Today money laundering has become a vital subject due to the fact that there has been an increasing number of banking organizations, management companies, other companies and their offered services. Money laundering is the process of disguising dirty obtained money into clean obtained money.
In the case of Mauritius, as per the reports by the Financial Intelligence Unit, the banking industry witnesses the highest number of suspected cases of money laundering compared to other industries. Banking organizations are more vulnerable to money laundering activities, which maybe due their variety of services that they offered. Also, the banking system is the most exposed to the general public.
Hence, there is a strong need of studying the Anti-Money laundering laws, codes and guidelines targeted for the banks. A survey has been conducted where a questionnaire was used.
Are the presented Anti-Money laundering guidelines are being implemented by the banking organization? Are they being effective in combating Money laundering? This project seeks to answer these questions.
Eventually, positive results were obtained from the study. In other words, it was seen that banks do comply with AML guidelines though through different means and the current AML system also reflects effective results.
I. AIMS & OBJECTIVES
1. DEFINITION OF FINANCIAL SERVICES
Financial services are the economic services provided by the finance Mauritian industry, which encompasses a broad range of Banking and non banking organizations that manage money, which include unions, banks, credit card companies, leasing companies, global businesses, consumer finance companies, stock brokerages, investment funds and some government sponsored enterprises.
Financial institutions are classified into 2 categories: Banking Institutions and Non Banking Institutions
2. EXAMPLES OF BANKING INSTITUTIONS
A "commercial bank" is what is commonly referred to when one uses the term 'bank.' A commercial bank differs from an investment bank in that a commercial bank lends money directly to businesses while an investment bank helps businesses raise money from other firms, usually through the exchange of bonds or stock. Typical commercial bank services include holding money and allowing withdrawals, issuing payments based on checks, providing personal and business loans, issuing credit and debit cards, and so forth. These entities are heavily regulated by state and federal law and a number of regulatory agencies.
3. EXAMPLES OF NON BANKING INSTITUTIONS
Foreign Exchange Service
Foreign exchange services allow the transfer of money from the currency of one nation to another. These are heavily regulated by domestic and international laws, as well as many banking and other regulations.
Asset Management Services
Asset management usually refers to the servicing of collective investment funds. Entities offering these services are usually registered with the Securities and Exchange Commission (SEC) as Registered Investment Advisors. The focuses of these services are usually the growth of capital through client investments.
Another, commonly overlooked financial service, is insurance. Insurance is regulated at both the state and federal level. Many insurance policies are backed by investments which are, themselves, further regulated by the SEC and other agencies.
Other Financial Services
Examples of other industries that fall under the heading of financial services may include bank-issued credit and debit cards, credit card processing services, hedge fund investing, financial intermediation services, private equity funds, angel investment services, and many others.
These above named financial services sectors are regulated by laws form two different bodies. The banking organisations are regulated by the Bank of Mauritius Act and the non banking sectors are regulated by the Financial Services Commission Act.
4. EMERGENCE OF MONEY LAUNDERING IN THE FS SYSTEM
Mauritius is emerging as a private Banking Hub. To further enhance the banking industry, different legal frameworks have been set up. For instance, as discussed earlier, ML may cause harm to the integrity of banks, which made the issue ML much of concern, and as a result, an AML framework was set up.
Mauritius is considered as a new age International Banking and Financial centre that does offer world class ICT infrastructure, transparent legal structure, regulatory framework, business friendly environment, good governance bilingual multi-ethnic workforce and skilled manpower (Bosco 2011). Financial institutions are the core of the financial system and thus it plays a prime role in the proper functioning of an economy.
Commercial Banking came into existence in 1812 and since then Mauritius has adopted a cautious attitude towards the development of its banking sector (Gokool 2012). Since 2004, the banking regime has been split into two different regimes: the onshore and the offshore banking regime. Mauritius is known for its strong economic performance and this has contributed in the development of a profitable and sound banking sector (World Bank 2003). The banking system is liquid, profitable, highly concentrated and well-capitalised (IMF 2003).
One major threat to the Financial Services Sectors in Mauritius is Money Laundering. This phenomenon has become a worldwide issue with the increased number of financial organizations. Money laundering is the processing of these criminal proceeds to disguise their illegal origin. This process is of critical importance, as it enables the criminal to enjoy these profits without jeopardizing their sources. Generally, money laundering is Athe process by which one conceals the existence, illegal source, or illegal application of income to make it appear legitimate. In other words, the processes used by criminals through which they make dirty money appear clean. Though initially considered an aspect integral to only drug trafficking, laundering represents a necessary step in almost every criminal activity that yields profits.
5. INTRODUCTION OF THE ML IN THE FS
Criminals engage in money laundering for three reasons.
First, money represents the lifeblood of the organization that engages in criminal conduct for financial gain because it covers operating expenses, replenishes inventories, purchase the services of corrupt officials to escape detection and further the interests of the illegal enterprise, and pays for an extravagant lifestyle. To spend money in these ways, criminals must make the money they derived illegally appear legitimate.
Second, a trail of money from an offense to criminals can become incriminating evidence. Criminals must obscure or hide the source of their wealth or alternatively disguise ownership or control to ensure that illicit proceeds are not used to prosecute them.
Third, the proceeds from crime often become the target of investigation and seizure. To shield ill-gotten gains from suspicion and protects them from seizure, criminal must conceal their existence or, alternatively, make them look legitimate.
Money laundering has become a global problem as a result of the confluence of several remarkable changes in world markets (i.e., the globalization of markets). The growth in international trade, the expansion of the global financial system, the lowering of barriers to international travel, and the surge in the internalization of organized crime have combined to provide the source, opportunity, and means for converting illegal proceeds into what appears to be legitimate funds. Money laundering can have devastating effects on the soundness of financial institutions and undermine the political stability of democratic nations. Criminals quickly transfer large sums of money to and from countries through financial systems by wire and personal computers.5 Such transfers can distort the demand for money on a macroeconomic level and produce an unhealthy volatility in international capital flows and exchange rates
A high number of money laundering has been observed in Mauritius, as per the reports by the Financial Intelligence Unit. Mostly these observations were made in the financial sectors like the banking industry. In terms of normal banking due diligence procedures and KYC litmus test, the Bank of Mauritius Supervision Department has to carry an urgent investigation into the Bank who failed to trigger a STR (Suspicious Transactions Report) in view of an alleged 23 year old Director who, along with his fellow Directors, carried out bank deposits and impending transfers circa MUR 700 Million (estimated to exceed MUR 1 Billion).
BOM has to severely reprimand and apply strict sanctions against the Bankers, who, as account managers, have implicitly condoned purported criminal behavior pertaining to the fraudulent transactions and transfers.
Should Accountants and Lawyers who advised in this business transaction and contractual clauses, terms and conditions, not be named and held legally liable for knowingly facilitating misrepresentation in a fraudulent business model, purportedly intended to induce unsuspecting investors, who relied on their professional integrity, to enter into a valid contractual relationship with the proposed fund managers in what effectively was a Ponzi Scheme? This Ponzi Scheme Episode serves to prove a blatant fact: Mauritius is awash with black money desperate for elaborate investment schemes to undergo dirty cash laundering. Our tax authority, financial intelligence and banking regulators have to be summoned to enhance our goodwill as a credible world financial centre. The irony being that many significant Ponzi Investment Fraud Victims will not testify due to their illegal source of funds. Dirty money laundering is on a regional scale in foreign currency. Mauritius has woed Russian, Gulf, South African and other unverified jurisdictions funds; we need to be seriously concerned as to when the bubble will burst and
III. BILATERAL LITERATURE REVIEW
6. DEFINITION ML
Money Laundering is often considered as a financial crime, because it involves an attempt to evade confiscation of proceeds or even monetary fines levied and tax evasion purposes (IMF2001). Money Laundering is a matter of concern to each and every economy, and even a global matter. Given that both the financial and the non-financial sector are vulnerable to ML activities:
The purpose of this chapter is to provide a brief overview of Money Laundering through the use of past studies: its process, causes, consequences, impacts and why there is a strong need to combat Money Laundering.
WHAT IS ML?
In simple terms, Money Laundering is the act of legitimising illegal money, in order to hide its true nature or source. It is a process by which illegally obtained money is given the appearance of having originated from a legitimate source (AUSTRAC, 2008). Examples of illegal sources are: Illegal trade, Corruption, Fraud, Forgery, Theft, Blackmail, Extortion, Smuggling, and other criminal activities.
7. PROCESS OF ML?
The ML process can be broken into 3 stages, namely: Placement, Layering and Integration.
In this stage, the money is moved from its original source. As the name itself suggests, in the first stage, the illegal money is placed into the economy through financial institutions. Hence it can be said that this particular stage serves out for two purposes: firstly, it relieves the criminals from the burden of holding large sum of illegal money and secondly, the money is seen as having a legal source. However during this stage, there is a high probability of getting ensnared as suspicions may be raised by officials if large sum of money is being transacted (Fincen,n.d.). The placement of the illegal money may be done through different ways: currency smuggling (movement across country), currency exchanges, blending of funds (mix illegal with clean money), gambling/betting, asset purchase and others.
The aim of this stage is to obscure the origin of the funds and to disguise its true ownership (Steel,n.d.). During the layering stage, complex layers of financial transactions are used in order to disguise the trail of funds and to cover the laundering activity, i.e., severing the link with the crime (McDowell & Novis,2001). This process can be achievable through the use of electronic transfer system (constant movement of funds between institutions/jurisdictions) or through complex dealings of stock or assets (purchases are made with the illegal funds and then the purchased are resold in such a way that the assets/stock purchased become untraceable).
Integration is the final stage of the Money Laundering process. At this stage, it is very difficult to distinguish between the legal and illegal money (Steel,n.d.). Hence, the launderer makes use of the illegal money, which has been integrated in the economy/legitimate financial system. Ultimately, from others point of view, the launderer is using legal money for his transactions purposes, thus launderers are able to enjoy their illegal profit without any rouse of suspicious towards them. The aim behind this stage is to reunite the money to its true owner. This can be done through different ways: purchase of property or false import/export invoices.
The above can be summarised in the following figure in summarised form:
Figure 2.1: Money Laundering Stages
Source: 'An Assessment of Narcotics Related ML', FinCEN, July 1992
8. CAUSES OF ML
' Absence of Legislation
It give a free hand to criminals. Sometimes government itself is involved, thay do this to win political rivals, and to please their allies.
' Tax Evasion
Tax evaders launder money so that they can lie about where money and assets came from in order to evade tax and sometimes they simply operate outside the economy where records are kept.
' Increased profits
' When people are incentive for more profits in any particular area, such as in production and trading of drugs, arms and across borders trade, they start taking risks to earn higher profits.
' To appear black money legitimate
In ML, black money usually becomes legitimate after a series of process. And less risk is involved of being caught. This doesn't happen in other economic crimes. So in order to appear their money more legitimate they go for ML.
' Limited risks
The availability of multiple opportunities for personal enrichment without the risk of being exposed is another cause of money laundering. Such economic environment is much more conducive to black money.
9. CONSEQUENCES OF ML
' Undermining Financial Markets/its Integrity: Expansion of the black economy undermines the financial system and raises questions on its credibility and transparency.
' Expanding Crime: Criminals are able to deploy and use their illicit funds efficiently.
' 'Criminalizing' Society: By reinvesting illegal funds in legal businesses.
' Reducing Revenue and Control: Diminishes government tax revenue and weakens government control over the economy.
' Undermining the Legitimate Private Sector: Front companies have a competitive advantage over legitimate firms that draw capital funds from financial markets as they are able to offer products below cost of manufacturing.
' Loss of Control of Economic Policy: Due to the increased volatility of international capital flows, interest, and exchange rates and in money demanded.
' Economic Distortion and Instability: Owing to the constant movement funds from sound investments to low-quality investments/ from one industry to another so as to veil illegal proceeds
' Reputation Risk: Such activities diminish legitimate global opportunities and sustainable growth while attracting international criminal organisations with undesirable reputations and short-term goals. This can result in diminished development and economic growth.
EFFECTS OF ML
As shown above, ML carries numerous negative effects. These are further supported by some empirical evidences. B.L.Bartlett and D.Ballantine (2002) classified the effects of ML into three categories; an economy's financial sector, its real sector and its external sector. The study aims on analysing the economic consequences on individual economies, rather than on the global financial system.
They are of the view that ML may cause erosion of the financial institutions as there are high probabilities that the financial institution becomes corrupted or controlled by launderers. Given that there is a positive link between the financial sector and a country's economic growth - especially in strong developing countries: confidence and reputation play a special role in financial institutions. Hence, an erosion of the financial institutions will have a negative effect on the economy's growth rate. According to the authors, ML also has an encouraging effect on a country's financial sector. In other words, as it helps in the good governance of the institutions through the AML policies though the cost of implementing those policies is high.
Secondly, the effects on the real sector were considered. They scrutinize that ML depresses growth in the real sector and ultimately a corrosion of economic growth. This is because with ML, productive assets are crowded-out to less-productive assets. It was
COMBATTING MONEY LAUNDERING
Over the years, great importance has been assigned to the fight of the illegal practice, ML. The Commonwealth Secretariat produced a model of best practice to combat ML in the financial sector. The model points out four main reasons to take immediate action.
Firstly, crime seems more attractive if criminals are able to benefit from their proceeds through laundering. Secondly, laundering money through individual banks undermines the integrity of the financial institution and ultimately the whole financial system as well as macro-economic factors like the interest rates. The Basel Committee (December 1988) stated:
'Public confidence in bank, and hence their stability, can be undermined by adverse publicity as a result of inadvertent by bank with criminals.'
Thirdly, ML promotes other economic crimes such as fraud or tax evasion and finally, easy ML may lead to a rise in corruption level as launderers will have the possibility to conceal their corrupted money. As unscrupulous politicians have recourse to, national economy and democratic system will be jeopardized.
The model serves for two purposes; firstly to be used as a tool for policy-makers who are preparing legislations, regulation or setting national policy to combat ML and secondly, as a guidance to institutions to protect themselves from being as a means for ML. It also sets out the basic principles of ML prevention, which includes the FATF 40 recommendations.
On the other hand, the FSA (July 2007) suggested that the AML measures can be in terms of minimising ML risk. Hence the various risks faced by the private banking were studied and according to them, different measures were shaped. It was seen that the factors that contribute to the increase of ML risk are weak legal structures, poor implementation of the measures enforced, the provision of secretive or discrete services offered by banks and failure by banks' managers. There is also a lack of monitoring customer transactions which helps launderers to easily place their money.
Eventually, the FSA suggested for more efficient, experienced and less autonomous Relationship Managers. Other suggestions made were the commonly used ones such as CDD, Monitoring of customer's transactions, provision of STRs and good implementation of the AML Laws. Also mentioned was that if these measures are to be used efficiently, ML cases can be detected at the placement stage itself.
However, Mariano-Florentino Cuellar (2003) has an opposite view of the fight against ML. He is of the view that:
'Like many other enforcement systems, the fight against ML involves three major elements: statutes with criminal penalties charged by prosecutors, rules administered by regulators, and detection systems primarily run by investigators.'
This goes in hand with the separation of powers theory; jurisdiction, legislation and administration. Philip Robinson (2005) as well agreed to this theory, according to him, there are three key elements to fight against ML; effective framework, proper regulatory bodies and an effective practice.
The Financial Services Commission (FSC) (French: Commission des Services Financiers de Maurice) is a regulatory authority responsible for the regulation, supervision and inspection of all financial services other than banking and global business in Mauritius. The FSC operates under the aegis of the Ministry of Finance and Economic Development within an internationally recognised legal framework which includes the Financial Services Act, the Securities Act and the Insurance Act, it licenses, regulates, monitors and supervises the conduct of business activities in the non-banking financial services sector
FSC Mauritius (Financial Services Commission of Mauritius)
The main role of FSC Mauritius is to protect the integrity and stability of the non-bank financial services sector and by so doing protect the interest of investors and consumers.
' Oversees all participants in the non bank financial industry including the stock exchange, the depository and settlement system, market intermediaries, collective investment schemes, insurance companies, and the global business sector.
' Monitors and supervises them to reduce the risks of non compliance with laws and regulations and to ensure financial soundness.
The Commission also monitors Financial Service Providers. This includes firms or individuals that arrange, execute, or otherwise facilitate client transactions in financial assets by providing specialised services to their customers. These units do not, as a main business activity, raise funds or extend credit on their own account.
' Conducts off-site and on-site compliance visits of licensed entities.
' Handles complaints.
' Investigates malpractices and fraud and takes corrective actions.
' Sets licensing standards and grant licences.
' Authorises investment products and services.
' Ensures compliance with expected standards of conduct and the law.
' Enforces Codes and Guidance.
The Financial Services Commission, Mauritius (the 'FSC') is the integrated regulator for the non-bank financial services sector and global business. Established in 2001, the FSC is mandated under the Financial Services Act 2007 and has as enabling legislations the Securities Act 2005, the Insurance Act 2005 and the Private Pension Schemes Act 2012 to license, regulate, monitor and supervise the conduct of business activities in these sectors.
Our vision is "to be an internationally recognised Financial Supervisor committed to the sustained development of Mauritius as a sound and competitive Financial Services Centre".
In carrying out its mission, the FSC aims to:
' promote the development, fairness, efficiency and transparency of financial institutions and capital markets in Mauritius;
' suppress crime and malpractices so as to provide protection to members of the public investing in non-banking financial products; and
' Ensure the soundness and stability of the financial system in Mauritius.
The FSC's internal structure is organised in a functional manner so as to optimise resources and ensure cross-functionality
FSC'S STATUTORY OBJECTIVES
Strong regulation and supervision are essential to ensure stability in the financial system. FSC's objective is to position Mauritius as a jurisdiction of substance with the right balance between regulation and business development. The revision of the legislative framework in 2007 and the implementation of the Risk-Based Supervision framework, further reinforce the supervision of the financial services sector, the continuous review of the legislations and the supervisory tools ensure alignment with international norms and standards.
The FSC is mandated under the Financial Services Act, to inter alia:
' To ensure the orderly administration of the financial services and global business activities;
' To ensure the sound conduct of business in the financial services sectors and in the global business sector;
' To elaborate policies which are directed to ensure fairness, efficiency and transparency of financial and capital markets in Mauritius;
Study new avenues for development in the financial services sector, to respond to new challenges and to take full advantage of new opportunities for achieving economic sustainability and job creation; ensure soundness and stability of the financial system in Mauritius; and work objectives, policies and priorities for the development of the financial services sector and global business.
FSC's core functions
Regulate and supervise - The FSC regulates and supervises entities licensed and/or registered under its Enabling Laws.
License - The Financial Services (Consolidated Licensing and Fees) Rules 2008 apply to all entities licensed and regulated by the FSC and aim at streamlining the licensing process by providing a comprehensive set of licensing criteria and requirements within a well defined and consolidated framework.
Enforce regulatory and compliance requirements - The FSC requires that its licensees demonstrate compliance with the requirements set out in the legislative framework. Our legislation has over the years been consolidated to reinforce our powers to mitigate risks while creating an innovative business environment.
Policy formulation - The FSC elaborates policies which aim at ensuring fairness, efficiency, transparency and stability of the financial system in Mauritius.
Combat fraud and money laundering - The FSC takes measures to prevent and address investment business abuse, market abuse and financial fraud in relation to any activity conducted in the non-banking financial services and global business sector by implementing an Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) framework and adhering to international norms and standards.
Promote development of the sector - The FSC has the statutory obligation to promote development in the financial services sector so as to respond to new challenges and achieve economic stability. In this respect, the FSC values the contribution of the industry and other stakeholders.
Ensure consumer education and protection - The FSC through its legislative framework ensures the protection of consumers and investors. The FSC promotes access to financial services through dissemination of financial information and awareness of the benefits and risks associated with the financial markets.
I. Financial Services Act 2007
II. Insurance Act 2007
III. Private Pension Schemes Act 2012
IV. Protected Cell Companies Act 1999
V. Securities Act 2005
VI. Securities (Central Deposit, Clearing and Settlement Act 1996)
VII. Trust Act 2001
Cyprus contagion reach our financial shores. Banking sectors are more vulnerable and are exposed to money laundering activities, which may be due to various services and transactions. Also, the banking system is the most exposed to the general public.
Although money Laundering has threatened the Mauritian society yet there are laws that have been set and strictly followed by the Financial Services Commission Act And The Bank Of Mauritius Act.
Regulations governing the banking sector
The banks are governed by the Banking Act, enacted in October 2004. The aim of replacing the previous Banking Act (1988) is to consolidate and revise the laws relating to meet the new requirements of the banking industry. The act provides that banks are to be regulated by the BoM, governed by the BoM Act, enacted in 2004.
Legislative framework to fight Money Laundering and Financing of Terrorism
Mauritius adheres to international initiatives to combat Money Laundering and Financing of Terrorism. Various legislations were enacted and include:
' The Financial Intelligence and Anti-Money Laundering Act 2002 (FIAMLA)
' The Prevention of Corruption Act 2002
' The Prevention of Terrorism Act 2002
The Convention for the Suppression of the Financing of Terrorism Act 2003 provides for the International Convention for the Suppression of the Financing of Terrorism to have force of law in Mauritius.
As mandated under Section 7(1)(a) of the Financial Services Act 2007 and Section 18(1)(a) of the Financial Intelligence and Anti-Money Laundering Act 2002, the FSC issued in March 2012 the new FSC Code on the Prevention of Money Laundering and Terrorist Financing, which is a single comprehensive document applicable to all its licensees.
Combating Money Laundering and Financing of Terrorism through effective exchange of information
The FSC has the power to exchange information with public sector agencies, international organisations, foreign supervisory institutions or law enforcement agencies.
In addition, several Memoranda of Understanding (MOUs) were signed between the FSC and regulatory bodies (including foreign supervisory bodies) to address the framework for mutual assistance and exchange of information. The main objectives of the MOUs are inter alia to:
' consolidate supervision of cross-border operations of financial institutions;
' define mechanisms to share information in accordance with international standards; and
' reinforce collaboration amongst institutions in the fight against crime, Money Laundering and Financing of Terrorism.
In particular, the FSC signed a Memorandum of Understanding (MOU) with the Financial Intelligence Unit (FIU) which describes the ways in which both institutions will cooperate in preventing Money Laundering and the Financing of Terrorism. The FSC, in compliance with Section 22 of the Financial Intelligence and Anti-Money Laundering Act 2002, forwards any information on the possibility of a money laundering offence or suspicious transaction to the FIU.
In addition, pursuant to the provisions of the Mutual Assistance in Criminal and Related Matters Act 2003, a foreign authority may, in relation to a serious offence, make a request to the Attorney General for assistance in any judicial proceedings carried in their jurisdiction state.
Financial Sector Assessment Programme (FSAP)
The FSC voluntarily requested Financial Sector Assessment Programme(FSAP) exercises to be conducted by the International Monetary Fund-World Bank in 2003 and 2007. The main objectives of these exercises were to assess the Mauritian financial sector's strengths, weaknesses and vulnerabilities to macroeconomic shocks, as well as the contribution of the financial services to economic growth.
The AML/CFT framework based on the Forty Recommendations 2003 and the Nine Special Recommendations on Terrorist Financing 2001 of the FATF was also assessed.. The FSAP team recognised that significant steps have been taken by Mauritian authorities in recent years to enhance the AML/CFT framework and that the Mauritian authorities are fully committed to fight Money Laundering and Financing of Terrorism.
The FSC constantly reviews its AML/CFT regulatory framework to meet new standards as set out by other international organisations such as the International Organisation of Securities Commission (IOSCO) and the International Association of Insurance Supervisors (IAIS). The FSC also reviewed its Risk-Based Supervision Framework to ensure compliance of licensees with AML/CFT legislation.
Mauritius is also an active member of the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG), an associate member of FATF and is committed to implementing the FATF recommendations regionally.
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