臺灣銀行業之全球挑戰:防制洗錢與打擊資助恐怖主義–以兆豐國際商業銀行為例 - 政大學術集成

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(1)國立政治大學商學院國際經營管理英語碩士學位學程 International MBA Program College of Commerce National Chengchi University 碩士論文. 治. 政 Thesis大 Master’s. 立. ‧ 國. 學. 臺灣銀行業之全球挑戰:防制洗錢與打擊資助恐怖. ‧. 主義–以兆豐國際商業銀行為例 y. Nat. er. io. sit. A Global Challenge of Taiwanese Banking Industry: Anti-Money Laundering and Combating the Financing a. n. iv l C n U h eStudy of Terrorism – A Case International n g c hofi Mega Commercial Bank. Student: Sun, Man-Jung Advisor: Professor Jack Wu. 中華民國 106 年 12 月 December 2017.

(2) 臺灣銀行業之全球挑戰:防制洗錢與打擊資助恐怖主義– 以兆豐國際商業銀行為例 A Global Challenge of Taiwanese Banking Industry: Anti-Money Laundering and Combating the Financing of Terrorism – A Case Study of Mega International Commercial Bank 研究生：孫曼蓉. 學. ‧ 國. 指導教授：吳文傑立. 政治大Student: Sun, Man-Jung Advisor: Jack Wu 國立政治大學. ‧. 商學院國際經營管理英語碩士學位學程. y. A Thesis. er. io. a. sit. Nat. 碩士論文. n. iv l to International MBAnProgram Submitted. Ch. U. i e n g c hUniversity National Chengchi. in partial fulfillment of the Requirements for the degree of Master in Business Administration. 中華民國 106 年 12 月 December 2017.

(3) Acknowledgements. First and foremost, I would like to express my sincerest gratitude and appreciation to my thesis advisor, Professor Jack Wu, who has supported me throughout my thesis with his patience and knowledge. Without his guidance and encouragement, this thesis would not have been completed or written.. 治政 I would also like to express my gratitude and appreciation 大to the members of NCCU IMBA for 立 their assistance and hospitality throughout all my studies at NCCU. ‧ 國. 學 ‧. I would also like to thank my colleagues, Bessie, Lunna, and Mandy for their suggestions and mental support throughout the work.. er. io. sit. y. Nat. Finally, I would like to express my special thanks to my parents for their support and. n. al. Ch. encouragement to make this piece of work possible.. engchi. Sun, Man-Jung. i. i n U. v.

(4) Abstract A Global Challenge of Taiwanese Banking Industry: Anti-Money Laundering and Combating the Financing of Terrorism – A Case Study of Mega International Commercial Bank By Sun, Man-Jung. 政治大. Money laundering (ML) involves a wide range of predicate offenses, including drug trafficking,. 立. human smuggling, arms smuggling, gambling, fraud, tax evasion, etc. Additionally, money. ‧ 國. 學. laundering activities had been associated with drug trafficking or organized crime in the past, but the terrorist attacks on September 11th, 2001 have highlighted the link between money. ‧. laundering activities and terrorist financing (TF). Due to the over-banking phenomenon in. Nat. sit. y. Taiwan, banks focus more on business performance than compliance, resulting in the violation. n. al. er. io. incident of Mega International Commercial Bank (Mega Bank) New York Branch with a huge. i n U. v. penalty of US$180 million fined by the New York State Department of Financial Services. Ch. engchi. (NYDFS) in August, 2016. The violation incident of Mega Bank New York Branch has reinforced the importance of compliance with international Anti-money laundering/Combating the financing of terrorism (AML/CFT) standards for risk mitigation. Taiwan will undergo the third round of the Asia/Pacific Group on Money Laundering (APG) mutual evaluations in 2018, it calls for not only government legislation but also raising public awareness of ML/TF crimes and involves the public cooperation with the government in the fight against ML/TF.. Keywords: Money Laundering, Financing of Terrorism, Mega International Commercial Bank, New York State Department of Financial Services, Panama Papers. ii.

(5) TABLE OF CONTENTS 1. Introduction .......................................................................................................................... 1 1.1. Background and Motivation for the Study ...................................................................... 1 1.2. Methodology of the Study ............................................................................................... 2 1.3. Limitation of the Study .................................................................................................... 3. 政治大. 1.4. Framework of the Study .................................................................................................. 3. 立. 2. Money Laundering and Terrorist Financing ..................................................................... 6. ‧ 國. 學. 2.1. The Role of Banking System Involved in Money Laundering Activities ....................... 6. ‧. 2.2. Overview and Background of Money Laundering .......................................................... 7. sit. y. Nat. 2.3. Money Laundering Cycle ................................................................................................ 8. n. al. er. io. 2.4. Methods and Typologies of Money Laundering Activities ........................................... 11. Ch. i n U. v. 2.5. Link Between Money Laundering and Terrorist Financing .......................................... 16. engchi. 2.6. The Impacts of Money Laundering ............................................................................... 19 2.7. Where the Money is Hidden .......................................................................................... 22 2.8. International Organizations on Money Laundering ....................................................... 27 2.8.1. United Nations Office on Drugs and Crime (UNODC) .......................................... 27 2.8.2. Financial Action Task Force (FATF) ....................................................................... 28 2.8.3. Asia/Pacific Group on Money Laundering (APG) .................................................. 31 2.8.4. The Egmont Group of Financial Intelligence Units ................................................ 34. iii.

(6) 2.8.5. The Wolfsberg Group .............................................................................................. 35 3. Anti-Money Laundering Legislation in Taiwan ............................................................... 36 4. Case Study of Mega International Commercial Bank .................................................... 42 4.1. Overview of Mega International Commercial Bank ..................................................... 42 4.2. Violation Incident of Mega Bank New York Branch ..................................................... 46. 政治大 4.4. The Impacts of AML/CFT 立 on the Operations of Mega Bank........................................ 54 4.3. Taiwanese Banking Industry Review ............................................................................ 51. ‧ 國. 學. 4.4.1. Reform a Business Culture of Compliance and Internal Control ........................... 54. ‧. 4.4.2. Establish an Effective AML/CFT Program ............................................................. 56. sit. y. Nat. 5. Conclusion and Recommendation ..................................................................................... 72. n. al. er. io. Reference ................................................................................................................................. 76. Ch. engchi. iv. i n U. v.

(7) List of Figures and Tables Figure 1: Framework Chart of the Study .................................................................................... 5 Figure 2: Three Stages of Money Laundering .......................................................................... 10 Figure 3: A Simple Hawala Transaction Sample ...................................................................... 18 Figure 4: Global Sanctions Regimes 2016 ............................................................................... 21 Figure 5: The10 Most Popular Tax Havens in the Panama Papers ........................................... 23 Figure 6: Top 10 Countries with the Most Active Intermediaries in the Panama Papers ......... 26. 治政 Figure 7: How Mossack Fonseca & Co Helped its Clients 大Hide Their Wealth Offshore ........ 27 立 Figure 8: Timeline for Anti-Money Laundering Legislation in Taiwan ................................... 41 ‧ 國. 學. Figure 9: Organization Chart of Mega International Commercial Bank .................................. 43. ‧. Figure 10: Financial Statistics for Mega International Commercial Bank, 2014 ~ 2016 ......... 46 Figure 11: Deficiencies Directed by the New York State DFS Examination ........................... 51. y. Nat. er. io. sit. Figure 12: Elements for Building a Business Culture of Compliance and Internal Control .... 56 Figure 13: AML KYC Onboarding Lifecycle .......................................................................... 60. n. al. Ch. i n U. v. Figure 14: Elements for Establishing an Effective AML/CFT Program .................................. 71. engchi. Table 1: Major U.S. Sanctions Violations Cases, 2009~2016 .................................................. 22 Table 2: Financial Secrecy Index (FSI) – 2015 Results ........................................................... 25 Table 3: The FATF Recommendations ..................................................................................... 30 Table 4: APG Members List ..................................................................................................... 33 Table 5: Major Institutional Shareholders of Mega International Commercial Bank List ....... 44 Table 6: Taiwanese Banks Ranked Among the Top 500 Banks in the World in Terms of Tier One Capital.................................................................................................................. 45. v.

(8) Table 7: Number of Banking Institutions in Taiwan, as of the end of Sept., 2017 ................... 53 Table 8: Major General Enforcement Actions of NYDFS for Violations of BSA/AML (Including Tax Evasion), 2013~2017 .......................................................................... 74 Table 9: Number of Overseas Branches of Domestic Banks, as of the end of Sept., 2017 ...... 75. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. vi. i n U. v.

(9) 1. Introduction. 1.1. Background and Motivation for the Study Mega International Commercial Bank (Mega Bank) New York Branch was fined by the New York State Department of Financial Services (NYDFS) at a penalty of US$180 million (NT$5.7. 治政大 Co., Ltd. 2016), which has (BSA/AML) on August 19, 2016 (Mega Financial Holding 立 reinforced the significance of a vigorous Anti-Money Laundering and Combating the Financing. billion, in equivalent) for violations of the Bank Secrecy Act and Anti-Money Laundering. ‧ 國. 學. of Terrorism (AML/CFT) regime. Additionally, the violation incident of Mega Bank New York. ‧. Branch implied that Taiwanese banking industry has not yet well implemented the relevant regulations, reporting requirements, and compliance regimes of the BSA/AML, which not only. y. Nat. er. io. sit. undermined the brand image of Mega Bank itself but also deteriorated Taiwan’s international reputation (Ministry of Foreign Affairs, Republic of China (Taiwan), Taipei Liaison Office in. al. n. the RSA).. Ch. engchi. i n U. v. Executive Yuan, Republic of China (Taiwan) mentions that Taiwan enacted the Money Laundering Control Act in 1996, which was the first dedicated law in Asia for the purpose of anti-money laundering and also became one of the founding members of the Asia/Pacific Group on Money Laundering (APG) in 1997. However, Taiwan’s efforts on combating money laundering became less effective over time since its subsequent amendments focused more on criminal prosecution than keeping up with international standards. Accordingly, Taiwan. 1.

(10) received positive reviews in the APG mutual evaluations in 2001, but then was downgraded to a follow-up watch list in 2007. Fortunately, Taiwan was taken off from the APG 10-member watch list on July 20, 2017 with its ongoing efforts over the past few years on both Anti-Money Laundering (AML) legislation and counter-measures. Taiwan will undergo the third round of the APG mutual evaluations in the fourth quarter of 2018. Confronted with the challenge of the third round of the Asia/Pacific Group on Money Laundering (APG) mutual evaluations held in the fourth quarter of 2018, both public and private sectors need to speed up the legislation and. 政治大. enforcement associated with AML/CFT to meet international standards and earn a better. 立. reputation through the mutual evaluation process (張迺佳 2016).. ‧ 國. 學 ‧. 1.2. Methodology of the Study. sit. y. Nat. A case study is adopted as methodology of this thesis. This thesis will discuss the currently. io. er. deficient AML/CFT regime of Taiwanese banking industry through the case study of violation. al. v i n C h Bank as well as the AML/CFT on the operations of Mega e n g c h i U entire banking industry in Taiwan in n. incident of Mega Bank New York Branch. Moreover, this thesis will discuss the impacts of. order to meet the international standards and pass the third round of APG mutual evaluations in the fourth quarter of 2018. According to the Financial Action Task Force (FATF) Mutual Evaluation Report in September 2016, the FATF assessed that Singapore has a strong framework for AML/CFT in terms of the level of compliance with the FATF 40 Recommendations and the level of effectiveness of Singapore’s AML/CFT system through the on-site visit, which has made significant enhancements to its AML/CFT regime since its last FATF assessment in 2008 (Monetary Authority of Singapore (MAS); FATF and APG 2016). Therefore, this thesis will undertake the AML/CFT regime in Singapore – the Association of. 2.

(11) Banks in Singapore (ABS) Guidelines on Anti-Money Laundering and Countering the Financing of Terrorism which is in compliance with the MAS’ Notice and Guidelines – as a benchmark to discuss the counter-measures to combat money laundering and terrorist financing (ML/TF) in Mega Bank as well as the whole banking industry in Taiwan.. 1.3. Limitation of the Study. 政治大 In general, Taiwanese banks do not establish an effective and vigorous AML/CFT program with 立. ‧ 國. 學. little experience and insufficient guidance from the authorities concerned since AML/CFT issues have been neglected for far long in the past and are relatively new in Taiwanese banking. ‧. industry. For this reason, the discussion of this thesis is based on the experience and related. sit. y. Nat. AML/CFT regime in Singapore. Furthermore, the author also encounters some difficulties in. io. er. gathering the AML/CFT regulations, regimes, and guidance of other foreign countries, such as. al. the United States, which is supposed to be the country with the highest standards and best. n. v i n C hAdditionally, it is difficult practice associated with AML/CFT. e n g c h i U to gather an effective AML/CFT program from a certain bank, especially foreign-owned banks since they treat their AML/CFT policy as confidential.. 1.4. Framework of the Study This thesis is divided into five chapters. Chapter one provides an introduction to the background and motivation for the study, methodology of the study, and the framework of the study. 3.

(12) respectively. Chapter two provides an overview of money laundering and terrorist financing, including the definition and cycle of money laundering, methods and typologies used in money laundering activities, the impact caused by money laundering, and the international organizations on money laundering, such as United Nations Office on Drugs and Crime (UNODC), Financial Action Task Force (FATF), Asia/Pacific Group on Money Laundering (APG), The Egmont Group of Financial Intelligence Units, and The Wolfsberg Group. Chapter three focuses on the governmental policy-making side, it looks at the legislation in association. 政治大. with AML/CFT in Taiwan. Chapter four focuses on the violation incident of Mega Bank New. 立. York Branch occurred in August, 2016 as a case study, which explains the role of banking. ‧ 國. 學. industry involved in money laundering activities, discusses the deficient and inadequate AML/CFT program of Mega Bank, and explores the counter-measures to combat ML/TF based. ‧. on the AML/CFT regime in Singapore and other international standards given that Taiwan is. y. Nat. sit. still at the beginning stage in AML/CFT field with insufficient regulations and guidelines. n. al. er. io. provided by the authorities concerned. Chapter five provides the conclusion and policy. i n U. v. recommendation to Mega Bank as well as the entire Taiwanese banking industry in the fight. Ch. engchi. against ML/TF, particularly under the challenge of the third round of the APG mutual evaluations held in the fourth quarter of 2018.. 4.

(13) Figure 1: Framework Chart of the Study. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. 5. i n U. v.

(14) 2. Money Laundering and Terrorist Financing. 2.1. The Role of Banking System Involved in Money Laundering Activities Jayasuriya (2003) states that money laundering is a process to disguise criminal activities in order to conceal the proceeds obtained from illicit origins to avoid detection. Furthermore, since the terrorist attacks happened on September 11th, 2001, which highlighted the link between. 治政大 financing has currently been money laundering activities and terrorist financing, terrorist 立 treated as one of the most important predicate offenses, and thus, combating money laundering ‧ 國. 學. and terrorist financing becomes a national and international challenge of countries around the. ‧. world (Jayasuriya 2003; Krieger and Meierrieks 2011; Rahman 2008).. er. io. sit. y. Nat. Rahman (2008) mentions that the banking system tends to be one of the most important and. al. n. v i n common vehicles for money laundering advantages: convenience, C h due to its comparative engchi U. accessibility, and security. As compared to other institutions, Association of Certified AntiMoney Laundering Specialists (ACAMS) states in 2016 that it is less risky for money launderers to be detected through banking institutions since there are hundreds of thousands of transactions every day in the entire banking system. Therefore, it is easier for criminals to conceal their proceeds from illicit origins comingled with other legitimate transactions in banking institutions, and even leave no trace by utilizing the banking system due to its difficulties in detection.. 6.

(15) Nowadays, with the rise of online banking and Financial Technology (FinTech), there is an emerging trend to abuse the banking system to facilitate criminals’ illicit transactions without restriction by legal and border barriers or by government supervision However, it makes the detection through banking system even more difficult since the criminals could undertake illegitimate transactions by using merely computers, mobile phones or other electronic devices without physical presence to mitigate the risk of detection with anonymity (Rahman 2008).. 政治大 2.2. Overview and Background of Money Laundering 立. ‧ 國. 學. The term “Money Laundering” was derived from the US describing the Mafia’s attempt to “launder” illicit proceeds through cash-intensive washing salons in the 1930s, which controlled. ‧. by criminal organizations (Schneider 2010). Jayasuriya (2003) relates money laundering to a. y. Nat. sit. process to make dirty money look clean, in order to disguise a wide range of criminal activities,. n. al. er. io. such as drug trafficking, human smuggling, arms smuggling, gambling, fraud, tax evasion, etc.. i n U. v. to conceal criminals’ illicit proceeds from illegitimate origins and evade investigation.. Ch. engchi. According to the United Nations Office on Drugs and Crime (UNODC), there are two reasons why criminals have to launder money:. (1) The illegitimate origin of proceeds is evidence of their crime.. (2) The proceeds are vulnerable to be traced and has to be obscured.. Given that money laundering has negative impacts on state financial stability and economic development since it undermines a nation’s international reputation and also distorts the real supply and demand of an economy, countries all over the world have ratified and enacted anti-. 7.

(16) money laundering legislation (Executive Yuan, Republic of China (Taiwan); ACAMS 2016). Terrorist attacks happened on September 11th, 2001 have highlighted the link between money laundering activities and terrorist financing whereas in the past money laundering activities had been associated with drug trafficking and organized crime. Moreover, in the aftermath of the September 11th attacks, terrorist financing has become one of the most important predicate offenses. In general, the methods and schemes used in terrorist financing and money laundering are basically the same, except that the proceeds of terrorist financing may be obtained from. 政治大. both illegitimate and legitimate origins. Furthermore, combating the financing of terrorism is. 立. currently one of the most important national and international tasks of countries worldwide. ‧ 國. 學. since more and more emerging terrorist activities happened all over the world in recent years are undoubtedly harmful to world peace (Jayasuriya 2003; Krieger and Meierrieks 2011;. ‧. Rahman 2008).. er. io. sit. y. Nat 2.3. Money Laundering Cycle. n. al. Ch. engchi. i n U. v. Money laundering cycle takes basically three stages. These three stages are commonly referred to as placement, layering and integration. The following three stages can be accomplished in one combined transaction as well as in three separate transactions (Aluko 2012; ACAMS 2016; Mulig and Smith 2004; Rahman 2008):. (1) Stage One: Placement. At this stage, large amounts of illicit proceeds obtained from criminal activities are laundered into the financial system. Financial institutions, legally operated businesses, and casinos are all common vehicles for criminals to place their illicit proceeds into circulation of the financial 8.

(17) system. For example, criminals may make large repayment for bank loans or purchase foreign currencies in banking institutions by using their illegitimate funds to launder dirty money and make it appear legitimate. The purpose of placement stage is to comingle the illicit proceeds with other legitimate money in the entire financial system and convert their illegitimate funds into other assets to avoid detection and attention of regulatory agencies.. (2) Stage Two: Layering. 政治大. At this stage, criminals intend to obscure the illegitimate origin of their criminal proceeds.. 立. Layering can be achieved through a serious of financial transactions to obscure the trace and. ‧ 國. 學. ownership of the proceeds. For example, criminals may use their illicit funds to invest in real estate, stocks, bonds, insurance products or other financial instruments, and even legitimate. ‧. businesses by implementing multiple transfers and transactions to make the true source of illicit. y. Nat. sit. funds indistinct. With the help of nowadays technology, funds can be easily moved among. n. al. er. io. accounts, banks, and countries via simple wire transfers or even e-banking. Additionally,. i n U. v. utilizing shell companies is a common way to conceal the substantive beneficial owner and. Ch. engchi. assets. The purpose of layering stage is to create a great deal of complicated financial transactions to make the detection and tracing of regulatory agencies more difficult with multiple transactions and facilitate criminals to hide the true source and ownership of the illegitimate funds.. (3) Stage Three: Integration. The money laundering process is completed at this stage. Criminals integrate the laundered money into legally operated businesses to create the perception of legitimacy. For example, criminals may use the funds to purchase luxury assets, such as real estate, jewelry, or high-value 9.

(18) automobiles to further launder their funds. The purpose of integration stage is to legalize the illicit proceeds from organized crime by investing the proceeds in legitimate businesses without compromising the true origins.. Figure 2: Three Stages of Money Laundering. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. Sources: Jayasuriya (2003); Mulig and Smith (2004); UNODC. 10.

(19) 2.4. Methods and Typologies of Money Laundering Activities The Asia/Pacific Group on Money Laundering (APG) is devoted to detailed and relevant typologies research in order to well understand the phenomena of money laundering and terrorist financing in the Asia/Pacific region. The following examples taken from APG research are common methods, techniques, schemes and instruments used in money laundering and terrorist financing (APG; ACAMS 2016): . Corruption/Bribery. 立. 政治大. ‧ 國. 學. Criminal organizations may bribe the officials or compliance staff in banking institutions to facilitate money laundering by undermining AML/CFT measures, including possible. y. Nat. io. sit. Currency Exchanges/Cash Conversion. er. . ‧. influence of politically exposed persons (PEPs).. Criminals may purchase traveler’s checks to transfer value to another jurisdiction or seek. n. al. certain Money Services. v i n C h (MSB) with Ulow reporting Business engchi. requirements to evade. detection. . Cash Couriers/Currency Smuggling. The use of smuggling facilitates criminals to conceal the illegitimate movement of large amounts of cash across borders to avoid reporting requirements and detection. . Structuring/Smurfing. Criminals may break their illicit proceeds into small amounts below the reporting. 11.

(20) threshold to undertake numerous transactions (deposits, withdrawals, transfers, etc.) by various people to evade reporting obligations and mitigate the risk of detection. . Use of Credit Cards/Checks/Promissory Notes. Criminals may use credit cards, checks, promissory notes, etc. to make their transactions and fund transfers look normal and facilitate their access to funds held in financial institutions. Especially, credit cards have a prepayment function, and thus criminals could. 政治大. prepay their credit cards to create a credit balance on their accounts and then request. 立. refunds for the purpose of layering and further conceal the original source of their funds.. ‧ 國. 學. . Purchase of Portable Valuable Commodities. ‧. Criminals may purchase portable high-value commodities, such as gems, precious metals,. y. Nat. sit. etc. to conceal ownership or move value to another jurisdiction without detection and. n. al. er. io. evade AML/CFT measures. . Ch. Purchase of Valuable Assets. engchi. i n U. v. Criminal may purchase high-value and negotiable assets, such as real estate, race horses, vehicles, etc. to take advantage of reduced reporting requirements to conceal the illicit origins of their criminal proceeds. . Commodity Exchanges/Barter. Criminals may directly exchange narcotic drugs for gold bullion - avoid the use of money or other financial instruments - to evade AML/CFT measures and detection by regulatory. 12.

(21) authorities. . Use of Wire Transfers. Criminals may use wire transfers to move funds between financial institutions, accounts, and even countries to evade detection and confiscation. . Underground Banking. 政治大. Criminals may use Alternative Remittance Systems (ARSs) or Informal Value Transfer. 立. Systems (IVTSs), such as Hawala, Hundi, etc., which are based on trust and outside the. ‧ 國. 學. formal banking system to move funds across borders without detection and official scrutiny.. ‧ sit. y. Trade-Based Money Laundering and Terrorist Financing. Nat. . n. al. er. io. Criminals may use over-invoicing, under-invoicing, multiple invoicing, fictitious trades,. i n U. v. etc. to transfer value between buyers and sellers, or use shell companies to reduce the. Ch. engchi. transparency of their transactions. . Gambling Activities. Businesses associated with gambling activities, such as casinos, horse racing, internet gambling, etc. are ones of the most cash-intensive businesses. Criminals may buy chips with criminal proceeds and then ask for repayment by a check drawn on the casino’s account to obscure the source of their criminal proceeds.. 13.

(22) . Abuse of Non-Profit Organizations (NPOs). It is common for criminals to utilize Non-Profit Organizations (NPOs) to raise funds for terrorism and hide the true origin and nature of funds by taking advantage of positive public reputations of NPOs. . Investment in Capital Markets. 政治大 by using criminal proceeds to obscure the source of funds. 立. Criminals may purchase stocks, bonds, or other financial instruments in capital markets. ‧ 國. Comingling. 學. . ‧. It is essential for criminals to combine their illicit proceeds with legitimate funds in the. sit. y. Nat. financial and economic system to obscure the origin of proceeds. Criminals may comingle. io. al. n. . er. their proceeds into legitimate businesses to evade detection.. Use of Shell Companies. Ch. engchi. i n U. v. Shell companies are companies established with neither significant operations nor assets, and their ownership structures can take multiple forms. Criminals may use shell companies to take advantage of their reduced transparency of ownership to further their money laundering and obscure criminal ownership. . Use of Foreign Bank Accounts/Offshore Banking/Offshore Businesses. Criminals may use foreign bank accounts, offshore banking or offshore businesses to conceal ownership identity of ill-gotten funds and transfer funds to another jurisdiction to. 14.

(23) avoid supervision by domestic authorities. . Use of Third Parties. Criminals may take advantage of third parties, such as trusts, family members or even nominees to obscure ownership identity of illegitimate funds. . Identity Fraud. 政治大. Criminals may use identity fraud to obscure the true identity of persons controlling illicit. 立. funds and engaging in money laundering and terrorist financing activities.. ‧ 國. 學. . Use of Gatekeepers. ‧. It is common for criminals to involve so called “gatekeepers,” such as lawyers, accountants,. y. Nat. sit. brokers, etc. in their money laundering activities. Criminals may bribe these professionals. n. al. er. io. to provide them with specialized services to facilitate them to obscure identity of. i n U. v. substantive beneficiaries and the origin of illegitimate funds. . Ch. engchi. New Payment Technologies. Criminals may take advantage of nowadays payment technologies to transfer funds among accounts, banks, and countries through e-banking or mobile phone-based remittance and payment system.. 15.

(24) 2.5. Link Between Money Laundering and Terrorist Financing Rahman (2008) mentions that the terrorist attacks on September 11th, 2001 have highlighted the link between money laundering activities and terrorist financing while in the past money laundering activities had been associated with drug trafficking or organized crime. Accordingly, terrorist financing is currently treated as the most important challenge to all civilized countries given that the emerging terrorist attacks worldwide in recent years have been harmful to world peace (Jayasuriya 2003).. 立. 政治大. ‧ 國. 學. Freeman (2011) states that terrorism does need money to sustain their organizations for daily. ‧. operations, purchase of weapons, recruiting new members, training, future terrorist attacks, and. sit. y. Nat. even pension funds for families of terrorists died from terror attacks. As a matter of fact,. io. er. terrorists have four general sources to raise their funds, including state sponsorship, criminal. al. n. activities, legitimate businesses, and charitable donations. The most distinct difference between money laundering activities. v i n Cterrorist and is the source h e n gfinancing chi U. of their funds. Money. laundering activities generate funds from criminal activities, such as drug trafficking, human and arms smuggling, etc. while terrorist financing may obtain funds from illegitimate or legitimate sources, and even both (Rahman 2008). In addition to illegal fund-raising methods, such as smuggling, extortion, kidnapping for ransom, etc., terrorist organizations may also operate totally legal businesses like trading companies, investment companies, manufacturing companies, etc. for profit generating with their terrorism essence (Freeman 2011).. 16.

(25) Rahman (2008) states that the purpose of traditional money laundering is to legitimize their criminal proceeds and conceal their illicit origins to facilitate their future use of funds whereas that of terrorist financing may be making use of their well legitimate funds for the purpose of illegitimate terrorism activities, operations, or attacks in the future. In terms of techniques, what money launders use to conceal their illicit origin of proceeds are similar to those used to obscure the sources of, as well as uses for, terrorist financing, such as wire transfers, smurfing, use of credit cards and underground banking systems, etc. Nonetheless, detecting terrorist financing. 政治大. is more difficult as compared to that of money laundering; only the ultimate use of funds for. 立. terrorism is illegitimate whereas the nature of funds may be well legitimate, which thoroughly. ‧ 國. 學. reverses the traditional money laundering model and makes it difficult to apply AML measures to terrorist financing.. ‧ sit. y. Nat. n. al. er. io. Furthermore, ACAMS (2016) states that charities and NPOs are vulnerable to be abused for. i n U. v. terrorist financing due to their public trust. Evidence suggests that many charitable. Ch. engchi. organizations are founded for the purpose of fund raising for terrorism with their seemingly normal operations. Terrorists may also take advantage of alternative remittance systems or informal value transfer systems (e.g. underground banking systems), such as Hawala, Hundi, etc., which are based on trust and outside the formal banking system to facilitate their fund transfers across jurisdictions with the anonymity feature and the lack of government scrutiny to evade detection. Additionally, it is suggested that the size of transactions involved in terrorist financing may be only small amounts below reporting threshold circulated via simple wire transfers among accounts of various persons, which also deepens the difficulties in detection and official scrutiny. 17.

(26) An effective way to combat terrorism is to disrupt their sources for fund raising, and thus terrorist organizations would be unsustainable with insufficient funds to support their daily operations and spending. Consequently, banking system is therefore obligated to establish and maintain an effective mechanism for identifying suspicious transactions associated with money laundering activities and terrorist financing to facilitate and further official scrutiny given that banking system is one of the most important and common vehicles for money laundering and terrorist financing due to its comparative advantages: convenience, accessibility, and security (ACAMS 2016; Rahman 2008).. 立. 政治大. ‧ 國. 學. Figure 3: A Simple Hawala Transaction Sample. ‧. n. er. io. sit. y. Nat. al. Ch. engchi. Source: International Monetary Fund (IMF); KYC360. 18. i n U. v.

(27) 2.6. The Impacts of Money Laundering The ultimate goal of money laundering is to comingle criminal proceeds into the financial system without restriction of borders and jurisdictions to legitimize their ill-gotten funds and obscure illicit origins. It is suggested that even well-developed global financial centers are vulnerable to money laundering activities as well due to their large volumes of transactions and various services provided. Accordingly, successive money laundering activities expose the. 政治大 International Monetary Fund (IMF) once estimated that the scale of money laundering lied 立. global financial system to the circumstances of money laundering (ACAMS 2016). The. ‧. ‧ 國. 學. between 2% to 5% of world GDP (Aluko 2012).. sit. y. Nat. It is also common for money launderers to operate legitimate businesses as front companies to. io. er. further comingling their criminal proceeds with legitimate funds to conceal their illicit origins.. al. Moreover, these seemingly normal businesses controlled by criminal organizations have. n. v i n comparative advantage over otherCtruly businesses, namely, they have plenty of illicit h elegitimate ngchi U funds to support their businesses to compete with other competitors in the market by setting the prices of their products and services well below the market rates since their businesses are not established for profit maximizing but for the purpose of hiding their ill-gotten funds. Consequently, money laundering undermines state economic growth and financial stability since it distorts the real supply and demand of an economy, which further invalidates national economic policies with wrong decisions or mistakes as a result of the misleading macroeconomic statistics (ACAMS 2016; Aluko 2012).. 19.

(28) On the other hand, ACAMS (2016) and Aluko (2012) mention that one of the predicate offenses of money laundering is tax evasion. Inevitably, money laundering also reduces government revenue and makes government tax collection even more difficult. As a result, raising the tax rates would often be the case to make up for the tax gap and government budget deficit, which is unfair to the honest tax payers and would turn into a vicious circle resulting in economic instability as well. In the meanwhile, money laundering and terrorist financing also adversely affect the stability of financial institutions, and that is the reason why financial institutions are. 政治大. mandatory and responsible to establish and maintain an effective and adequate AML/CFT. 立. program. Once a country becomes recognized as a high-risk jurisdiction for money laundering,. ‧ 國. 學. it will undoubtedly deteriorate a nation’s global reputation and result in dampening effect on foreign investments, and thus it diminishes global opportunities since its environment is not. ‧. business-friendly – it involves extra scrutiny works with high costs – which will further damage. y. Nat. n. al. er. io. sit. national economic development.. Ch. engchi. i n U. v. Furthermore, ACAMS (2016) states that a high-risk or non-cooperative jurisdiction with critical deficiencies on its AML/CFT regimes would further expose the country to the risk of international sanctions. To combat money laundering and terrorist financing, some governmental bodies, such as the Office of Foreign Assets Control of the United States Department of Treasury (OFAC) or international organizations, such as the United Nations (UN), the European Union (EU), etc. may impose sanctions - both economic and trade sanctions - against foreign countries, entities, and individuals with high risk of money laundering and terrorist financing as counter-measures. OFAC imposes either targeted sanctions or comprehensive sanctions against foreign countries. Targeted sanctions prohibit transactions 20.

(29) with designated individuals, entities, and industries on the sanctions list whereas comprehensive sanctions prohibit all transactions with countries on the sanctions list. Consequently, the economic development of a country under international sanctions will be further deteriorated with no doubt since its cross-border economic activities are strictly limited or even fully prohibited. Therefore, a rigorous AML/CFT regime is essential to preventing a nation’s economy as well as its international reputation from the menace of money laundering and terrorist financing activities.. 學. ‧ 國. 立. 政治大. Figure 4: Global Sanctions Regimes 2016. ‧. n. er. io. sit. y. Nat. al. Ch. engchi. Source: Council on Foreign Relations (CFR). 21. i n U. v.

(30) Table 1: Major U.S. Sanctions Violations Cases, 2009~2016 Headquarters. Year. Fine. BNP Paribas. France. 2014. US$8.9 Billion. Credit Agricole. France. 2015. US$787 Million. UK. 2012. US$667 Million. ING. Netherlands. 2012. US$619 Million. Credit Suisse. Switzerland. 2009. US$536 Million. ABN AMRO. Netherlands/UK. 2010. US$500 Million. Standard Chartered. Japan. 2014. US$315 Million. UK. 2010. US$298 Million. Germany. 2015. US$258 Million. Japan. 2013. Luxembourg. 2014. US$152 Million. UK. 2013. US$100 Million. ‧ 國. 2015. Deutsche Bank. Bank of Tokyo - Mitsubishi. Nat. Clearstream. Royal Bank of Scotland. io. al. n. Source: Council on Foreign Relations (CFR). Ch. US$342 Million. 學. Germany. Bank of Tokyo - Mitsubishi Barclays. US$350 Million. ‧. 立. Commerzbank. US$375 Million. y. LLOYD’S. 治 2012 政UK 大2009 UK. sit. HSBC. US$250 Million. er. Bank Name. engchi. i n U. v. 2.7. Where the Money is Hidden The leak of the “Panama Papers” on April 3, 2016 revealed how politicians, public officials, criminals, and celebrities around the world have used secret offshore vehicles incorporated in tax havens worldwide by a Panama-based law firm Mossack Fonseca & Co – which helped the rich and powerful park their wealth in tax havens and offshore bank accounts or shell companies – over the past 40 years in an attempt for tax evasion, corruption, money laundering, sanctions. 22.

(31) evasion, hiding other activities, etc., which involved 11.5 million documents as well as more than 214,000 offshore entities, and some of the transactions involved in the documents could be traced back to the 1970s. The disclosure of the Panama Papers lifted the veil of secret money, involving top government officials, such as the Prime Minister of Iceland, the Former Prime Minister of Great Britain, the President of Argentina, high-level Chinese government officials, and the President of Russia (Mcgee 2016; O’Donovan, Wagner, and Zeume 2016; Trautman 2017). The ten most popular tax havens exposed in the Panama Papers revealed that almost one. 政治大. out of every two offshore legal entities were incorporated in the British Virgin Islands, followed. 立. by the second favorite jurisdiction – Panama – where Mossack Fonseca & Co is headquartered. ‧ 國. 學. (International Consortium of Investigative Journalists (ICIJ); The Atlantic; Trautman 2017).. Nat. n. al. er. io. sit. y. ‧. Figure 5: The10 Most Popular Tax Havens in the Panama Papers. Ch. engchi. i n U. v. Source: Forbes; International Consortium of Investigative Journalists (ICIJ) 23.

(32) On the other hand, in 2015, the Financial Secrecy Index (FSI) published by the Tax Justice Network (TJN) named the most secretive jurisdictions around the world due to low taxes, tight secrecy laws, corporate transparency legislation, and lack of transparency of beneficial ownership (Newsweek U.S. Edition; SWI swissinfo.ch.). FSI is based on the weakness of financial regulation and the volume of transactions, which relies on a qualitative measure with a secrecy score and 15 secrecy indicators (SWI swissinfo.ch.; The Atlantic; World Economic Forum). Switzerland – which is the global leader in cross-border asset management with 28%. 政治大. of market share – has been ranked number one for financial secrecy for the third consecutive. 立. the top five spots (SWI swissinfo.ch.; Tax Justice Network).. 學. ‧ 國. time, followed by Hong Kong, the United States, Singapore, and Cayman Islands, comprising. ‧. It is noted that if British Overseas Territories or crown dependencies, such as the Cayman. y. Nat. sit. Islands and Jersey were combined, the United Kingdom would occupy the top spot (SWI. n. al. er. io. swissinfo.ch.; The Atlantic). Furthermore, it is also noted that the 2015 results of FSI do not. i n U. v. align with the revelations in the Panama Papers. However, if the countries with the most active. Ch. engchi. intermediaries disclosed in the Panama Papers are taken into consideration, the results will be somehow consistent since Mossack Fonseca & Co worked with intermediaries – including banks, law firms, accountants, etc. – in more than 100 countries worldwide, and their most active clients by number of offshore company incorporations were from Hong Kong, Switzerland, and the United Kingdom (ICIJ; The Atlantic). Meanwhile, many people were wondering why few Americans were named in the Panama Papers. In fact, U.S. states like Delaware and Nevada have recently become hubs for low taxes and corporate confidentiality, therefore, Americans don’t need to go to Panama since they have an onshore tax haven, which is as secretive as anywhere (The Atlantic; World Economic Forum). 24.

(33) Table 2: Financial Secrecy Index (FSI) – 2015 Results. FSI Value. Secrecy Score. Global Scale Weight. 1. Switzerland. 1,466.1. 73. 5.625. 2. Hong Kong. 1,259.4. 72. 3.842. 3. USA. 1,254.8. 60. 19.603. 4. Singapore. 1,147.1. 69. 4.280. 5. Cayman Islands. 1,013.2. 65. 4.857. 6. Luxembourg. 55. 11.630. 7. Lebanon. 79. 0.377. 8. Germany. 701.9. 56. 6.026. 9. Bahrain. 471.4. 74. 10. United Arab Emirates (Dubai). 440.8. 學. 0.164. 77. 0.085. 11. Macao. 420.2. 70. 12. Japan. 418.4. ‧. 0.188. 58. 1.062. 13. Panama. 415.7. y. Jurisdiction. 72. 0.132. 14. Marshall Islands. 405.6. 0.053. 15. io. sit. Ranking. United Kingdom. 380.2. 16. Jersey. 17. Guernsey. 18. Malaysia (Labuan). 19. 政治817.0 760.2 大. Nat. 79. er. ‧ 國. 立. 41. 17.394. 65. 0.216. 64. 0.231. 338.7. 75. 0.050. Turkey. 320.9. 64. 0.182. 20. China. 312.2. 54. 0.743. 21. British Virgin Islands. 307.7. 60. 0.281. 22. Barbados. 298.3. 78. 0.024. 23. Mauritius. 297.0. 72. 0.049. 24. Austria. 295.3. 54. 0.692. 25. Bahamas. 273.1. 79. 0.017. n. al. Ch. 354.0. e n g c 339.4 hi. Source: Tax Justice Network (TJN). 25. i n U. v.

(34) Figure 6: Top 10 Countries with the Most Active Intermediaries in the Panama Papers. 立. 政治大. ‧. ‧ 國. 學 er. io. sit. y. Nat. Source: World Economic Forum; International Consortium of Investigative Journalists (ICIJ). n. al. Ch. engchi. 26. i n U. v.

(35) Figure 7: How Mossack Fonseca & Co Helped its Clients Hide Their Wealth Offshore. 立. 政治大. ‧ 國. 學. Source: ICIJ; Mcgee (2017); O’Donovan, James, Wagner, Hannes F., and Zeume, Stefan (2016);. ‧. Tax Justice Network (TJN). er. io. sit. y. Nat. 2.8. International Organizations on Money Laundering. n. al. Ch. hi. en. i n U. v. c Crime (UNODC) 2.8.1. United Nations Office on Drugsg and United Nations Office on Drugs and Crime (UNODC) states that UNODC was set up in 1997 through a merger between the United Nations Drug Control Program and the Center for International Crime Prevention, which is a global leader in the counteraction against illicit drugs and international crime. UNODC is mandated to assist it members to fight against illicit drugs, crime and terrorism, and its work program is comprised of the following three pillars:. (1) To enhance the capability of its members in the fight against illicit drugs, crime and. 27.

(36) terrorism through field-based technical cooperation projects. (2) To increase knowledge and understanding of drugs and crime issues through research as well as analytical work and to augment the evidence base for policy and operational decisions. (3) To assist its members to ratify as well as implement the relevant international treaties and develop domestic legislation on drugs, crime and terrorism, providing secretariat and substantive services to the treaty-based and governing bodies through normative work.. 政治大 In addition to the three pillars of UNODC’s work program mentioned above, UNODC can also 立. ‧ 國. 學. provide assistance in the following five areas associated with AML/CFT issues, including organized crime and trafficking, corruption, crime prevention and criminal justice reform, drug. ‧. abuse prevention and health, and terrorism prevention.. n. Ch. engchi. er. io. sit. y. Nat. al. 2.8.2. Financial Action Task Force (FATF). i n U. v. The Financial Action Task Force (FATF) states that FATF was established in July 1989 by a G7 Summit in Paris, which is an independent inter-governmental body to examine and develop counter-measures for money laundering and terrorist financing. The FATF is mandated to set standards and promote effective implementation of legal, regulatory and operational measures in the fight against money laundering, terrorist financing, and other related threats to the integrity of the international financial system. Therefore, the FATF is a policy-making body, working to generate the necessary political will to bring about national legislative and regulatory reforms in these fields. The FATF has developed a series of Recommendations for combating money laundering and the terrorist financing, which are widely adopted all over the 28.

(37) world and recognized as the international AML/CFT standard. The FATF Recommendations were first issued in 1990, then revised in 1996, 2001, 2003 and 2012 respectively to ensure that they remain relevant and up-to-date, moreover, they are in an attempt to be of universal application. The FATF monitors its members’ progress in implementing necessary measures, reviews the techniques and counter-measures of money laundering and terrorist financing, and promotes the adoption and implementation of appropriate measures worldwide. The FATF works to identify national-level vulnerabilities with the objective to protect the global financial. 政治大. system against misuse by money laundering and terrorist financing in cooperation with other international stakeholders.. 立. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. 29. i n U. v.

(38) Table 3: The FATF Recommendations. 1. Assessing Risks & Applying a RiskBased Approach. 21 Tipping-Off and Confidentiality. 2. National Cooperation and Coordination. Designated Non-Financial Businesses 22 and Professions (DNFBPs): Customer Due Diligence. 3. Money Laundering Offence. 23 DNFBPs: Other Measures. 4. Confiscation and Provisional. 24. Measures. Transparency and Beneficial Ownership of Legal Persons. Transparency and Beneficial Ownership 25 政治 of Legal 大 Arrangements. 5. Terrorist Financing Offence. 6. Targeted Financial Sanctions Related to Terrorism & Terrorist Financing. 26. 7. Targeted Financial Sanctions Related to Proliferation. 27 Powers of Supervisors. 8. Non-Profit Organizations. 28 Regulation and Supervision of DNFBPs. 9. Financial Institution Secrecy Laws. 29 Financial Intelligence Units. y. ‧. Nat. n. Ch. 12 Politically Exposed Persons. 31. Responsibilities of Law Enforcement and. sit. io. al. 30. Investigative Authorities. er. 10 Customer Due Diligence 11 Record Keeping. Regulation and Supervision of Financial Institutions. 學. ‧ 國. 立. Powers of Law Enforcement and Investigative Authorities. i n U. v. i Couriers e n g c32h Cash. 13 Correspondent Banking. 33 Statistics. 14 Money or Value Transfer Services. 34 Guidance and Feedback. 15 New Technologies. 35 Sanctions. 16 Wire Transfers. 36 International Instruments. 17 Reliance on Third Parties. 37 Mutual Legal Assistance. 18. Internal Controls and Foreign Branches and Subsidiaries. 38. Mutual Legal Assistance: Freezing and Confiscation. 19 Higher-Risk Countries. 39 Extradition. 20 Reporting of Suspicious Transactions. 40. Source: Financial Action Task Force (FATF). 30. Other Forms of International Cooperation.

(39) 2.8.3. Asia/Pacific Group on Money Laundering (APG) The Asia/Pacific Group on Money Laundering (APG) states that APG is headquartered in in Sydney, Australia, which was established in 1997 in Bangkok, Thailand. The APG is an autonomous and cooperative global organization consisting of 41 members and a number of global and regional observers. APG members and observers are dedicated to the effective implementation and enforcement of internationally accepted AML/CFT standards, particularly. 政治大 to better utilize resources to counter money laundering and terrorist financing through 立. the FATF Forty Recommendations. Additionally, the APG provides assistance to its members. ‧. ‧ 國. functions:. 學. establishing national coordination mechanisms. The APG has the following five primary. (1) Mutual Evaluations. sit. y. Nat. io. er. The APG conducts mutual evaluations to determine its members’ compliance with global. al. AML/CFT standards through a peer review system. APG mutual evaluations are comprised of. n. v i n C hAML/CFT regimesUand an on-site visit to its members by a desk-based review of its members’ engchi other APG members and the APG Secretariat. The APG has conducted two rounds of mutual evaluations since 1997, and the third round of mutual evaluations have been conducted since 2014 in accordance with the FATF’s revised 2012 standards and 2013 methodology, consisting of an assessment of the “technical” compliance of its members’ AML/CFT systems in compliance with the FATF Recommendations as well as the “effectiveness” of their AML/CFT regimes. Furthermore, Taiwan will undergo the third round of mutual evaluations in the fourth quarter of 2018.. 31.

(40) (2) Technical Assistance and Training. The APG provides bi-lateral and donor-agency technical assistance and training in the Asia/Pacific region for the purpose of improving its members’ compliance with the international AML/CFT standards.. (3) Typologies Research. 政治大 laundering and terrorist financing in order to provide its members and the general public with 立. The APG has been devoted to research and analysis of typologies and methods of money. ‧ 國. 學. the up-to-date and relevant trends, methods, risks and vulnerabilities of both financial and nonfinancial institutions to these criminal activities.. ‧. (4) Global Policy Development. sit. y. Nat. io. al. er. The APG proactively takes part in the international network of FATF-style regional bodies. n. (FSRBs) for participation and contribution of policy development in compliance with the global AML/CFT standards.. Ch. engchi. i n U. v. (5) Private Sector Engagement. The APG provides the private sectors with the up-to-date AML/CFT information and keep them posted on the global AML/CFT developments. Moreover, the APG also provides the private sectors with a forum to facilitate them to engage with the APG in the fight against money laundering and terrorist financing.. 32.

(41) Table 4: APG Members List Afghanistan. Mongolia. Australia. Myanmar. Bangladesh. Nauru. Bhutan, Kingdom of. Nepal. Brunei Darussalam. New Zealand. Cambodia. Niue. Canada. Pakistan. China, People's Republic of Cook Islands. 立. Philippines. Hong Kong, China. Samoa. India. Singapore. 學. ‧ 國. Fiji. 政治Palau Papua大 New Guinea. Solomon Islands. Japan. Sri Lanka. ‧. Indonesia. Nat. Chinese Taipei. (South Korea). Thailand. er. io. Lao People's Democratic Republic. Timor-Leste. n. al. Macao, China Malaysia. Ch. sit. y. Korea, Republic of Korea. i n U. Tonga. v. i States of America e n g c hUnited. Maldives. Vanuatu. Marshall Islands, Republic of. Vietnam. Source: Asia/Pacific Group on Money Laundering (APG). 33.

(42) 2.8.4. The Egmont Group of Financial Intelligence Units The Egmont Group of Financial Intelligence Units states that The Egmont Group is a united body consisting of 154 Financial Intelligence Units (FIUs), which is mandated to provide a platform to securely exchange expertise as well as financial intelligence against money laundering and terrorist financing. This is especially relevant since FIUs are uniquely positioned to collaborate and support national and international efforts to combat money laundering and. 政治大 information domestically and globally in line with international AML/CFT standards. In 立 terrorist financing, which are a trusted gateway for sharing and exchanging financial. ‧ 國. 學. addition, the Egmont Group has made it efforts to support its global partners and other stakeholders to well implement the resolutions and statements authorized by the United Nations. ‧. Security Council, the G20 Finance Ministers, and the Financial Action Task Force (FATF). The. sit. y. Nat. Egmont Group could not only enhance its members’ work by improving their understanding of. io. er. money laundering and terrorist financing risks among its stakeholders, but also be able to. al. establish operational experience for considerations of policy making, including AML/CFT. n. v i n C h reforms. The Egmont implementation as well as AML/CFT e n g c h i U Group facilitates and prompts sharing and exchanging financial intelligence around the world, which has been recognized as. one of the most important counter-measures for the global efforts on combating money laundering and terrorist financing, and Financial Intelligence Units (FIUs) worldwide are obligated by global AML/CFT standards to share and exchange financial information as well as engage in global collaboration.. 34.

(43) 2.8.5. The Wolfsberg Group The Wolfsberg Group states that The Wolfsberg Group was established in 2000 at the Château Wolfsberg in Switzerland, which is an association consisting of 13 international banks – including Banco Santander, Bank of America, Bank of Tokyo-Mitsubishi UFJ, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, J.P. Morgan Chase, Société Générale, Standard Chartered Bank, and UBS – in an attempt to develop frameworks and. 政治大 Customer (KYC) and AML/CFT policies. The Wolfsberg AML Principles for Private Banking 立. guidance for financial crime risk management, particularly in association with Know-Your-. ‧ 國. 學. were first published in 2000, then revised in 2002 and 2012 respectively to ensure that they remain up-to-date and relevant. Since the first set of AML Principles was issued, the Wolfsberg. ‧. Group has published a wide range of documents, including Due Diligence Questionnaire for. sit. y. Nat. correspondent banks, the form of Principles, Guidance, Frequently Asked Questions (FAQs),. io. er. Statements, etc. Materials issued by the Wolfsberg Group – such as Wolfsberg AML. al. Questionnaire comprised of 27 questions, Statement on the Financing of Terrorism, AML. n. v i n C h Guidance on aURisk Based Approach for Managing Principles for Correspondent Banking, engchi. Money Laundering Risks, FAQs on Politically Exposed Persons (PEPs), Trade Finance. Principles, Guidance on Anti-Bribery & Corruption Compliance Programs, etc. – are designed to provide financial institutions (FIs) with an industry perspective on effective management of financial crime risks in accordance with global AML/CFT standards.. 35.

(44) 3. Anti-Money Laundering Legislation in Taiwan In response to the global trends for combating money laundering, Taiwan enacted the Money Laundering Control Act (MLCA) on October 23, 1996, which was the first dedicated law in Asia for the purpose of anti-money laundering, then revised in 2003, 2006, 2007, 2008, 2009, and 2016 respectively (Anti-Money Laundering Division, Investigation Bureau, Ministry of Justice). However, Taiwan’s efforts on combating money laundering became less effective over. 政治大. time since its subsequent amendments focused more on criminal prosecution than keeping up. 立. with international standards. As a result, APG deemed Taiwan’s AML system non-compliant. ‧ 國. 學. with FATF standards in 2007, then Taiwan was downgraded to a follow-up watch list in the subsequent audit in 2011. After the audit in 2011, Taiwan remained on the APG follow-up watch. ‧. list since some of the issues in the banking and regulatory system were fixed or partially fixed. Nat. sit. y. at more of a form instead of substance level (Executive Yuan, Republic of China (Taiwan);. n. al. er. io. TheNewsLens). Fortunately, Taiwan was taken off from the APG 10-member watch list on July. i n U. v. 20, 2017 with its ongoing efforts in the fight against money laundering and terrorist financing. Ch. engchi. – including legislation and counter-measures – over the past few years, which brought Taiwan into line with global standards (Executive Yuan, Republic of China (Taiwan); TheNewsLens).. Mega Bank New York Branch was fined by the New York State DFS Examination at a penalty of US$180 million (NT$5.7 billion, in equivalent) for violations of the BSA/AML on August 19, 2016 (Mega Financial Holding Co., Ltd. 2016), which has reinforced the significance of a vigorous AML/CFT regime. Additionally, the violation incident of Mega Bank New York Branch implied that Taiwanese banking industry has not yet well implemented the relevant. 36.

(45) regulations, reporting requirements, and compliance regimes of the BSA/AML, which not only undermined the brand image of Mega Bank itself but also deteriorated Taiwan’s international reputation (Ministry of Foreign Affairs, Republic of China (Taiwan), Taipei Liaison Office in the RSA), which was caused by Taiwanese public sector’s insufficient legislation and surveillance. In light of the violation incident of Mega Bank New York Branch as well as to prepare for the third round of the APG mutual evaluations in the fourth quarter of 2018, AntiMoney Laundering Office (AML Office) was established under the Executive Yuan on March. 政治大. 16, 2017 to integrate Taiwan’s AML policies and directions staffed by experts from both public. 立. and private sectors. Moreover, the Anti-Money Laundering Division – part of the Ministry of. ‧ 國. 學. Justice’s Investigation Bureau – is Taiwan’s financial intelligence unit (FIU), as required in the FATF 40 Recommendations serving as a national center for the receipt and analysis of. ‧. suspicious activity reports (Focus Taiwan; International Financial Law Review (IFLR)).. n. er. io. sit. y. Nat. al. i n U. v. Furthermore, International Financial Law Review (IFLR) mentions that the most significant. Ch. engchi. amendments to the MLCA came into effect in Taiwan on June 28, 2017, which was approved by the Legislative Yuan on December 28, 2016 with a six-month period of preparation offered. The newly amended MLCA consists of the following new requirements and mechanisms:. (1) Expansion of the Definition of Money Laundering. The newly amended MLCA expands the definition of money laundering to include broader types of ML activities in compliance with the FATF 40 Recommendations and other international standards.. 37.

(46) (2) Expansion of the Scope of Predicate Offenses. In line with the FATF 40 Recommendations, the newly amended MLCA was revised to include all predicate offenses punished by more than a six-month imprisonment under Taiwan Criminal Code and other criminal laws, which were not included in the old version of the MLCA.. (3) Adding the New Concept of Designated Non-Financial Businesses and Professions. 政治大 obligations not only on financial institutions (FIs) but also on designated non-financial 立. The newly amended MLCA imposes the due diligence, record-keeping and reporting. ‧ 國. 學. businesses and professions (DNFBPs) – including jewelry retail businesses, attorneys, notaries,. accountants, land administration/registration agents and real estate brokers – when providing. ‧. certain services in accordance with the FATF 40 Recommendations. Additionally, the. sit. y. Nat. amendments were revised to include the financial leasing service provider in the scope of FIs.. er. io. (4) Introduction to the Concept of Politically Exposed Persons (PEPs). al. n. v i n C h the concept of theUPEPs as well as defined the scope of The newly amended MLCA includes engchi. the PEPs to further monitor the ML activities of high-risk politicians. In addition, the “family. members” and “close associates” of the PEPs are also subject to the same regulatory requirements as the PEPs.. (5) Customer Due Diligence (CDD). In line with the newly amended MLCA, the FIs and DNFBPs are required to undertake CDD process – including identifying and verifying the identity of the customer as well as their substantive beneficial owners – when establishing a new business relationship with them and. 38.

(47) report any transactions above the reporting threshold, which is currently NT$500,000 (US$16,666, in equivalent) in Taiwan.. (6) New Confiscation Scheme. The amendments permit Taiwanese customs to confiscate the cash, securities, gold, items without the required declaration carried into/out of Taiwan exceeding certain thresholds, and suspicious items used for ML activities or above certain thresholds. Cross-border delivery of. 政治大. cash, securities, items via goods delivery, courier, and mailing service are also subject to the. 立. same confiscation requirements. Additionally, the amendments permit the customs and the. ‧ 國. 學. court to confiscate such proceeds or instrumentalities without criminal conviction required.. ‧. (7) International Cooperation. y. Nat. sit. In accordance with the newly amended MLCA, Taiwanese government may enter into treaties. n. al. er. io. or agreements with foreign governments, institutions or global organizations on the reciprocity. i n U. v. principle for the cooperation in the fight against ML activities. Moreover, the information. Ch. engchi. regarding declarations, reports or investigation results collected under the MLCA may be also shared based on the reciprocity principle in response to request for assistance made by foreign governments, institutions or global organizations.. In addition, Taiwan also enacted the Terrorism Financing and Prevention Law, which came into effect on July 27, 2016 as part of its efforts in the fight against money laundering. The new law imposes penalties for the financing of terrorist activities, organizations, and individuals as well. 39.

(48) as emphasizes that those violations are classified as “serious crimes” under the MLCA (Executive Yuan, Republic of China (Taiwan); TheNewsLens). TheNewsLens states that combating money laundering and terrorist financing does not rely on government legislation only, it also calls for raising public awareness of ML/TF crimes and involves the public cooperation with the government in the fight against money laundering and terrorist financing.. 政治大. In terms of the banking industry, The Bankers Association of the Republic of China also. 立. amended “Template of Directions Governing Anti-Money Laundering and Countering the. ‧ 國. 學. Financing of Terrorism of Banks” and established “Guidelines to Banks on Money Laundering and Terrorist Financing Risks Assessment and Relevant Prevention Program” in accordance. ‧. with the “ Money Laundering Control Act,” “Counter- Terrorism Financing Act,” and. Nat. sit. y. “Directions Governing Internal Control System of Anti-Money Laundering and Countering. n. al. er. io. Terrorism Financing of Banking Sector and Electronic Payment Institutions as well as. i n U. v. Electronic Stored Value Card Issuers” to help Taiwanese banking industry to well develop an. Ch. engchi. effective AML/CFT program to meet the international standards as well as to earn a better reputation through the APG mutual evaluations in the fourth quarter of 2018.. 40.

(49) Figure 8: Timeline for Anti-Money Laundering Legislation in Taiwan. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. i n U. v. Sources: Anti-Money Laundering Division, Investigation Bureau, Ministry of Justice;. Ch. engchi. Executive Yuan, Republic of China (Taiwan); IFLR; Mega Financial Holding Co., Ltd.. 41.

(50) 4. Case Study of Mega International Commercial Bank. 4.1. Overview of Mega International Commercial Bank Mega International Commercial Bank Co., Ltd. (Mega Bank) states that Mega Bank is a merger between The International Commercial Bank of China (ICBC) and Chiao Tung Bank (CTB), effective in August, 2006. Both banks have their long histories in Taiwanese banking system.. 政治大. In order to enlarge the scale and scope of the businesses as well as increase the market share,. 立. ICBC and CTB formally merged into one bank under the name of Mega International. ‧ 國. 學. Commercial Bank Co., Ltd. in August, 2006 for the purpose of synergy creation.. ‧ y. Nat. sit. Mega International Commercial Bank is one of the fully-owned subsidiaries of Mega Financial. n. al. er. io. Holdings Co., Ltd. As of December 31, 2016, Ministry of Finance, R.O.C., National. i n U. v. Development Fund, Executive Yuan, R.O.C., Chunghwa Post Co., Ltd., and Bank of Taiwan. Ch. engchi. Co., Ltd. hold 20.47 percent of the shares of Mega Financial Holdings Co., Ltd. In other words, Mega Bank is a private bank but state controlled. As of the end of 2016, Mega Bank had 108 domestic branches, and 22 branches, 5 sub-branches, and 5 representative offices abroad. Moreover, Mega Bank has fully-owned subsidiaries in Thailand and Canada as well, bringing the total number of overseas branches and offices amounted to 39 in total. Meanwhile, Mega Bank has 5,543 employees and an aggregate paid-in capital of NT$85.362 billion. It is believed that Mega Bank is an important banking institution in the international financial system (NYDFS 2016).. 42.

(51) Figure 9: Organization Chart of Mega International Commercial Bank. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. Source: Mega International Commercial Bank. 43. i n U. v.

(52) Table 5: Major Institutional Shareholders of Mega International Commercial Bank Name of the Institutional Shareholders. Top Shareholders (Percentage of Shares Ownership) Ministry of Finance, R.O.C. (8.40%) National Development Fund, Executive Yuan, R.O.C. (6.11%) Chunghwa Post Co., Ltd. (3.50%) Fubon Life Insurance Co., Ltd. (3.47%). Mega Financial Holding Co., Ltd.. Cathay Life Insurance Co., Ltd. (2.98%). 治政 Nan Shan Life Insurance Co., 大Ltd. (1.80%) 立China Life Insurance Co., Ltd. (1.69%) Bank of Taiwan Co., Ltd. (2.46%). ‧ 國. 學. Pou Chen Corporation (1.41%). Source: Mega International Commercial Bank 2016 Annual Report. ‧. Nat. sit. y. According to The Banker, issued July 2017, Mega Bank is ranked No. 164 among the top 500. n. al. er. io. banks in the world in terms of tier one capital, which is the second highest ranking among. i n U. v. Taiwanese banks. In general, Mega Bank is a continuously profitable bank with a sound. Ch. engchi. financial structure and stability. Net operating income/Net income (expressed in thousands of NT dollars) of Mega Bank from 2014 to 2016 were NT$50,680,532/NT$25,990,682, NT$49,815,491/NT$25,708,445, and NT$45,180,643/NT$19,009,961 respectively (Mega International Commercial Bank). The significant decrease in its net income in 2016 was attributed to the penalty payment in the amount of US$180 million (NT$5.7 billion, in equivalent) for the violation incident of its New York Branch.. 44.

(53) Table 6: Taiwanese Banks Ranked Among the Top 500 Banks in the World in Terms of Tier One Capital Ranking. Taiwan. World. Strength. Size. Tier One Capital. Assets Rank (World). 109,007. 2. 150. 1. 155. CTBC Bank (Chinatrust Banking Corporation). 2. 164. Mega International Commercial Bank. 7,722. 92,043. 4. 182. 3. 196. Bank of Taiwan. 6,087. 147,623. 1. 129. 4. 210. Taiwan Cooperative Bank. 5,497. 97,165. 3. 174. 5. 214. First Commercial Bank. 5,432. 76,905. 8. 216. 6. 225. Cathay United Bank. 5,005. y. Rank (Taiwan). 學. US$m. 77,728. 6. 207. 7. 233. Taipei Fubon Bank. 4,881. sit. US$m. 64,949. 9. 238. 8. 239. Hua Nan Commercial Bank. 77,028. 7. 215. 9. 250. E Sun Commercial Bank. 57,870. 11. 257. 10. 258. Land Bank of Taiwan. 4,104. 82,716. 5. 194. 11. 262. The Shanghai Commercial & Saving Bank. 3,956. 50,960. 12. 275. 12. 272. Chang Hwa Bank. 3,825. 62,048. 10. 247. 13. 279. Taishin International Bank. 3,731. 46,855. 13. 302. 14. 286. Bank SinoPac. 3,609. 46,592. 14. 304. 15. 366. Taiwan Business Bank. 2,587. 46,377. 15. 305. 16. 465. Yuanta Commercial Bank. 1,902. 26,826. 16. 447. 政治 8,249大. io. n. 4,710. Ch. i U e n g c h 4,232. Source: The Banker, Top 1000 World Banks 2017. 45. er. Nat. al. ‧. ‧ 國. 立. v ni.

(54) Figure 10: Financial Statistics for Mega International Commercial Bank, 2014 ~ 2016. Financial Statisitcs for Mega Bank, 2014 ~ 2016 (Unit: In Thousands of NT Dollars) 60,000,000 50,000,000 40,000,000 30,000,000 20,000,000. 10,000,000. 立. 0. 政治大 2015. Net Operating Income. Net Income. Nat. er. io. sit. y. ‧. Source: Mega International Commercial Bank. 2016. 學. ‧ 國. 2014. n. 4.2. Violation Incident aof Mega Bank New York Branch v. i l C n hengchi U Mega Bank is licensed by the NYDFS to operate a foreign bank branch in New York State. At the time of violation incident of its New York Branch happened, Mega Bank held total assets of approximately US$103 billion, and assets held by its New York Branch were approximately US$9 billion. Mega Bank New York Branch has operated a correspondent banking business for many years (NYDFS 2016).. 46.

(55) Mega Bank and its New York Branch signed a Consent Order with the NYDFS on August 19, 2016. The Consent Order concluded that Mega Bank and its New York Branch failed to maintain an effective and compliant anti-money laundering compliance program and failed to comply with regulations and reporting issues of the BSA/AML. Mega Bank was fined at a penalty of US$180 million (NT$5.7 billion, in equivalent) as a result of having an inadequate and deficient compliance program (Mega Financial Holding Co., Ltd. 2016). The New York State DFS Examination discovered numerous deficiencies in Mega Bank New York Branch's. 政治大. compliance function, which was extremely troubling and can be concluded into the following. 立. 學. ‧ 國. six aspects (NYDFS 2016):. (1) The New York Branch's Poor Internal Controls. ‧. (i). The compliance structure at Mega Bank New York Branch was significantly flawed given. y. Nat. sit. that the compliance and operational functions were comingled causing a conflict of interest. n. al. er. io. arose from the dual conflicting responsibilities of certain compliance personnel with little. i n U. v. familiarity with U.S. regulatory requirements. Similarly, its Chief Compliance Officer. Ch. engchi. (CCO) had insufficient knowledge of U.S. BSA/AML and the Office of Foreign Assets Control of the United States Department of Treasury (OFAC) requirements. (ii) New York Branch's transaction monitoring systems and policies were seriously deficient. Compliance personnel failed to periodically review surveillance monitoring filter criteria and thresholds. Moreover, plenty of documents relied upon in the transaction monitoring process remained un-translated from Chinese, preventing effective examination by the NYDFS. Additionally, its procedures provided little guidance associated with the reporting requirements for continuing suspicious activity, and it neither filed a Suspicious Activity Report (SAR) nor maintained necessary documentation to support decisions made by 47.