Compliance Management

(Anti Money Laundering / Combating of Terrorist Financing & proliferation Financing)

Office of Chief Risk & Compliance Management

August 23 , 2023
 Objectives
At the end of the training, participants should able to :

o define what is Money laundering ML , Terrorism Financing TF &

Proliferation Financing PF

o understand sources of illicit fund & methods used by criminals to

launder illicit funds

o identify and report unusual or suspicious transaction

o recognize national & international requirements (laws and regulations)

that banks must comply and the rationale behind

o effectively implement national AML/CFT requirement not to trigger

various types of risks to the bank.
o ascertain expected role in fighting money laundering and overall need
of effective AML framework.
Introduction

“Compliance Management” means the process of

identifying international and national laws and regulations applicable to
the operation of the Bank and ensuring that the Bank complies with them so
as to protect the Bank from the compliance risk

“Compliance Risk” means risk of legal or regulatory sanction,

financial loss or reputation loss that the Bank might suffer owing to its failure
to comply with all applicable national and international laws and regulations.
 Intr…
o The term money laundering is said to have its origins from the
mafia's ownership of Laundromats in the US in the 1920's and
1930's. Organized criminals were making so much money from
extortion, prostitution, gambling & bootlegging, they needed to
show a legitimate source of the money.
o The Financial Action Task Force /FATF/ was established
during the 1989 G7 Summit in Paris to develop more effective
financial standards and anti-laundering legislation at the
national and international level to combat the growing problem
of money laundering. Consequently, issued Forty
Recommendations.

o Terrorism Financing (TF ) & Proliferation Financing (PF)of

Weapons of Mass Destruction were added in 2001 and 2012
respectively.

o The two recommendations are revised and merged in to one

document entitled “International standards on combating
money laundering and the financing of terrorism and
proliferation of weapons of mass destruction”
FATF’s 40 Recommendations
i. AML/CFT POLICIES AND COORDINATION
(Recommendation 1 – 2)

ii. MONEY LAUNDERING AND CONFISCATION

(Recommendation 3 – 4)

iii. TERRORIST FINANCING AND

FINANCING OF PROLIFERATION
(Recommendation 5 – 8)
iv. PREVENTIVE MEASURES
(Recommendation 9- 23)
v. TRANSPARENCY AND BENEFICIAL OWNERSHIP
OF LEGAL PERSONS AND ARRANGEMENTS
(Recommendation 24 -25)

vi. POWERS AND RESPONSIBILITIES OF http://www.fatf-gafi.org/

COMPETENT AUTHORITIES AND OTHER
INSTITUTIONAL MEASURES ( Recommendation
26-35)
vii. INTERNATIONALCOOPERATION
(Recommendation 36- 40)
 INTR…
Eastern and Southern Africa Anti-Money Laundering Group
(ESAAMLG)

• Mutual evaluation Report (MER)of Ethiopia was conducted by the World

Bank and the mutual evaluation report (MER) was approved by the ESAAMLG Council of
Ministers on the 5th of June 2015.According to the FATF various assessment report on Ethiopia,
it has recommended to:- Adequately criminalizing ML/TF, establishing and implementing an
adequate legal framework and procedures to identify and freeze terrorist assets, ensuring a
fully operational and effectively functioning Financial Intelligence Unit (FIC)……

• Consequently, Ethiopia existed from high risk jurisdiction having significant strategic
deficiencies by addressing the technical compliance deficiencies identified since the adoption
of its Mutual evaluation Report (MER), Now, Ethiopia is under enhanced follow-up-
report /FUR/ and will continue to inform the ESAAMLG of the progress made in improving
the implementation of its AML/CFT measures before each Task Force meeting .

• Therefore, at micro level, unless our bank is effectively and adequately implement the
standards recommended by FATF and adopted by FIC, it will be prone to regulatory body
FIC,NBE and our correspondent banks (fines, sanctions, closure of correspondent accounts,
etc).
 Proclamations , directives and working manual on AML/CFT

o Proclamation on Prevention & Suppression of Money Laundering and Financing of

Terrorisms (Proclamation # 780/2013) , which has become effective on Feb 04, 2013,
o Directive number 01/2014 on (Financial Anti-Money laundering and countering the
financing of terrorism and compliance),Issued by Financial Intelligence Center of
the Federal Democratic republic of Ethiopia

o Designated Non-Financial Business and Professions' (DNFBP’s) Anti Money

Laundering and Countering The Financing of Terrorism compliance directive
number 02/2016

o Order of the Council of Minister to freeze finances used to support proliferation of

weapons of mass destruction issued pursuant to Article 9 of the Proclamation no.
1132/2019,

o Suspicious Transaction detection and reporting guideline for financial institution

# 02/2019
o The Bank’s AML/CFT policy and procedure /manual on prevention of Money
laundering and terrorism
1. MONEY LAUNDERING (ML)
Money Laundering (M/L) is the process of converting
illegitimately obtained proceeds into seemingly
legitimately obtained proceeds by concealing or
Disguising the true Nature ,Source ,Location and
Ownership of illicitly obtained Proceeds.
 A. SOURCES OF ILLICIT FUND FOR MONEY
LAUNDERING

The major sources of illicit

fund are:
 Drug trafficking
 Corruption (bribe, fraud,
embezzlement,
extortion)
 Human smuggling
 Tax evasion
 Contraband
 Theft
 Counterfeiting
 Robbery, burglary
 Human trafficking
 Illegal arms trafficking
 Illegal wildlife trade
 Cyber crime
B. METHODS OF ML

1) Use of other persons (families, close associates, etc or (wife/husband,

sons, daughters, family members, employees, close friends… etc , to disguise the true
ownership of the illicit fund

2) The Use of Financial Institutions Products and

Services: To move the illicit fund from its original location and to mask the
illicit fund make it appear legitimate
– Wire transfer
– Over and under invoicing of goods and services
– Over and under shipments
– Falsely described goods and services
METH…

3) Front/shell companies/business i.e. companies

established by criminals to conceal the illicit fund.

Shell Companies; no physical presence, other than a postal address, and generate
little or no independent economic value. used to generate false invoices, fictitious consultancy
fees

4) Anonymous/false names is simply to hide the true name from

law enforcement
 Method cntd...
Example 1

A business man in Ethiopia was accused of tax evasion

for Birr 795 million. Among which Birr 378 million was
deposited at bank in the name of his employees. Finally
the man is accused of two crimes, one is tax evasion and
second money laundering offence totally to pay Birr 795
million + 378 million
 Method cntd...

Example 2
An Ethiopian fraudster opened a deposit account in one of
the local banks using forged keble ID. He falsified check
payments from 2 governmental companies with a total of Birr
156,213.00. Consequently ,He deposited the amount of the
check in his deposit account. Meanwhile, he withdrew the
amount from his account. After being caught, he was
sentenced 5 years and 6 months in prison.e.g.
 REAL CASES

Example 3
1. Person B is a college emplyee with lower monthly income.
2. However his account activity indicate large transactions which far
exceeds his legitimate income
3. In addition, various individuals with no apparent relationship with
the customer credit to his account
4. The branch conducted due diligence and could not identify
legitimate sources of fund as well as could not identify the
relationship between the various individuals that deposits
into his account
5. The Branch chose to file STR Investigation indicate that the
person has links with smugglers/traffickers that kidnap migrants
in neighboring countries and the amount in his account represents
extortion money.
 Real Cases CNTD…

Example 4.
1. Person A runs a legitimate business with an estimated
annual turnover of USD 150,000.
2. His account however showed an annual turnover b/n USD
1.7 – 3.5 million.
3. The Bank reported the account as suspicious transaction as
the income is abnormally high for the type of business.
4. Investigations reveled that the business is a cover and the
customer is engaged in trafficking women for sexual
exploitation from Asia into Europe
5. The proceeds represents illicit payments transfer for
trafficking in persons.
 C. Stages of MONEY LAUNDERING
1. Placement- The initial injection of the illegal fund
into the financial Institutions. The goal is to deposit
criminal’s cash into the financial system.
2. Layering - the location of complex networks of
transactions which attempts to obscure the link
between the initial entry point and the end of the
laundering cycle by the sophisticated layering of
financial transactions.
3. Integration- Injecting the illegal funds into the
legitimate economy. The goal is to creat apparent legal
origin for the criminal proceed. It is at the integration
stage where the money is returned to the criminal from
what seem to be legitimate sources
 2.Terrorist Financing (TF )
“Terrorist Financing” means an act of providing or making
available to a person, unlawfully and deliberately by any means
whatsoever whether directly or indirectly, funds with the intent that
they be used, or with knowledge that the will be used, in whole or in
part to commit terrorism and any activity which constitute a crime.
A. Classification of Terrorism Finance Need.

1) Direct attack costs- includes Bomb making equipments,

vehicles, maps and surveillance materials.

2) Other Direct Operational Support-

– Salaries, subsistence (for themselves and their dependents)
– Training (ideological indoctrination and practical skills such as home bomb making)
– Travel (false documentation)
– Logistics, etc

3) Broad Organizational Requirement costs

Maintaining a terrorist network (or a specific cell) i.e.
Recruitment of operatives
Planning attacks
Promote ideology (using charities, websites, etc)
B. SOURCES OF TERRORISM FINANCING
a. Legitimate sources
– Abuse of Charities
– Legitimate Business
– Self Funding
b. Illegitimate sources
Drug trafficking,
Fraud (card-debit or credit).etc
kidnapping and ransom, theft, smuggling, petty crime, and pirating
and counterfeiting goods.
Charity is a special source of funding for terrorists due to :-
• Public trust
• Access considerable sources
• Cash intensive
• Global presence
• Lighter regulatory requirements
• Charity is also used to promote ideology and recruit members of terrorists if
the top leadership of charity is hijacked by Terrorists themselves
 C.MOVING TERRORIST FUNDS
Terrorist move funds through;
A. Financial Sector
• Terrorists use the products and Services provided by the Financial System as vehicle to
move terrorist funds Between and among financial jurisdictions

• The most attractive financial institutions sector services for terrorists is “wire transfer” .
(E.g…9/11 attack)

B. Alternative Remittance Sector (Hawala) are attractive to terrorists because

– Weaker/Less record keeping
– Less stringent regulatory oversight

C. Charities- are also attractive to move terrorist funds in such a way that they are
susceptible for “diversion of legitimate transactions” and “Broad exploitation of the charity
sector

D. Cash Couriers- physically transporting cash.

-To avoid the AML/CFT safeguards established in financial institutions
D.STAGES OF TERRORISM FINANCING

1. Acquisition- Funds are initially gathered from contributors.

Contributors at this stage may or may not know that the final
purpose of the funds is for terrorist activity.
2. Aggregations- Smaller amount of funds are then channeled to
larger ones. This is done by moving them to one or few financial
institutions.
3. Transmission to Terrorist Organizations - The funds
aggregated are moved into a central terrorist organization and
location
4. Transmission to Terrorist cells: the funds are transferred in to
the individuals or groups that carries out the terrorist activities.
5. Conversion - funds are used to purchase the necessary
materials to carry out the terrorist activities.
The main reason that Banks are a focus by global policy makers for combating the
financing of Terrorists is due to the fact that “terrorist organizations usually utilize
banks to gather and remit fund to terrorist cells that is utilized by the terrorists to
conduct the terrorist activity.
3. Proliferation Financing (P/F)

Proliferation Financing /PF/ is defined by the FATF as

the provision of funds or financial services used for the manufacture,
acquisition, possession, development, export, trans-shipment,
brokering, transport, transfer, stockpiling or use of nuclear,
chemical or biological weapons and their means of delivery and
related materials in contravention of national laws or, where applicable,
international obligations.
 The financial elements of a Financing of Proliferation
program can be broken down into three stages

 “Program fundraising”: A proliferating country raises

financial resources for in-country costs.

 “Disguising the funds”: The proliferating state moves assets

into the international financial system, often involving a
foreign exchange transaction, for trade purposes.

 “Materials and technology procurement”: The proliferating

state or its agents uses these resources for procurement of
materials and technology within the international financial
system.
 4.SUSPICIOUS TRANSACTION Reports (STRS)

• What is a suspicious Transaction?

Suspicious Transactions refers to one which is unusual because of
its size, volume, type or pattern or otherwise suggestive of known
money laundering, predicate offense or terrorist financing methods

It indicates/suggests that the transaction is not a normal

transaction and may have some linkages with illegitimate activity

Suspicious Transaction Reports (STRs) are critical tools in

detecting serious crimes which helps countries Law enforcement
agencies to detect persons’ crimes
Some Facts about STRs

• There is no clear cut rule on how to identify suspicious

transactions related to ML

• Reporting institution’s employees judgment and

experience is crucial in identifying unusual transactions

• A Bank or other reporting institution’s employee need not

be 100 % correct on the Criminal Activity

• He/she are not required to know precisely what the

underlying criminal activity was
STR FACTS…

• Identification & Reporting of Transactions is a common practice of financial

institutions around the globe. STRs are key in detecting various crimes

• FIS and other stakeholders needs to ensure that reporting institutions create
an enabling environment to their employees to report suspicious
transactions

• He /she must report to FIS via Chief RCM if he/she sees suspicious activity
based on his/her Judgment.

• The FIS will further evaluate and scrutinize based on available information
the STR reports sent. Not all STRs sent to FIC will be prosecuted
Red flags/Indicators of suspicious Transactions

• The Deposit account has a large amount of

deposit which is inconsistent with the business.
• A customer may have no history of business or
employment but makes frequent cash
transactions or maintains a large account
balance.

• The customer transfers or makes payments to

various individuals to unrelated to him (family,
business, etc)
• Loans for so long kept inactive but suddenly
credited high amount of cash implying
substantial reduction or full settlement.
• Exporters conducting business in high risk
jurisdictions.
Red flags/Indicators…

• Exporters shipping items through high risk

jurisdictions, including transit through non-
cooperative countries.
• Items shipped that are inconsistent with the nature
of the exporter’s business (e.g. a steel company that
starts dealing in paper products)
• Exporters involved in potentially high-risk
activities that may be subject to export/import
restrictions (e.g. weapons, ammunition, etc)
• Obvious over-or under pricing of goods and
services.
• Obvious misrepresentation of quantity or type of
goods imported or exported.
INDICATORS OF TERRORIST FINANCING

Most indicators for suspicion on ML may also be applied

here on TF.
However, the following indicators are derived from FATF, “Guidance for
FIs in detecting TF”.

o A dormant account suddenly receives a series of deposits and/or big

sum deposit followed by cash withdrawal with in onetime or few days.

o Wire transferred ordered in small amounts to avoid reporting

requirement and/or originator’s name is not indicated with the wire
transfer.

o The use of NPO to collect and then transfer funds immediately or after
a short time to a number of beneficiaries.

o Funds generated by a business of individuals of the same origin from

countries/region/place of specific concern
 Indicators of proliferation Financing PF

o The customer is involved in the supply, sale, delivery or purchase

of dual-use, proliferation-sensitive or military goods, particularly
to higher risk jurisdictions.

o The customer or counter-party, or its address, is the same or

similar to that of an individual or entity found on publicly
available sanctions lists.

o The customer’s activities do not match the business profile &

vague about the end user(s)

o The country involved does not normally export or import the

types of goods concerned.
5.Takeaway from Directives , working
manuals….
I. Customer Risk Classification
Low Risk ; identities and sources of wealth can be easily
identified ,known profile, Government Departments and
Government-owned companies, regulators and statutory bodies
etc salaried ,employees, individuals from the lower economic
strata

Medium Risk; pose a higher than average risk, depending on

customer’s background, nature and location of activity ,country
of origin, sources of funds and his client profile etc

a) Persons in business/industry or trading activity where

business has a scope or history of unlawful trading/business
activity.
b) Where the client profile of the person/s opening the
account, according to the perception of the branch is
uncertain and/or doubtful/dubious.
Customer Risk…

High Risk ; sources of funds are not clear or have high

venerability of ML

The following are some of the high risk categories of

customers/geograhy:
• Politically exposed persons
• Non for profit organizations
• Non-resident customers for short period
• Transfers from and to geographical areas in which
extremism is a concern.
• Business in Geographical areas (example: border areas) in
which illicit activity is a concern.
• Business relationship with countries subject to measures for
example by the united Nations (UN)
• Business relationships/transfers from countries or
geographical areas that have designated terrorist
organizations operating within the country (e.g. Somalia )
II. KYC for Politically Exposed Persons (PEPs)
• Individuals who are or have been entrusted with prominent public
functions by a foreign country or domestically , for example Head of
state or Government, senior politicians, senior government, judicial or
military officials, senior executives of state owned corporations and
political party officials and persons or companies related or closely
associated to them;

• Persons who are or have been entrusted with a prominent function by

an international organization and includes members of senior
management such as directors, deputy directors and members of the
board or equivalent functions other than middle ranking or more
junior individuals;

Special Treatment of PEPs

 Obtain approval from senior management;
 Take all necessary measures to identify the sources of the wealth and funds of
such customer
 Conduct an on-going monitoring of their business relationship.
III. Customer Due Diligence (CDD)
CDD is the processes used by financial institutions to collect and evaluate
relevant information to uncover any potential risk to the financial
institution of doing business with a specific organization or individual by
analyzing information from a variety of sources

Simplified Due Diligence (SDD) FI’s may conduct simplified

customer due diligence measures in the case of identifying lower risk of money
laundering or financing of terrorism. Example: Banks, insurance companies,
microfinance institutions, postal savings, money transfer institutions that are
supervised for compliance to AML/CFT; Public enterprises; Government
ministries, departments, parastatals and agencies;

Enhanced Customer Due Diligence (EDD) FI’s may conduct

enhanced customer due diligence measures in the case of identifying higher
risk of money laundering or financing of terrorism.”
 Customer Risk factors: PEP, NGO , Non Resident…
 Country or geographic risk factors: Countries not having
adequat AML/CFT systems, Countries subject to sanctions,
embargos
 Product, services, transaction or delivery channel risk
factors: Wire transfers, Cross-border business relationships
Financial institution shall carry out customer due diligence
measures:
1) before establishing business relations with or opening an account for a
customer;

2) before carrying out a transaction for a customer who does not have an
account or is not in an established business relationship with the
financial institution and who wishes to carry out:
o a transaction above the amount fixed by the Center(Birr 300,000)
whether conducted as a single transaction or several transactions
that appear to be linked; or
o a transaction that is a domestic or international wire transfer;
3) Whenever doubts exist about the veracity or adequacy of previously
obtained customer due diligence information; or

4) Whenever there is a suspicion of money laundering or financing of

terrorism.
Banks may refuse to open an account or halt a business relationship if the client
fails to meet minimum KYC requirements.
IV. Obligations Regarding Wire Transfers Financial institutions whose
activities include wire transfers shall obtain and verify the full name, account
number, and address, or in the absence of address the national identity
number or date and place of birth of the originator and beneficiary and the
beneficiary account number where such an account is used to process the
transaction. The information shall be included in the message or payment
form accompanying the wire transfer. If there is no account number, a unique
reference number shall accompany the transfer.

V. Reporting of Suspicious Transaction Financial institutions and that suspect

or have reasonable grounds to suspect that funds or property are the proceeds of crime, or
are related or linked to, or are to be used for financing of terrorism shall be required to
submit promptly reports setting forth their suspicions to the Center. This obligation shall
also apply to attempted transactions.

VI. Cash & Noncash Transaction Reporting Financial institutions shall

report to the Center cash transactions above the amount fixed by the
Center(currently Birr 300,000) whether conducted as a single transaction or
several transactions that appear to be linked.
VII.Prohibition of Tipping-off Under no
circumstance shall financial institutions and their
directors, officers and employees disclose to their
customers or third parties that:

a) information concerning suspected

money laundering or financing of
terrorism will be, is being or has been
provided to the Center; or
b) a money laundering or financing of
terrorism investigation will be, is being
or has been carried out.
6.THE Need to Fight ML?

Bank’s
Reputational risk
reduce a country’s access to both foreign investments and foreign markets apart from domestic
customers reliability questions.

Litigation risk
Litigation risk is the possibility that legal action will be taken because of an individual's or
corporation's actions, inaction, products, services, or other events.

Operational risk
failed internal processes, people and systems & technology

Concentration risk
Concentration risk is the potential for a loss in value of an investment portfolio or a financial
institution when an individual or group of exposures move together in an unfavorable direction…
THE NEED…
As a Country
ML undermine the integrity and stability of financial institutions and systems, discourage foreign
investment, distort international capital flow (FDI)

It will have devastating effect on the economy of the entire country by undermining the
competitiveness of the legitimate business

It may attract other persons to go for criminal activities and crime will increase

It will disorder rule of law and good governance

We should also remember that there are victims to all the crimes from which the proceeds
require money laundering.

Examples.
 corrupt officials lead exotic lifestyles while majority of the people do not have clean water to drink or
sufficient food to eat,
 drug dealers get lucrative money while those drug addicted persons lives are ruined by addiction
 terrorism causes thousands of people killed or maimed by terrorist attacks around the world
 7. EFFECTIVE AML FRAMEWORK

AML-Program The objective of effective Anti Money Laundering program is to

prevent, detect and report money laundering, terrorist financing and other illicit
activity which are the basic components of an effective control system.

Prevention Detection Reporting

· Suspicious Activity
· Account Opening · Transaction Monitoring Reporting
– Customer Identification – Alert Generation
· Subpoenas (Court Order)
Program – Investigations
– Know Your Customer · Account Restrictions or
· Periodic Reviews Closures
(KYC) Processes
– Enhanced Due Diligence · Enterprise-wide Reviews · Business Reviews
· Customer Screening
 Three Lines of Defense - AML
First Line of Defense Second Line of Defense Third Line of Defense
Business and Support Units Risk and Compliance Audit

Business Management
AML Compliance Audit
· Drives a compliance culture –
“tone at the top” · Plan, coordinate and supervise the activities of the · Provides independent
· Ensures client on-boarding compliance functions of the bank. periodic assessments of
meets AML requirements · envisage to enhance compliance culture across the the adequacy and
· Oversees operational support Bank to contribute for sustainable development and effectiveness of internal
units profitability of the Bank by ensuring effective controls
· Monitors results of internal risk implementation of the compliance management
assessment reviews system;
· develop AML/CFT policy and procedures and
Support Units
oversee its effective implementation;
· Operational support for client · conduct internal supervision regularly to ensure
on-boarding and renewals
compliance and rendering reports on similar matters
· AML transaction monitoring to the FIC;
· OFAC and other list scanning · Coordinate and conduct trainings to employees on
issues of AML/CFT awareness, detection methods
and reporting requirements;
· review the bank’s AML/CFT frameworks from time
to time with a view to determine the adequacy and
identifying other areas of potential risks;
Components of a Strong AML Culture

Tone at the Top

Strong governance structure at all levels of the

organization and inclusive of all stakeholders
Effective relationships – the business, compliance, risk, legal,
operations, technology

AML requirements integrated with

Continuous training and business processes – clients, products,
communication processes
 Powers of Regulatory Authorities

The National Bank of Ethiopia may impose one or more of the following measures
and sanctions where they establish violations of the obligations under the
Proclamation by financial institutions:
a) written warnings;
b) order to comply with specific instruction;
c) ordering regular reports from the financial institution and on the
measures they are taking;
d) fine in an amount not less than Birr 10,000 and not greater than Birr
100,000;
e) barring individuals from employment within the business sector or
profession;
f) restricting the powers of managers, directors and controlling owners,
including the appointing of adhoc administrator;
g) suspending or revoking of license and prohibiting the continuation of
the business ;
h) other appropriate measures.
 Thank
YOU !!!