF.  Originally, the AML/CFT policies and procedures were to be defined as part of the Internal Control System document (a chronicle of the eGaming operator’s business processes), and would be audited as part of the Commission’s policy of, usually annual, audit of the eGaming operator’s business processes.  Such audits are a key part of the eGaming operator’s Operating Licence.

Money laundering is defined by the AGCC as means of turning funds obtained through criminal activity into “clean” money, such crimes including theft, fraud and tax evasion, and indeed any form of criminal activity, such as drug trafficking.  It is also an offence under Channel Islands law to be involved in the funding of terrorism or dealing with property used or ‘laundered’ for that purpose.  The AGCC also defines the application of funds as meaning the spending or otherwise disposing of funds.  There is no legal minimum amount - even 1p used in this way is an offence!

In an AML/CFT context, illegitimate funds, to be ‘laundered’ as it were, are the proceeds of crime as defined under Section 1 Paragraph 1 of the Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) 1999.  The range of such offences, both criminal and political, is a wide one, and contains at least the following:-

•	Participation in an organised crime of greed and racketeering
•	Terrorism including terrorist financing
•	People (including migrants) trafficking
•	All forms of sexual exploitation
•	Drug trafficking
•	Arms Trafficking
•	Stolen goods trafficking
•	Bribery and corruption
•	Fraud and tax evasion
•	Product piracy and counterfeiting
•	Environmental crime
•	Murder and grievous bodily harm
•	Kidnapping and hostage taking
•	Robbery/theft
•	Smuggling
•	Extortion
•	Forgery
•	Piracy (of the maritime kind)
•	Insider trading and market manipulation

The AGCC considers AML/CFT policies and procedures to be important as the gaming industries in general are vehicles for such activities, so it is beholden on each eGaming operator to detect and prevent all  acts of money laundering and terrorist financing.

The AGCC defines money laundering (whether criminal or political) as comprising three stages : Placement, where the ‘dirty’ money enters the eGaming operator’s financial systems, Layering, where the origin of the money is concealed, and Integration, where the funds are extracted for legitimate use.  The eGaming operator’s AML/CFT policies and procedures will be expected to counteract all three stages of the money laundering (whether criminal or political) process.

All eGaming operators licensed in the Channel Islands will be expected to comply with the various AML/CFT laws and regulations.  This will affect gamers, as there will be, in practice, a lengthier and more detailed registration process before they may commence gaming, and they will be expected to provide information about themselves (ID, residence, finances, etc) when demanded by the eGaming operators customer registration staff.  Again, in practice, this will be no more rigorous than the practices of the financial sector at large - their AML/CFT problems are at least as bad!

Specific eGaming Operator’s AML/CFT Compliance

Although the AGCC’s Guideline document implies that the eGaming operator’s AML/CFT procedures are to be part of the wider business process description, in practice, this produces an unusable (500+ pages) monster, so the AML/CFT material is accorded it’s own document, which sets out the eGaming operator’s AML policies and procedures in the areas listed below.  Incidentally, the same applies to the technical aspects of the eGaming operator’s gaming offering, particularly if they have a lot on in-house ‘written’ content, as Gala Coral did.

Risk Assessments

The AGCC defines this as a Business Risk Assessment as defined in Regulation 265 of the 2009 Alderney Gambling Regulations.

The Risk Assessment must include policies and procedures for Standard Risk (cf. medium risk in the other financial sectors) and High Risk operators.  For standard risk customers, normal financial due diligence procedures will be implemented, and for High Risk customers enhanced financial due diligence procedures will be implemented.  The AGCC will regard failure to follow such procedures for such customers as a criminal offence.

AML/CFT Staff

All of the eGaming operator’s staff will be expected to have at least a basic knowledge of AML/CFT, which basically means attending a training course in outline AML/CFT appreciation, which, in essence, means all of the eGaming operator’s staff, notably call centres and customer support staff, having a duty to report any suspicious financial transactions to the Payment & Fraud team - see below.

The team with specific responsibility for preventing money laundering of all kinds is the eGaming operator’s Payment & Fraud team.  All members of this team would receive both basic and advanced (which may mean passing an examination on the subject) AML/CFT training.  This would result in subjective, rather than objective risk assessments for each new customer, for example, for example of the following natures:-

“are we at risk of being defrauded by this customer?”
“is the customer acting in any way that cannot be explained?”

Where AML/CFT is concerned, the second category will cover transaction s that have no lawful of economically constructive purpose.

The eGaming operator’s senior management will be expected to enforce a culture of vigilance throughout the Company, and to lead by example where necessary.  Senior management personnel will also be expected to supply suitable levels of human, financial and material (such as IT) resources to sustain an effective AML/CFT effort.  The titles and roles of specific AML/CFT staff will be described below in more detail.

Money Laundering Reporting Officer (MLRO)

The eGaming operator will be expected to appoint a Money Laundering Reporting Officer and a ‘nominated officer’ as defined in Section 7(1)(b) of the 2009 Alderney eGamibling Regulations.  To cover times when the MLRO is unavailable, the eGaming operator should also appoint a Deputy MLRO.  As customer service in the eGaming industry tends to be a 24X7X365 operation these days, having a ‘duty’ MLRO for each customer service ‘shift’ will also be a good idea.

All of these individuals will receive reports of any activity and their contact details will be known to all of the eGaming operator’s staff, and procedures for escalating and reporting suspected AML/CFT incidents will be both defined within the eGaming operator’s AML/CFT policies and procedures document and will form part of the AML/CFT training scheme.

Business Risk Assessment

The eGaming operator must also produce and regularly update a business risk assessment that identifies those areas of it’s operation that pose the greatest AML/CFT risk.  From this, the operator must determine the most flexible and cost-effective way of investigating these risks.  The AGCC will audit the eGaming operator against Regulation 175 Paragraph 3 of the 2009 Alderney eGambling Regulations.  The assessment must contain, as a minimum:-

General & Specific Risks
Policies and Procedures that mitigate these risks
Procedures to record actions
Compliance with AGCC AML/CFT legislation

The specific risks identifies and mitigated must include as a minimum:-

Customers
eGaming products used
Banking methods 
Area of operation (both UK and overseas)
Employees (screening & probity checks)

Individual Risk Assessment

The eGaming operator must carry out a risk assessment of each customer as part of the registration process.

There must be procedures to be followed in the event of a customer failing either the basic (general risk) and advanced (high risk) due diligence processes.

Customer Due Diligence Process

This must be carried out for the following reasons:-

•	To ensure that they are who they say they are
•	That it is appropriate to offer each customer the services that they seek - this particularly to under-18s and gambling addicts who known to be under remedial measures.

This involves the collection of the following details:-

•	Legal Name
•	Address
•	Date of Birth
•	Place of Birth
•	Nationality
•	Certified copies of identity documents : Driving Licence, Passport, etc.

All of these items will have to be checked against the identity databases, using services provided by the specialist information providers.

If the prospective eGaming customer is not an individual but a business entity, the following information must be collected in certified copy form and compared against the appropriate databases:-

Certificate of Incorporation
Company Registry Search
Most Recent Audited Accounts
Memorandum & Articles of Association
Directors’ Register
Shareholders’ Register
Apparent Board Composition

The Customer Due Diligence process must have been successfully negotiated before commencing the relationship with the new customer, whether that customer is an individual or an organisation.

As well as the ‘initial’ Customer Due Diligence (CDD) process outlines above, there must be a continuing CDD process that checks for apparent or real changes in the information supplied by the customer.  There must also be checks on large deposits and/or withdrawals that occurs in a 24 hour period. Any other suspicious data on an existing customer must be checked using the CDD procedure as they are received by the Payment & Fraud team.

Politically Exposed Persons 

A Political Exposed Person (PEP) is defined as the individuals, families and close business associates of the following categories:-

Heads of State or Heads of Government
Senior politicians and political party officials
Senior government officials
Senior members of the judiciary
Senior military officers
Senior members of State corporations

PEPs are regarded by the AGCC as being at potential risk of being, for want of a better word, ‘blackmailed’ into becoming involved in criminal and/or terrorist money laundering.  These means that they must receive special additional Due Diligence measures, notably approval of acceptance as customers by the eGaming operator’s senior management, and must not be automatically accepted on completion of the CDD process.

It appears that specific databases of PEPs and their background and potential vulnerabilities are becoming available from the database providers, facilitating (for a fee) the additional PEP due diligence checks.  The eGaming operator must specify the additional PEP due diligence checks to the satisfaction of the AGCC as part of the operator’s AML/CFT policies and procedures document.  Such procedures must specifically include checks on the sources of wealth and funds of PEPs.

Monitoring of Transactions

The eGaming operator is required by the AGCC to monitor all transactions for signs of:-

Complexity
Size and/or exceptional nature
Unusual Patterns
Transactions originating form a country or jurisdiction that does not recognise a Financial Action Task Force recommendation.
Business from Sensitive Source Notices (BSSNs)
No apparent legal or economically constructive purpose

AML/CFT monitoring in this area may be thought of as “management by exception”.  In practice, experienced Payment & Fraud officers soon build up a detailed ‘mental picture’ of suspicious transactions, and can therefore spot these faster and more reliably than an automated system would.  Such transactions would then be specifically audited for money laundering and/or terrorist financing activity.

Record Keeping

As an aid investigating AML/CFT incidents in particular, the AGCC expects the eGaming operator to keep the following categories of records:-

Transaction documents
Customer Due Diligence information
Unusual/Suspicious Transactions details
Disclosure/Terrorism Law MLRO Reports
Train (of staff) Record
(Alderney eGambling) Regulation Documents
AML Policies & Procedures documents, so any changes may be examined by the AGCC as part of their audits

The AGCC also expects the eGaming operator to establish specific policies and procedures to ensure that the above categories of records are kept for the stipulated period (at least five years form the date of the transaction() and in a form (usually CD-ROM) that is easily retrieved by the Financial Intelligence and other interested Channel Island authorities.

Suspicious Transactions

The eGaming operator must report to the AGCC all transactions that have an AML/CFT impact when the operator’s staff:-

•	Know that an AML/CFT incident has taken place
•	Suspect that an AML/CFT incident has taken place
•	Have reasonable grounds for knowing or suspecting an individual is engaged in money laundering of a criminal and/or terrorist nature

The AGCC defines such incidents as “grounds for knowledge or suspicion”.

The AGCC expects, in practice, that such suspicions will be based on the mental picture a Payment & Fraud officer will have formed regarding what suspicious transactions and what are not - this can only be gained through experience rather than formal training, although CDD reports will be a major source of such information.

The AGCC also expects all licensed eGaming operators to provide training for their Payment & Fraud staff in the Channel Islands AML/CFT legislation, as set out in Paragraph 16 of the 2009 eGambling Regulations.  The AGCC further expects all licensed eGaming operators to train all of their staff regarding their AML/CFT obligations and making reports to the MLRO or nominated officer.  Licensed eGaming operators must recognise that all of their employees must have some sort of AML/CFT role, even a basic one mentions possible AML/CFT incidents to the Payment & fraud team - this particularly applies to customer support staff.

The AGCC further expects that any licensed eGaming operator has established effective policies, procedures and controls to ensure compliance with the Channel Islands eGambling Regulations.  Licensed eGaming operators will be expected to demonstrate that their AML/CFT reports are correctly raised and passed to the MLRO or nominated officer, examined and acted upon as part of the Commission’s audit process.

The Commission expects that licensed eGaming operators recognise that AML/CFT reporting obligations extend to the operator’s contractors and business partners as well as the operator’s customers.  All such contractors and partners will therefore have to be subjected to a Due Diligence process as well, to s similar level as any organisations that have registered themselves as customers.

The MLRO will be expected to demonstrate considering each report made to him as to whether any such report gives genuine grounds for suspicion of an AML/CFT incident.  The MLRO will be required by the Commission to demonstrate that all relevant information prior to making a AML/CFT report to the Commission, and the operator’s AML/CFT policies and procedures document must specify how the MLRO or nominated officer is made aware of all information relevant to an AML/CFT incident, promptly, decisively and without question..  The Commission also expects the operator to show how employees in general refer AML/CFT incidents to the MLRO and nominated officer,

Reporting to the Financial Intelligence Service

The next stage in the AML/CFT incident reporting process is for the operator’s MLRO or nominated officer to report such an incident, if they have determined that one has actually taken place to the Guernsey Financial Intelligence Service (FIS).  His is governed by Part 1 of the Disclosure Law and/or Section 12 of the Channel Islands Terrorism Law.  All such reports are to be made using the Form located in Appendix D2 of the Guernsey Financial Services Commission (GFAC) Handbook.

A copy of the AML/CFT report must also be supplied to the AGCC.  The FIS will acknowledge receipt of the AML/CFT incident report.  The Commission regards failing to report an AML/CFT incident as a criminal offence, and operators should therefore submit such a report if they have even slight grounds for considering that an AML/CFT incident (what the AGCC calls a suspicious transaction) incident has taken place.

Employee Screening and Training

The AGCC expects all of an eGaming operator’s staff to be screened for fraud and business risk.  In the author’s case, immediately before being offered a job with the Gala Coral Group he was subjected to a ten-year background check, and three-monthly probity checks thereafter.  Any problems with the latter would have most emphatically led to disciplinary action!  This was for a post of Technical Author - customer service staff would have received even more stringent checks and the Payment & Fraud team more stringent still.

Regarding training, the AGCC expects the eGaming operator’s Payment & Fraud staff to have been trained on:-

The relevant Channel Islands Law, Ordinances and Regulations
Their personal obligations and potential criminal liability under Channel Islands Law
The implications of non-compliance with the AGCC’s AML/CFT Guidelines document
The eGaming operator’s policies, procedures and controls for the purposes of forestalling, preventing and detecting money laundering and terrorist financing
The MLRO’s identity and responsibility for the detection of unusual or complicated  transactions
The principal vulnerabilities of the operator’s products and services
New developments in AML/CFT techniques, methods, trends and typologies

As well as the Payment & Fraud team,, the AGCC expects the Customer Services staff of the eGaming operator and the operator’s senior management to be given similar training.

The MLRO, nominated officer and ‘duty’ MLROs are expected by the AGCC to have received specific training in the following areas:-

Handling and reporting of internal AML/CFT incident (or suspicious transaction) reports
The handling and production of the restraining orders applied to perpetrators of AML/CFT incidents
Liasing with law enforcement agencies
The management of ‘tipping off’ risk, where the perpetrator or perpetrators of one or more AML/CFT incidents may get warning that the authorities are ‘on their case’.

The AGCC will expect the operator’s Board and senior management to have received specialised training in:-

The relevant Channel Islands AML/CFT Law and Regulations, and both individual and collective Customer Due Diligence and record keeping requirements.
Internal and external AML/CFT incident (suspicious transaction) reporting procedure

Channel Islands AML/CFT Legislation

Implicit within the AGCC’s AML/CFT guidelines document is the expectation on the part of the AGCC and the other Channel Islands law enforcement that licensed eGaming operators will not directly contact international law and law enforcement agencies, but will instead submit their AML/CFT incident reports and other documentation expected by the Channel Islands authorities to those authorities.

The items of international law that the AGCC and associated Channel Islands bodies consider to the AML/CFT field are described below.

The Terrorism Order

This is the Terrorism (United Nations Measures) (Channel Islands) Order 2001, which implements UN Resolution `373, which makes it an offence for any person to make any funds or financial services available to or for the benefit of any person involved with terrorism, as per Article 3 of the Terrorism (UN Measures) Order 2001.

The latter Order makes a criminal offence for any person to make any funds or financial services available for the benefit of any of the following persons who:-

a) Commit, attempt to commit, facilitate or participate in the commission of terrorism
b) are indirectly connected with or involved directly or individually to persons (a) above or
c) acting on behalf of, or at the direction of persons mentioned in paragraph (a) above

It is therefore incumbent on licensed eGaming operators to:-

Have checks in place that ensure players do not fall under the provisions of the Terrorism Order
Ensure that do not make funds and/or financial services available to or for the benefit of any individual, entity or group which is proscribed under the Terrorism Order

The AGCC expects licensed eGaming operators to be familiar with the UK Treasury website for the full list of financial sanctions targets.

The Al-Qa’ida Order

The Al-Qa’ida and Taliban (United Nations) (Channel Islands) Order 2002, which implements UN Resolution 1267, contains requirements similar to that of the Terrorism Order in respect of funds to designated persons as per Article 2 of the Al-Qa’ida (UN Measures) Order 2002.

A listed person under Article 2 of the Al-Qa’ida is:-

a) A member of the Al-Qa’ida organisation
b) A member of the Taliban
c) Individuals, groups and undertakings or entities associated with the persons covered in (a) and (b) above

While the presence of individuals on either of the above lists is a strong indication that such persons fall within the definition of the Terrorism and Al-Qa’ida Orders, there are likely to be legal or natural persons who come within these definitions but who are not on the lists.

The AGCC there expects licensed eGaming operators to be particularly vigilant regarding ‘political’ money laundering.

Financial Action Task Force Statement

The Terrorism Order 2001 and the Al-Qa’ida Order 2002 cover the most obvious forms of ‘political’ money laundering.

The continuing monitoring of ‘criminal’ money laundering at an international level is carried out by the Guernsey Financial Action Task Force (FATF).

The FATF’s reports and directions (FATF Statement) funnels in AML/CFT information into the Channel Islands jurisdiction.  Licensed eGaming operators are expected to take account of the content of these statements, and the AGCC will be monitoring for compliance with these statements, albeit perhaps as part of their (usually annual) audits.

A summary of a good example of a FATF Statement is the one issued on the 24th of February 2008, which covers the following countries:-

Uzbekistan - this country’s AML/CFT regime is being dismantled, so eGaming operators must take account of this in their external due diligence procedures conducted on customers from this Central Asian country.

Iran - this country’s AML/CFT regime continues to be deficient, although the Iranian Government is trying to improve matters.  However eGaming operators are exhorted to remain vigilant regarding Iranian Customers.

Pakistan - a similar situation to Iran

Turkmenistan - a similar situation to Pakistan and Iran

Sao Tome and Principe - (otherwise known as the Cape Verde Islands) a similar situation to Iran, Pakistan and Turkmenistan

Northern Cyprus - the AML/CFT regime in this country continues to be deficient, to the FATF calls upon licensed eGaming operators, amongst others, to pay particular attention to the AML/CFT risks emanating form Northern Cyprus.

The author notes, with great interest, that, apart form Sao Tome & Principe, all of the above countries have unstable, harsh and anti-democratic political systems.  Something to watch out for in general?

International Legislation Underlying All AML/CFT Processes

Having read through the publicly available information regarding the legal framework behind the international AML/CFT effort, the initial impression is that of a major improvisation.

The first UN measure of AML/CFT significance is UN Security Council (UNSC) Resolution 1267 of 1999 - the 15th of October to be precise.  One would expect this Resolution to go into the principle of countering money laundering for both criminal and political purposes, but this is not so!  In fact, the Resolution Document, as publicly available goes into the activities of the Islamic Emirate of Afghanistan (a.k.a. the Taliban to us lesser mortals), particularly their failure to hand over Usama (UN spelling) bin Laden and stop providing legal sanctuary to, and training of, international terrorist organisations.

The key AML/CFT material begins with Paragraph 4(b) of the Resolution.  This calls upon member states to freeze funds owned or generated by the Taliban, and ensure that these funds cannot be made available to any citizen of any UN member state who is associated in any way with the Taliban, except where proven humanitarian need has been demonstrated.  It is interesting to note that there is no mention of ‘criminal’ money laundering.

Paragraph 6 of UNSC Resolution 1267 states that all UN member states provide to the UN all information regarding measures that have been taken to implement the strictures of Paragraph 4, plus regular detailed reports on violations of these strictures and the identity of the violators.  Paragraph 7 of UNSC Resolution 1267 apparently absolves member states from consequent violations if ‘rights legislation’, which one presumes includes such measures as the European Convention on Human Rights.

Paragraph 8 of this Resolution 1267 calls upon member states to bring prosecutions against the violators, presumably both individuals and corporate bodies, of the provisions of Paragraph 4, presumably under the laws of the UN member state in question.   Paragraph 9 of this Resolution also calls upon member states to co-operate with the 1267 Committee (established under Paragraph 6 of this Resolution) in order to enforce the Resolution.  Paragraph 10 established a timescale of 30 days to do this.

Paragraph 12 of this Resolution mandates full co-operation with the 1267 Committee and other national and international organisations with what becomes an AML/CFT interest.  Paragraph 13 mandates co-operation between the Resolution 1267 Committee and the UN Secretariat (presumably comprising the Office of the Secretary-General and his deputies).  Paragraph 14 refers to the Taliban, but Paragraph 15 resolves to make further unspecified measures, but under the UN Charter, to fully implement the provisions of UNSC Resolution 1267.

Although the author prepares to stand corrected by experts in international law, this Resolution does not cover ‘criminal’ money laundering, so a lawyer whose ‘criminal’ client is charged by the international AML/CFT organisation, under the terms of this Resolution, in a jurisdiction with weak ‘criminal’ AML/CFT laws, would appear to be able to get the prosecution struck down, quashed, or whatever the appropriate legal term is.

UN Security Council Resolution 1373, of the 28th of September 2001, the other UNSC Resolution quoted in an AML/CFT context, takes a very similar view and one presumes would suffer from the same legal loopholes.

The text of Resolution 1373 mandates that all member states take measures to prevent and suppress the financing of terrorism.  The Resolution defines that member states take measures to do this that include:-

a)  Criminalise all deliberate collection of funds by whatever means and either directly or indirectly, for terrorist acts.
b) Promptly and indefinitely freeze all financial and material resources of persons, and presumably corporate bodies, who intend to use these funds for the perpetration of terrorist acts.
c) Prohibit any nationals of UN member states, within these states, from funding terrorist acts and organisations in any way.

Paragraph 2 of Resolution 1373 further mandates UN member states to:-

a) Not support any terrorist individuals or bodies, presumably of any kind.  This includes clamping down on ‘safe havens’.
b) Prevent terrorist acts from taking place and to provide early warning that such acts are likely to the targets.
c) Prosecute any individual involved in an actual or potential terrorist act in any way, using strict laws passed especially for that purpose.
d) Maximise mutual assistance between UN member states in the detection and prosecution of terrorist acts.
e) Maximise border and identity controls within UN member states to close down the movement of terrorists between and within UN member states.

Paragraph 4 of Resolution 1373 is the really interesting one.  It records the Security Council’s concern at the links between international terrorism and international organised crime.  Of particular note are illicit drugs, money laundering techniques, arms smuggling and the. Presumably illicit, movement of hazardous nuclear, biological and chemical substances.  Again, co-operation and co-ordination between UN member states is emphasised.

Paragraph 6 of this Resolution resolves that a UNSC Committee reports to the full UNSC within 90 days on what AML/CFT measures UN member states have taken.  

The overall impression is that Resolution 1373 builds on Resolution 1267, but still places primary emphasis on ‘political’,. as opposed to ‘criminal’ money laundering,    although is begins to recognise the links between terrorism and organised crime. However, a clever lawyer is a weak jurisdiction could still get around legislation drawn up under the terms of this Resolution.

The Vienna Convention that is normally mentioned in an AML/CFT context id the 1988 United Nations Convention against illicit traffic in narcotics.  This seems to have been swept up into the international AML/CFT network because of the importance of illegal narcotics transportation in the support of both criminal and terrorist activities.

This 1988 Convention passed three measures that appear to have AML/CFT relevance: exchange of information, provisional application of the UN against illicit narcotic and psychotropic (such as LSD) substance smuggling, and the resorting of the UN Narcotic Drugs Division and International Narcotics Control Board, with the aim of enforcing the international drug control treaties.

The exchange of information resolution was intended to work in the same way as the subsequent Resolution 1373, which would presumably allow specific drug-related material to be channelled into the international AML/CFT network.

The 1988 Vienna Convention is divided into 23 Articles, and the author has been forcefully impressed by the similarities with the international AML/CFT network, as it currently exists.  The UN has clearly, over the years, established a standardised, and one hopes effective, way of operating against illegal international activity of all kinds.  The problem would, in practice, be deliberate obstruction by the governments of UN member states, ass there has often been an odour, of shall we say, of “in order to totally control, one must control totally control (both sides of the law) about illegal traffic in narcotic and psychotropic drugs in particular.

The Palermo Convention often mentioned in an AML/CFT context is the UN Convention against Transnational Organised Crime, which took place under the aegis of the Italian Government towards the end of 2000.  The chief importance of this Convention is that it deals with ‘criminal’ money laundering, whereas UNSC Resolutions 1267 and 1373 exclusively dealt with the ‘Political’ variety.  Major preparatory work had been done by the Governments of Poland, Argentina and Thailand before the Convention took place.

The Convention was set up to approve and facilitate the execution of the UN Convention against Transnational Organised Crime, which as well as referring to money ,laundering and corruption and organised crime, referred to traffic in rare plants and animals and the theft of antiquities (all of these very useful in both ‘criminal’ and ‘political money laundering) and the growing links between transactional organised crime and terrorism - hence the author using the terms ‘criminal’ and ‘political’ money laundering.

The UN Convention against Transnational Organised Crime is divided into Articles 1 to 41 inclusive.  The Convention’s contents are extremely detailed - covering some 30 pages in the UN Document, and clearly forms the basis of the international AML/CFT effort.  In the author’s opinion, the Convention is the best document to underpin the AML/CFT effort of a UN member state, and equally importantly, would be very difficult to ‘dodge’ if a given national AML/CFT effort is firmly based on it.

Related to this UN Convention, the UN passed at the same time a Protocol to prevent people (a.k.a. slavery).  This closes a major AML/CFT legal loophole, as other legislation implicitly excludes people smuggling to which the usual ‘clever lawyer’ comment applies.  The Protocol is contained in Articles 1 to 20 inclusive, within which are mandated processes very similar to the AML/CFT network.

Also related to this Convention is a Protocol covering the prevention of migrant smuggling by land, sea or air.  This Protocol is covered in Articles 1 to 25 inclusive.  Again, this Protocol mandates measures similar to AML/CFT, which would close another loophole.

The overall impression given by the Palermo Convention is that of a very well thought-out work which would form an excellent basis for a UN member state’s or associated territory’s AML/CFT effort, provided it is properly enforced!

The penultimate column in the AML/CFT legal framework is the Financial Action task Force (FATF) network.  This was originally established at the 1989 G-7 Paris Summit with the express purpose of developing a co-ordinated international response to the criminal and political threats posed by money laundering.

The first task of the FATF network was to develop what became the 40 Recommendations and nine Special Recommendations.  There is now a whole network of ‘country ‘ FATFs, which follow the original 1989 principles.  The FATF network works with other bodies in order to achieve its AML/CFT objective.  The Organisation of Economic Co-operation and Development (OECD) provides the international FATF’s office facilities, but while the two organisations co-operate closely, they remain separate.

The chief means by which the FATF within a given country or territory carries out it’s functions is through the AML/CFT Evaluations and Assessments Handbook.  This lists the following components of an AML/CFT ‘toolkit’, thus:-

Key documents to be used
Composition of assessment teams
Assignment of primary responsibilities
The mutual evaluation/assessment process
Instructions for completing the mutual evaluation questionnaire
Instructions for preparing the on-site visit
Instructions for producing the mutual evaluation report

The Handbook also contains, as Annexes, the following detailed ‘templates’ for an AML/CFT Assessment Report (also known as a Mutual Evaluation Report):-

Mutual Evaluation/Detailed Assessment Report Questionnaire
Mutual Evaluation/Detailed Assessment Report and it’s Executive Summary
Factors or elements that could be relevant to whether individual recommendations are effectively implemented

The Handbook has been designed to be used by staff with only the most basic understanding of AML/CFT  and FASTF principles.  It therefore constitutes an complete ‘toolkit’ for an AML/CFT assessment for a given country or territory with a separate jurisdiction.

The final pillar in the AML/CFT legal framework is the Egmont Group.  This is based on an international network of Financial Intelligence Units (FIUs) which was set up in 1995 to encourage international AML/CFT co-operation at the FIU level.  The Group, which more national FIUs are joining, meets regularly to exchange ideas on information exchange, training and sharing AML/CFT expertise.

The Egmont Group also provides a forum for FIUs to improve co-operation on AML/CFT matters and to facilitate national AML/CFT programmes.  The main elements in achieving this objective comprise:-

Expanding and embedding international reciprocal AML/CFT information exchange
Increasing overall FIU international effectiveness by promoting cross-training
Founding a secure data communications network, known as the Egmont Secure Web (ESW) to facilitate information exchange between FIUs.
Increasing co-ordination and support between the component divisions of a national FIU
Promoting the independence of national FIUs
Promoting FIU establishment as part of ‘best practice’ in AML/CFT ;policy implementation

To conclude, while the size of the threat posed by money laundering in general is, to say the least, considerable, the international community is far from defenceless.  Building on a foundation of UN Resolutions and pre-existing international law enforcement functions, the Palermo Convention in particular, accompanied by the increasingly broad international TATF and FIU network means that the international community have the means to, potentially at least, counter this threat.

Should the reader wish to examine the source material for the international AML/CVFT network, the following documents will be useful:-

United Nations Security Council Resolution 1267 of 1999
Document S/RES/1267 (1999)
15 October 1999
Unattributed
General Distribution (as a free and public PDF)
The whole of this document was examined and a commentary in my own words prepared.

United Nations Security Council Resolution 1373 of 2001
Document S/RES/1373 (1999)
28 September 2001
Unattributed
General Distribution (as a free and public PDF)
The whole of this document was examined and a commentary in my own words prepared.

United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, 1988
United Nations document freely and public available as a PDF (internet search)
Unattributed
United Nations document freely and public available as a PDF
The whole of this document was examined and a brief commentary in my own words prepared.

United Nations Convention against Transnational Organised Crime (of 2001)
Document A/RES/SS/25 of 8th January 2001
Unattributed
General Distribution (as a free and public PDF)
The whole of this document was examined and a brief commentary in my own words prepared.

FATF Reference Document
AML/CFT Evaluations and Assessments
Handbook for Countries and Assessors
Unattributed
FATF document freely and publicly available as a PDF
The whole of this document was examined and a brief commentary in my own words prepared.

Financial Action task Force
Policy Brief - Money Laundering
July 1999
Unattributed
FATF document freely and publicly available as a PDF
Pages 1 to 4 inclusive