Presentation By : Tanka Mani Sharma
Department of Customs
20 May , 2011
Criminal Activity for MONEY
Financial Crime ???
Financial crimes are crime against property, involving the unlawful
conversion of the ownership of property (belonging to one person) to
one's own personal use and benefit.
Financial crimes may involve fraud (cheque fraud, credit card fraud,
mortgage fraud, medical fraud, corporate fraud, securities fraud , bank
fraud, payment fraud, healthcare fraud;
Theft; scams or confidence tricks; tax evasion; bribery; embezzlement;
identity theft; money laundering; forgery , production of Counterfeit
money and consumer goods.
Other Financial crimes are Computer crime, elder abuse, burglary, armed
robbery, and even violent crime such as robbery or murder.
Financial crimes may be carried out by individuals, corporations, or by
organized crime groups. Victims may include individuals, corporations,
governments, and entire economies.
Financial Crime reporting is generally analyzing and reporting of above
mention and other related crimes.
Organized crime magnitude
Financial Crimes -Types
- Corporate Fraud/ including Banking Fraud
- Securities and Commodities Fraud
- Health Care Fraud
- Mortgage Fraud
- Identity Theft
- Insurance Fraud
- Mass Marketing Fraud
-Tax Evasion . Revenue Leakage.
- Money Laundering
Corporate Frauds- Activities
(1) Falsification of financial information, including:
(a) False accounting entries(b) Bogus trades designed to inflate profit or
hide losses (c) False transactions designed to evade regulatory oversight
(2) Self-dealing by corporate insiders, including:
(a) Insider trading (b) Kickbacks (c) Backdating of executive stock options
(d) Misuse of corporate property for personal gain
(e) Individual tax violations related to self-dealing
(3) Fraud in connection with legitimately-operated mutual or hedge fund:
(a) Late trading (b) Certain market timing schemes
(c) Falsification of net asset values
(d) Other fraudulent or abusive trading practices by, within, or involving a
mutual or hedge fund
(4) Banking Fraud ; Banking Crime Act – Crimes specified in the Act.
Example -Nepal Development Bank , Gorkha Development Bank etc.
Bank and Money Laundering
link of crime,
Securities and commodities Fraud
Market Manipulation (“Pump and Dump”)
Broker Embezzlement .
Late Day Trading : As like making your bet after you've seen your opponent's
High Yield Investment Fraud-
Ponzi Scheme-which is named after early 20th century criminal Charles
Ponzi. These schemes use money collected from new victims, rather than
profits from an underlying business venture, to pay the high rates of return
promised to earlier investors
Pyramid Schemes –Networking Business.
Prime Bank Investment Fraud- Schemes of reputed banks.
Advanced Fee Schemes
Hedge Fund Fraud and Mutual fund Fraud.
Commodities Fraud – Generally high value ornaments and precious metals.
Foreign Currency Fraud
Foreign Currency Fraud: The perpetrators of these frauds are foreign
currency trading firms that entice individuals into investing in the spot
foreign currency (Forex) market by false claims and high pressure sales
Additionally, individual currency traders employed by large financial
institutions may manipulate Forex prices and divert profit to themselves.
Corrupt currency trading firms use fraudulent sales practices including
false and deceptive guarantees of future return on investment.
These firms may even create artificial account statements that reflect a
purported investment in the Forex market when, in reality, no such
investment has been made.
When the currency trading firms actually invest clients’ funds into the
Forex market, they do so not with intent to conduct a profitable trade for
the client, but merely to "churn" the client's account.
Churning creates large commission charges benefitting the trading firm at
the expense of the client's interests.
The increased reliance by both financial institutions and
non-financial institution lenders on third-party brokers has
created opportunities for organized fraud groups,
particularly where mortgage industry professionals are
Combating significant fraud in this area is a priority,
because mortgage lending and the housing market have a
significant overall effect on the nation's economy.
Each Mortgage Fraud scheme contains some type of
"material misstatement, misrepresentation, or omission
relating to the property or potential mortgage relied on by
an underwriter or lender to fund, purchase or insure a loan.
Insurance- Corporate Fraud
Insurance companies hold customer premiums which are forbidden from
operational use by the company. However, when funding is needed,
unscrupulous executives invade the premium accounts in order to pay
This leads to financial statement fraud because the company is required to
"cover its tracks" to conceal the improper utilization of customer premium
Premium Diversion/Unauthorized Entities - The most common type of
fraud involves insurance agents and brokers diverting policyholder
premiums for their own benefit. Additionally, there is a growing number of
unauthorized and unregistered entities engaged in the sale of insurance-
As the insurance industry becomes open to foreign players, regulation
becomes more difficult. Additionally, exponentially rising insurance costs
in certain areas (i.e., terrorism insurance, directors'/officers' insurance,
and corporations), increases the possibility for this type of fraud .
Mass Marketing Fraud
Mass Marketing Fraud is a general term for frauds that exploit mass-communication
media, such as telemarketing fraud, Internet fraud, and identity theft.
Advanced communications, including computers, speed dialing, automatic dialing,
and facsimile machines, along with modern conveniences such as credit cards,
electronic banking, and television have led to tremendous growth in mass marketing.
Illegal mass marketers use three primary methods to identify potential victims.
First, they may contact individuals with whom they have had no prior contact and
attempt to scam these individuals.
Second, they prompt prospective victims to contact the mass marketing operation by
sending them communications that guarantee substantial awards or other benefits.
Third, many mass marketers purchase lists of people who are known to have been
victims of prior fraud schemes. These individuals are often receptive to investing in
other schemes. The most common mass marketing schemes are:
Advanced Fee Fraud
Foreign Lottery Fraud
Overpayment Fraud (Forged/Altered Check Scam)
Identity theft involves the misuse of another individual's personal
identifying information for fraudulent purposes. It is almost always
committed to facilitate other crimes, such as credit card fraud, mortgage
fraud, and check fraud.
Personal identifying information, such as name, Social Security number,
date of birth and bank account number is extremely valuable to an identity
With relatively little effort, an identity thief can use this information to
take over existing credit accounts, create new accounts in the victim's name
or even evade law enforcement after the commission of a violent crime.
Identity thieves also sell personal information online to the highest bidder,
often resulting in the stolen information being used by a number of
Identity theft can be very difficult for consumers to deal with, as they often
do not know they have been defrauded until they are denied credit or
receive a call from a creditor seeking payment for a debt incurred in their
Nigerian Letter Scam (419 Fraud)
- In Nigerian Letter Scams, an e-mail, fax, or letter is sent to a victim
claiming there are millions of dollars either from an exiled head of state,
political refugee, a pseudo-governmental company or a deceased relative
(inheritance) in an account in a foreign country.
The funds are supposedly in a security company and the victim is asked
to help get the funds to the U.S. The victim is asked to wire numerous
fees in conjunction with getting the funds released from the foreign
country and sent to the U.S. The victim is promised a percentage of these
funds for his assistance.
In other cases, the victim is provided a check to pay the "fees" required,
which, after the victim pays the "fees," turns out to be fraudulent. (419
Frauds are named after the Nigerian Penal Code Section 419.)
Business in Financial Crime(ML)
Drugs /Organized crime Frauds Terrorist Financing
•Hydroponics/ •Holding companies •Non-profit organizations
•Indoor gardening •Real estate development •Convenience
•Construction renovation •Consulting firms •Grocery stores
•Real estate •Energy sector •Real estate
•Travel agencies •Precious metals
•Convenience • use of commodities, false
•Grocery stores invoicing, and other trade
manipulation to move
Techniques of Financial Crime
A. Banking- Smurfing and transfers through banking channels.
B. Non-Bank financial Institutions –Remittance, money orders .
C. Non-Financial Businesses or Professions-Facilitators /advisors
Black Market currency Exchange
The use of gold in the Middle East, and the use of precious gems
Some terrorists use Islamic banks to move funds.
Real businesses-false invoicing , false import export declaration.
Real estate companies
Commercial trade and transactions through free trade zones.
Casinos , internet casinos etc.
Money Laundering ?
Money laundering is the process of creating the appearance
that large amounts of money obtained from serious crimes,
such as drug trafficking or terrorist activity, having originated
from a legitimate source.
In US -financial transactions to conceal the identity, source, or
destination of illegally gained money.
In UK -taking any action with property that disguise the fact.
Clean" money= Legally obtained.
• "Dirty" money =Illegally obtained.
• Laundering = Making dirty money clean .
• ML= Making Black money to White money.
Sources and Uses of MLFT Funds
Sources of Funds Uses of Funds
•Drug trafficking. •Consumption of luxury items
•Human trafficking •Investment in companies .
• Precious stones trafficking. • Real estate and Shares.
• Abduction(highjack) •Casinos, hotels, cinemas etc.
•Wildlife ,Herbs, Red sandal, • Cash based business invest.
• Valuable forest products, •Charity
•Aquatic animals trafficking . •Social works.
• Arms trafficking (sources/uses) •Further crime. etc.
•Revenue Leakage .
• Illegal business.
• Misuse of authority ,etc.
Nepal- Current Situation
2005 Mutual Evaluation
2oo8 Anti-money laundering Act.
National Coordination Committee.
Financial Information Unit (FIU) at NRB
Investigation Agency (DRI)
2010 Targeted Evaluation .( Critical Analysis)
High Risk Jurisdiction- Global Warning Position.
Working Committee./Awareness and Interim plan.
Latest Letter from the FATF President 27 October.
Compliance date- December 2010 – Already been ove
Improving AML/CFT Jurisdiction-On going process.
Certain strategic AML/CFT deficiencies remain.
(1) adequately criminalizing MLTF (R 1 and SR II);
(2) establishing and implementing adequate
procedures to identify and freeze terrorist assets
(3) implementing adequate procedures for the
confiscation of funds related to ML (R 3)
(4) enacting and implementing appropriate mutual
legal assistance legislation (R 36).
The FATF Recommendations
Financial Action Task Force created in 1989 ,G7 summit.
FATF report 1990,
40 recommendations in 4 groups.
(a) Legal System
(b) Banking, Measures to be taken to prevent MLFT
(c)Institutional and other measures for combating MLFT.
(d) International cooperation.
9 Recommendations regarding CFT after 9-11-2001
9 Special Recommendations
I Ratification and implementation of UN instruments
II.Criminalising the financing of terrorism and associated
III.Freezing and confiscating terrorist assets
IV.Reporting suspicious transactions related to terrorism
V.International co-operation (Information Exchange)
VI.Alternative remittance (Western union etc)
VII.Wire transfers Daily 700,000.
VIII.Non-profit organisations (Transparency)
IX.Cash couriers ( Declaration in the customs point)
UN Security Council Resolution 1267 &1373
1267 known as the Al-Qaida/Taliban Sanctions Committee .
3 Sanctions-assets freeze , travel ban, and arms and embargo.
Sanctions against terrorists, terrorist support networks and
terrorist organization related to Al Qaida, Osama Bin laden,
Requires freezing the funds/ other assets of persons who are
designated by the Un Security Council 1267 committee .
Currently app.484 names.(392 individuals 92 entities )
Persons whose funds/ other assets should be frozen in the
context of UNSCR 1373( national designations).
Nepal Ranking –High Risk
Status of 49 recommendations .
C= Fully complaint =0
L= Largely Complaint=3
N=Non complaint =34
NA=Not applicable =3
Corruption-146 out of 180( TI 2010)
Ease of doing business 116 out 0f 183.(WB 2010)
SR III – Regional Compliance
Non compliance(NC) 13 = Bangladesh, Chinese Taipei,
China, Cambodia, Fiji, Indonesia, Magnolia , Myanmar,
Nepal, Palau, Samoa, Tonga, Vietnam .
Partially Compliance(PC) 12 =Brunei , Macao china,
Srilanka , Vanuatu, Hong Kong China, Japan, Korea, New
Zealand, Thailand, Pakistan, Philippines, Solomon Island.
Largely Compliance(LC) 7= Cook Islands, India,
Malaysia, Australia , Canada, Singapore, United States.
Fully Compliance (C) = 0,
C=0, LC-7, PC 12, NC13.
High Risk and non-cooperative Jurisdictions
High Risk and Higthend Risk Jurisdiction.
Rated in 2001-2006 Evaluation
Hungary,Indonesia,Isreal,Lebanon,the Marshall Island
Myanmar, Nauru, Nigeria, Niue, the Philippines, Russia,
Saint Christopher and
Nevis, Saint Vincent and grenadines and Ukraine.
Now most of them upgraded as complaint.
Deficiencies Rated 8 countries (2008)
Iran, Uzbekistan, Pakistan, Turkmenistan, São Tomé and
Principe, and the northern part of Cyprus.
Financial Crimes(ML) -Practices
• Under ground Economy. Alternate Banking ( Hundi---)
• Anti-blocs /Isolated countries -Financing Terrorist.
• “ Narcoterrorists ". (Closely linked to the narcotics trade.)
• Foreign Terrorist Organizations (FTOs)Such as-;
Revolutionary Armed Forces of Colombia, (FARC),
The United Self Defense Forces of Colombia (AUC)
Sendero Luminoso (Shining Path) in Peru,
IRA in USA , GIA in Algeria , Al-Qaeda ,
SriLankan rebels, Armenian terrorist etc.
• Financing charitable organizations.
• Investing in cash based business.
• PEPs ( Politically Exposed persons.)
Investigation Experiences .
In 2007-2008, FINTRAC disclosed a total of 210 cases
171 ML , 10 cases MLTF , 29 cases TF and security threats.
Fraud -investment/securities and telemarketing fraud .
Drug-related activities- cocaine .
Money services businesses (MSB), including FOREX dealers;
Telecommunications businesses; and Car sales/rentals.
Open-loop and closed loops cards used to online gambling .
Internet payment systems (IPS) and their variants,
Digital precious metals (DPMs), exploited for MLFT
AML in Cooperative , securities and future markets
The global anti-money laundering guidelines for private
banking issued in 2000 .( Apply in Financial Coop also)
Ten major international private banks in Wolfsberg , and
the responsibility of capital market regulators in the fight
against money laundering and terrorism.
“The US Department of Justice feels a separate anti-money
laundering act should be enacted to plug the influx of bad
money in the capital market.
Bahrain Stock Exchange (BSE) anti money laundering
regulations is comprehensive .
Greece , Virginia , India, Kenya, comprehensive guidelines
to cooperatives for AML.
Nepal –Criminal Activities
Various Criminal activities has been increased.
Hijack, Abduction, Extortion ,Kidnapping,
Gambling, Smuggling and Tax Evasion
Counterfeiting, Drug trafficking,
Prostitution , Murder, Rape,
Cyber crime , Call bypass etc.
Travel document forged.
Forgery VAT Bill,
Under and Over Invoicing
• Involvement of PEPs - Sudan Darfur Scandal-NB Bank Case.
•Involvement of PEPs in Corruption.
•Feke import for foreign Currency.( Matihani and Rasuwa)
•Assassinations increased in Dolpa (Paush 17)
•Rs 3million looted in Butawol near Laxmi Bank- from Goenka Steels ,
Sanju Sharma . ( Paush 18)
•6 Persons caught with pistol –Bahuni Morang ( Paush 18)
•Drugs in Comfort housing -Woman / Holland Nathalia kelmand. 25 kg .
•People from 25 Countries doing Drugs business, transit.
• 142 foreigners caught during -2004-2010 in drugs case.
Belgium ,Netherland,UAESouth Korea , Afaghanisthan ,China , Myanmar ,
Nepal-Nature of Financial Crimes
• Repeated same person carrying Drugs –Nepalganj
• Bangladeshi –VOIP Telecom call by pass scandals.
• Over 50000 passports forged in six months.
• Mass deforestation / Smuggling- Forest official involvd.
Stone Export, India- 2000 cubic meter daily-Prez Concern.
Scarcity of Energy – Load shedding / Jholama Khola.
Dabur Nepal case in CIAA . Ambassador found GM .
Smuggling increased in various customs points
Motorcycle caught 589 – license, Parking , Structure change.
Chinese donated rice sold in Gorkha . Dustbins taken away.
More than 4000 people missing, annually , Women missing in abroad.
Cyber Café (ISP) disobey to maintain logbook.
Latest- Forgery VAT Bill, ML one ml dollar NB bank case.
What went wrong in Nepal
Open Market –No monitoring.
Privatization- No post Evaluation.
Deregulation- Difficult to register ,Easy to run.
Weak Governance – Strong Stakeholders.
Weak bureaucracy- Strong Unionism.
Weak Regulators- Strong Stakeholders.
Open Boarder- Security Threat.
Weak Law and order –Increased crime .
Overall causes is weak governance system.
Implications of Financial Crime
Social, economic and security threat.
Under ground economy . Parallel Banking. (Hundi....)
Loss in tax revenue .
Dirty money holding banks collapsed.
Clean money withdrawal increases .
Dirty money creates false demand , and sudden
disappearance financial sector falls apart.
Genuine business falls ,unable to compete with ML.
Their objectives is only to clean money not to make
profit. low price sale. Lastly economy collapses.
Combating Financial Crimes
UN conventions and UNSCR 1267,1373
Other International Conventions and Directives.
Bank Secrecy Acts ,Anti money Laundering Acts.
USA PATRIOT Act (commonly known as the "Patriot Act")
Information Technology. Compulsory Bank Transaction.
International and local legal measures against MLFT.
International and local confiscation measures.
Involvement of Financial and Banking Sectors(FIUs)
Strong Enforcement Agencies with adequate legal Authority.
High level Bureau of Economic Crime Control (BECC)
Involvement of High level officials and PEPs.(??)(News Follow)
After all- Regular monitoring and reporting by media.
Reporting Financial Crime
Collect detail Information about the crime.
Analyze the facts and figures.
Gather information about international practices.
Compare with similar types of previous events.
Study relevant Acts, Rules, Regulation and Literature.
Contact with the appropriate authorities for clarification.
Consult with the experts if needed.
Analyze the consequences.
Information for further justification and follow up .
Concentrate or Focus on result.