Customer due diligence (CDD) mandate and the propensity of its application as a global AML paradigm
| Date | 07 January 2014 |
| Pages | 76-95 |
| Published date | 07 January 2014 |
| DOI | https://doi.org/10.1108/JMLC-07-2013-0024 |
| Author | Norman Mugarura |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation |
Customer due diligence (CDD)
mandate and the propensity
of its application as a global
AML paradigm
Norman Mugarura
Global Action Research and Development Initiative Limited, Barking, UK
Abstract
Purpose – It has become customary for states or regulatory domains to come together and evolve
normative regimes to deal with overlapping exigencies such as money laundering. Over the past two
decades, there has been a proliferation of global AML laws designed to foster international cooperation
against money laundering and its predicate crimes. In this same vein, some states have adopted
domestic AML laws designed with an ethos of extra-territorial dimension as a caution against the
threats posed by money laundering crimes. The paper aims to critically examine CDD to tease out the
possibility of harnessing it as a global AML paradigm.
Design/methodology/approach – The paper was written by critically examining primary and
secondary data sources. In terms of primary data, the author has studied the relevant provision of
different AML legislation such as BSA (1970), MLCA (1986), and PATRIOT (2001) Act in the USA; and
challenges of harnessing CDD across countries. In terms of secondary data sources, the author utilised
data in academic text books, journal papers, electronic sources (web sites of AML agencies), and policy
and research papers from specialist institutions such as FATF.
Findings – The findings corroborate the thesis that much as CDD is an important AML measure,
it needs to be streamlined and implemented with care to apply across the board.
Research limitations/implications – The paper was written largely by way of library-based
research. The author did not carry out interviews to corroborate some of the secondary data sources
used in writing it. Carrying out interviews would have helped to minimise the potential for bias
secondary data sources used was generated.
Practical implications – It is anticipated that this paper can be utilised to foster desired strategic
and policy changes at a multiple institutional levels.
Originality/value – The paper is one of its kind to be written in its context. It will therefore make a
viable contribution to the study of money counter-measures and how they are harnessed globally. It is
therefore a must read!
Keywords Bank Secrecy Act, Counter-Terrorism Act,Patriot Act, Risk-based approach
Paper type Research paper
I. The evolution of a global AML paradigm
The global AML paradigm has been fostered through the proliferating AML regimes
either at a state or at an international level. For instance, the Bank Secrecy Act (BSA) in
(1970) in the USA was geared towards addressing bank secrecy laws operated not only in
the USA but also in offshore financial centers (Shams, 2006). Bank secrecy laws were
being exploited by money launderers and tax evaders to move illicit proceeds of crime
beyond the reach of domestic authorities. The UN Vienna Convention (1988) on Drug
Trafficking and Other Psychotropic Substances (1988) was adopted as a robust response
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Journal of Money Laundering Control
Vol. 17 No. 1, 2014
pp. 76-95
qEmerald Group Publishing Limited
1368-5201
DOI 10.1108/JMLC-07-2013-0024
JMLC
17,1
76
to address the problem of drug trafficking internationally (Shams, 2006, n 2).
The antecedents of the United Nations Carlson (2004)s were a series of General Assembly
resolutions[1] where the concern over drug abuse was expressly discussed by delegates
from many national governments. The drug abuse and trafficking was viewed as an
increasing concern internationally. This led to the adoption of UN General Assembly
Resolution 39/141 of December 1984 entitled “Draft Convention against Trafficking in
Narcotic Drugs and Psychotropic Substances”[2]. The Securitization of Drug abuse and
Trafficking through their conceptualization as a threat and prioritisation of the adoption
of counter-measures resulted in the call for a specialised conference (Anderson, 1989) to
deal with the fight against drug trafficking. Adopting a similar securitisation discourse,
the then Secretary General of United Nations[3] stated that existing resources were
inadequate to deal with the drug plague, which was contaminating, corrupting and
weakening the very fabric of society[4]. In December 2000, the United Nations
Convention against Transnational Organised Crimes and its attended three protocols
were adopted in Palermo. Palermo Convention not only addresses the definitional limits
of ML by Vienna Convention (1988) but it also creates four additional specifically on
internalisation of crimes: participation in organised criminal groups, money laundering,
corruption and obstruction of justice. Palermo Convention also streamlines modalities
for extradition of wanted criminals: through mutual legal assistance, law enforcement
and cooperation in the area of information exchange[5]. After UN Convention on
Organised Transnational Crimes in Palermo (Italy) in 2000, the scope of what constituted
ML was expanded to capture financial crimes such as bank fraud[6], credit card fraud,
investment fraud, advance fee fraud, bankruptcy, fraud, embezzlement which were the
most mentioned sources of proceeds of crime (FATF, 2005). The EU Council of Ministers
approved the revisions of the EU’s AML to reflect necessary changes in Europe[7].
The Directive broadens the definition of targeted criminal activities from drug offences
(as per the original Directive) to include proceeds from other crimes[8]. Many countries
have now taken positive action to extend the scope of their ML offences based the
expanded scope of ML activities under Palermo Convention (2000).
II. The use of legislative measures in the USA to fight ML globally
The earlyAML initiatives startedwith enactment of BSA 1970 whichcreated a framework
of rules for banks and regulatory authorities on varied issues in relation to money
laundering in the USA. Most significantly, the BSA introduced severe obligations on
financial institutions to know who theircustomers are at the point of initiatingcustomer
relationship but also creates enforcement regimes. Banks were required to generate and
keep records (also known as the Currency and Foreign Transactions Reporting Act
or CTR) on their customers (Sunha, 2013).Hence, financial institutionsin the USA would
work closely with US government agencies to detect and prevent money laundering.
Financial institutions were required to keep records of cash purchases of negotiable
instruments, and file reports of cash purchases of these negotiable instruments of more
than $10,000(daily aggregate amount),and to report suspicious activitythat might signify
money laundering, tax evasion, or other criminal activities[9]. The primary purpose of
BSA was to safeguardfinancial institutionsfrom being exploited by criminalsas avenues
to perpetuate financial crimes such as moneylaundering and tax evasion. BSA required
financial institutions to generate CTR of cash in excess of $10,000 during the same
business day. The amountover $10,000 can be either in one transactionor a combination
Customer due
diligence
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