Antimoneylaundering.us: In your mind, what are the causes of financial fraud?
There are several crime theories that discuss certain factors that have to be present in order to induce a person to commit a financial fraud or theft, in general terms, the first is that one has to have access in the first place such as opportunity (not possible otherwise), the second is that the person has to have the motivation (or pressure), and third the person has to have the rationalization (belief system) to commit the theft. This equation is most often referred to as the Fraud Triangle.
Many studies have shown that the crime of fraud is primarily an optimistic one so as long as people lack of ethics and the environmental factors are there (lack of controls), they are going to commit fraud. Fraud is not a random occurrence. In employee crime, there is a saying that I grew up with in the business that says 10% of the employees will steal from you no matter what you do (how difficult you make it), 10% will never steal from you no matter how easy you make it (no internal controls. Little chance of detection), and the remaining 80% of the employment workforce can go either way, depending on the factors mentioned above. So there is opportunity afforded by access, motivation or pressure by situational factors (the need for money), and lastly the rationalization to commit the crime (the mindset of the actor that justifies the behavior).
The idea is, you get someone in a position of responsibility (who has access to funds) with little or no internal controls, coupled with the motivation and rationalization to commit the fraud and the likelihood of fraud is very high.
In many instances, the motivation or pressure for committing financial fraud has been high medical bills (sick family member), a personal weakness such as gambling debts or an expensive drug addiction. However, lately, most of the large scale financial frauds that have been reported, typically have been marked by naked greed, people spending money uncontrollably, on lavish furnishings, lifestyles, extravagant parties and mega mansions.
So how does one break the fraud triangle? The Committee of Sponsoring Organizations of the Treadway Commission (COSO) suggests the “Internal Control – Integrated Framework,” as the foundation for fraud deterrence. The Internal Control Framework consists of five components: Control Environment (internal controls); Risk Assessment (forward looking survey of internal control risks); Control Activities (effective policies and procedures, checks and balances); Information & Communication (about the performance of the organization); and Monitoring (ongoing or periodic assessment of the quality of internal control performance).
Antimoneylaundering.us: What institutions have the highest risk of money laundering and which one is the number one method to launder money and why?
When talking about the provision of financial services, any product or service that enables unlimited payments to third parties will be high risk. For example, correspondent banking, trade finance, and just wire payments (the easiest and most expeditious way to move money) in general are typically the highest risk. In the case of complex products and services such as correspondent banking and trade finance, where the financial institution may not even truly know the counter parties, the risk is compounded many fold. Add to that, large dollar volumes, high risk international jurisdictions and you have the perfect storm, much in the same way of the fraud triangle mentioned above.
For most global financial institutions we know that the two areas of highest risk are traditionally correspondent banking or trade finance, and both almost always involves the facility of wire transfer.
For this reason, I would say the number one vehicle for money laundering now is in terms of frequency, the wire transfer. In addition to that, the FATF at least once a year calls attention to new areas for money laundering detection emphasis in their special reports, typologies or methodologies. Many of these trends, which are the subject of the FATF reports, are the current hot issue of the day. However, a compliance professional should never lose sight of the fact that money laundering can be committed in a seemingly endless variety of ways, in fact the money launderer, is only limited by his or her ingenuity and/or imagination. Currently, we hear a lot about official or public corruption, but next year it could be something else, and the year after something else. For example, the FATF in the past year or so has discussed new payment methods, remittances, free trade zones, football, then about casinos and it goes on and on. The FATF also reported on piracy and kidnapping, human trafficking, and so money laundering trends will always be evolving and changing. Since the money laundering methods are always changing, the compliance industry must increase its detection capability; primarily through the use of technology to prevent money laundering, but this has it’s good points as well as bad points.
Antimoneylaundering.us: Now we can see in the news that they are using technology for the prevention of money laundering, what do you think are the pros and the cons of the use of technology in the prevention of money laundering?
The pros are that if one has a large financial institution where there are a lot of volumes of transactions, the only way to effectively comply, is through the use of technology. The cons, however, and I see this more and more currently, is that so many institutions have implemented inferior systems or implemented the technology incorrectly. Many institutions haven’t bothered to check to see if their systems are working correctly (not just efficiently but effectively). The regulators have discovered this so this is a challenging time for the industry in taking compliance to the next level.
Independent verification and validation is so important to make sure, for example, the transaction monitoring system is working as expected. In my opinion, this is the number one problem facing financial institutions today.
Antimoneylaundering.us: Do you think that the penalties on the money laundering crime are severe enough or they could be tougher?
Many jurisdictions around the world by international standard have severe penalties for money laundering and in most jurisdictions the penalties are usually are sufficient enough.
The problem is globally that there are not enough prosecutions for money laundering, and this is evident in the numbers of arrests or convictions for money laundering. In many jurisdictions, there is lengthy jail time and fines and penalties for money laundering. The problem is in a lot of countries, there just aren’t enough people getting arrested and convicted for money laundering right now. I do think that once convicted, the incarceration and penalties would be sufficient. Please don’t get me wrong, could it be more? Yes, but in many countries, that have had all the money laundering offenses on the books for years, don’t even have more than a handful of convictions. This is why the IMF issued its recent report calling attention to the effectiveness of the AML/CFT regimes around the world.
Antimoneylaundering.us: Could you give regular people some tips to make themselves aware and prevent being victims involved in a fraudulent money laundering situation?
Probably the best advice would be to just know with whom you are doing businesses with, because in a lot of instances, if you look at all the situations where people get involved in these schemes (e.g. they receive checks from people that ask them to cash them and then send the money to some third party), one realizes that these people don´t really know who these people are and they are conducting financial transactions on behalf of someone else and that just makes no sense.
So number one is to know who you are doing business with, know who they are, not just the name of the person or the business, but do they really operate a legitimate business?
The second piece of advice would be for any person to ask themselves if the situation makes any rational, economic or logical sense. For example somebody approaches a person and they say “I got this check from my friend and he doesn´t have a bank account, can you put it in your account an then write a check for this other person so he can get the money because he doesn´t have an account,” the first thing one has to realize is, “I don´t even know who these people are, and why are they asking me to do this?” If a person doesn’t understand what type of business is involved, or if it seems suspicious, and the next thing they should ask themselves is “why they want me to do this? And why so they need my bank account? Why is it necessary to give these checks to another individual to cash and is this the normal way a legitimate business operates?